Issuu on Google+

Currency

OUTLOOK

Main contributors

David Bloom Global Head of FX Research HSBC Bank plc +44 20 7991 5969 david.bloom@hsbcib.com

Stacy Williams Head of FX Quantitative Strategy HSBC Bank plc +44 20 7991 5967 stacy.williams@hsbcgroup.com

Daragh Maher FX Strategist, G10 HSBC Bank plc +44 20 7991 5968 daragh.maher@hsbcib.com

Mark McDonald FX Quantitative Strategist HSBC Bank plc +44 20 7991 5966 mark.mcdonald@hsbcib.com

Paul Mackel Head of Asian FX Research The Hongkong and Shanghai Banking Corporation Limited +852 2996 6565 paulmackel@hsbc.com.hk

Robert Lynch Head of G10 FX Strategy, Americas HSBC Securities (USA) Inc. +1 212 525 3159 robert.lynch@us.hsbc.com

Ju Wang FX Strategist, Asia The Hongkong and Shanghai Banking Corporation Limited +852 2822 4340 juwang@hsbc.com.hk

Clyde Wardle Emerging Markets FX Strategist HSBC Securities (USA) Inc. +1 212 525 3345 clyde.wardle@us.hsbc.com

Dominic Bunning FX Strategist, Asia The Hongkong and Shanghai Banking Corporation Limited +852 2822 1672 dominic.bunning@hsbc.com

Marjorie Hernandez FX Strategist, Latin America HSBC Securities (USA) Inc. +1 212 525 4109 marjorie.hernandez@us.hsbc.com

Murat Toprak FX Strategist, EMEA HSBC Bank plc +44 20 7991 5415 murat.toprak@hsbcib.com

Macro Currency Strategy February 2014

Why the JPY won’t weaken Japan’s QE and associated JPY decline has not prompted a retaliatory currency war within Asia, but the threat to currency peace is growing. Furthermore, should Japanese exporters succeed in grabbing market share, we could see an improvement in Japan’s external balance. In addition, capital flows may act as a support for the JPY, especially if the JPY’s role as a safe haven continues to be rebuilt. FX: taking stock of any shock We examine the performance of global FX during periods of equity market weakness. Historically, the safe haven USD, JPY and CHF reign supreme, but EUR and GBP could also gain. At the opposite end of the G10 scale are the “risk on” currencies, where the CAD would be the most exposed. In EM FX, all currencies tend to fall against the USD. It is simply a question of deciding which is the more ugly. Long-term forecasts We publish our long-term FX forecasts up to 2020.


abc

Macro Currency Strategy February 2014

Summary Why the JPY won’t weaken

(pg 3)

Japan's QE and associated JPY decline has not yet prompted a retaliatory currency war within Asia, but the threat to currency peace is growing. Furthermore, should Japanese exporters succeed in grabbing market share, we could see an improvement in Japan's external balance. Finally, capital flows may act as a support for the JPY, especially if the JPY's role as a safe haven continues to be rebuilt.

FX: taking stock of any shock

(pg 9)

We examine the performance of global FX during periods of equity market weakness. Historically, the safe haven USD, JPY and CHF reign supreme, but EUR and GBP could also gain. At the opposite end of the G10 scale are the “risk on” currencies, where the CAD would be the most exposed. In EM FX, all currencies tend to fall against the USD. It is simply a question of deciding which are the more ugly.

Long-term forecasts

(pg 15)

Given the problems of forecasting out even one year, many are understandably reluctant to venture a view for further out. However, we are aware that a number of our customers have a need for some indication of the likely FX market direction over a longer term horizon for planning purposes. So again, with some trepidation, we publish these longer term forecasts.

Macro Health Check

(pg 18)

We assess whether current growth in the 39 countries we cover is 'healthy' and sustainable or whether downside risks are emerging. Some of the challenged countries we identify – Turkey, India, Indonesia and Brazil – are already under pressure in the financial markets. In the G10 space, the UK has an equally alarming current account deficit as troubled ‘fragile five’ countries and there are reasons for caution about the Japanese recovery.

Asian FX: What would make us think differently?

(pg 20)

For some time, we have preferred North Asian currencies. The relatively sound balance of payment positions and undervalued status of the KRW and the TWD are key sources of attraction. While our central theme for 2014 is still that the paths of Asian currencies will diverge, with North Asian currencies expected to outperform, we now take a closer look as what could make us think differently.

Dollar Bloc

(pg 22)

CAD: weaker now and later: We are adjusting our forecasts and now expect USD-CAD to reach 1.15 later this year. The CAD’s pronounced declines since the beginning of 2014, mainly caused by a change in the BoC’s rhetoric and weaker fundamentals, have placed it as the worst performing G10 currency

1


abc

Macro Currency Strategy February 2014

against the USD. We expect this broader fundamental and policy backdrop to continue to work against the CAD in the coming year. AUD: upside surprises are limited: We believe that any upside potential for the AUD from the current level is limited. The RBA’s shift towards a more neutral policy bias should support the currency, however fears over weaker Chinese economy and the broader uncertainty surrounding the emerging markets should stem any upward moves. NZD: trapped between ‘risk off’ and ‘carry’: We believe the local case for NZD outperformance remains robust, but the uncertainty surrounding emerging markets and the possible continuation of riskoff mood could hit the currency in the medium-term.

Key events Date

Event

17 February 18 February 19 February 26 February 4 Marc h 5 March 5 March 6 March 6 March 13 March

BoJ monetary policy meeting UK CPI revisions published FOMC minutes Riksbank minutes RBA rate announcement Fed releases Beige Book BoC rate announcement BoE rate announcement ECB rate announcement RBNZ rate announcement

Source: HSBC

Central Bank policy rate forecasts

USD EUR JPY GBP

Last

Q3 2014(f)

Q1 2015(f)

0-0.25 0.25 0-0.10 0.50

0-0.25 0.25 0-0.10 0.50

0-0.25 0.25 0-0.10 0.50

Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate

Consensus forecasts for key currencies vs USD

EUR JPY GBP CAD AUD NZD Source: Consensus Economics Foreign Exchange Forecasts January 2014

2

3 months

12 months

1.33 104 1.62 1.07 0.89 0.81

1.29 108 1.59 1.08 0.87 0.80


abc

Macro Currency Strategy February 2014

Why the JPY won’t weaken Trade up to JPY strength External balances became fashionable once again in the FX market during 2013. As fears about US tapering took hold, the dividing line between success and failure in emerging markets was largely defined by the health or otherwise of the current account balance. To judge by on-going EM FX trauma, the early signs for 2014 are that the balance of payments will remain central to many EM currencies. But this fixation may spread to engulf other currencies also. In Europe, the improvement in the Eurozone’s current account balance has already been offered by some as an explanation for the EUR’s resilience – a view we dispute (see ‘Currency Weekly: EUR: mythbuster’, 29 November 2013). If we believe the

substantially weaker in H2 14 (see ‘GBP: mind the trade gap’, Currency Outlook, January 2014). Given the market’s predilection for further JPY weakness, Japan’s deteriorating current account balance would be a tempting rationale for JPY bearishness. However, we believe the opposite is true. Japan’s external tribulations are set to become a catalyst for JPY strength, not weakness. Chart 1 shows Japan’s current account balance and its trade balance expressed as a percentage of GDP. The deterioration in both is clear. So despite the JPY’s weakness since the middle of 2012, and the associated optimism for exports, the external balance has become a drag on growth rather than a driver.

market is paying too much attention to the Eurozone’s current account, we suspect it is paying too little attention to the UK’s troubling visible trade deficit which will likely see GBP

1. Japan’s external balance has been getting worse not better

%

Japan C/A balance, % GDP

Japan Visible trade balance, % GDP

%

5.0

5.0

4.0

4.0

3.0

3.0

2.0

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0

-3.0

-3.0

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Source: HSBC, Bloomberg

3


abc

Macro Currency Strategy February 2014

2. Export volumes have not collapsed elsewhere because of weaker JPY

Japan ex ports

Taiw an ex ports

South Korea ex ports

230

230 Volumes, Index , 2005=100

200

200

170

170

140

140

110

110

80

80

50

50

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Source: HSBC, Bloomberg

The worst is over for the external balance However, we believe the worst may already be over for Japan’s external balance and that far, from driving the JPY weaker, it may be a force for stabilisation and potential appreciation. From a cyclical perspective, import demand may weaken when the consumption tax is introduced in April this year. Export demand should pick-up alongside accelerating GDP growth in the bulk of Japan’s main export markets. The US, Germany, Australia and most economies in Asia ex-Japan are forecast to show faster GDP growth in 2014 and 2015 than in 2013. China may show a modest slowdown, but with growth at an expected 7.4%, it will still be very strong. In addition, now that Japanese corporates have seen the JPY weaken for eighteen months, there may be greater confidence that this reflects a new “norm”, and exports could be re-priced accordingly to try and boost volumes. The anomaly of stagnant export volumes could come to an end (see ‘Chart of the Week: Why are Japanese exports not booming?’, 24 January 2014), and so long as it is not entirely offset by slimmer margins, the overall impact on the trade

4

balance should be beneficial. Those arguing for additional JPY weakness as an echo of a worsening external balance will have to re-think.

Corporate Japan and the currency war Our expectation that part of the revival in Japan’s export volumes might be triggered by a shift in the pricing behaviour of Japan’s exporters opens up an additional currency angle – the currency war. Japan has been at the forefront within G10 of using its currency to secure an economic advantage. We have written on this currency war process extensively in the past, and have noted that within Asia, both Korea and Taiwan have been remarkably good economic citizens insofar as they have not allowed themselves to be drawn into the currency war. Part of the explanation for their relatively relaxed attitude is that Japan’s weaker currency seems so far to have been used for expanding margins rather than market share. Chart 2 shows export levels for Japan, Taiwan and South Korea. The recent performance shows that South Korea has succeeded in expanding its export volumes even as those in Japan moved sideways.


abc

Macro Currency Strategy February 2014

3. JPY is among the most undervalued of currencies

Overvalued

SEK

CHF

ILS

NZD

SGD

GBP

NOK

PEN

EUR

RON

AUD

CNY

CAD

KRW

HKD

COP

PHP

BRL

33 34 31 32 30 29 27 28 Neutral 25 26 24 22 23 20 21 19 18 16 17

MXN

PLN

TWD

JPY

TRY

THB

CZK

IDR

ARS

USD

RUB

3

CLP

INR

1

2

4

ZAR

Undervalued

HUF

6

8

5

7

14 15 12 13 11 9 10

MYR

Valuation ranking

Source: HSBC, Bloomberg, OECD

Chart 3 shows our valuation ranking for the currencies we cover. We have three metrics, namely OECD purchasing power parity, the Big Mac index, and the current real effective exchange rate’s deviation from its 5-year average. The JPY remains very much towards the undervalued end of the scale, its blushes only spared by the horrors faced by the “fragile five” (in grey) which feature prominently on the left hand side of the chart. In other words, the JPY is at a valuation ranking currently generally being suffered by those currencies under the market microscope for potential market trauma. It would be a mistake to assume that the next pinch point in the currency war in Asia will come if the Bank of Japan were to add to the current pace of quantitative easing. Instead, the greater threat comes from the corporate sector. If corporate Japan’s export strategy were to change, reflecting greater confidence that earlier JPY weakness was not about to completely reverse, then the threat of a shift in relative market shares would become greater. The pressure for policy elsewhere in Asia to act to offset Japan’s currency-induced competitiveness could intensify. This creates a number of problems for JPY bears. First, it is a reminder that actively pursuing additional JPY weakness via policy is likely to come with international political repercussions.

The strategy of casting JPY depreciation as simply some passive side-effect of monetary policy attempts to reflate is already a difficult marketing tactic. It gets harder the closer we get to the inflation target. Japanese politicians have long since given up talking about JPY weakness as an on-going correction. More radical suggestions, such as a government foreign bond buying fund, are no longer floated. By extension, it may temper expectations for the likely scale of any fresh bout of QE. Finally, it is a reminder that much is already in the price of the JPY. Even looking beyond our valuation ranking, the JPY’s decline is already well in excess of what we saw for the USD during the Fed’s various QE programmes.

JPY to capitalise on a capital idea Our valuation chart is also a reminder of the new fragile environment in which emerging market FX is operating, one which further undermines the consensus case for relentless and steady JPY weakness. One argument offered for JPY weakness, in particular a rising USD-JPY exchange rate, is that rising US yields will be in contrast to low Japanese yields. This offers a carry argument for a weaker JPY and also a balance of payments argument via capital outflows. We are not convinced by either.

5


abc

Macro Currency Strategy February 2014

4. The JPY has regained its safe haven appeal

USD-JPY 100d correlations 0.9

0.9 Nikkei 225

10y bond y ields

RoRo

0.7

0.7

0.5

0.5

0.3

0.3

0.1

0.1

-0.1

-0.1

-0.3

-0.3

-0.5

-0.5

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: HSBC, Bloomberg

Chart 4 shows the correlation of daily changes in USD-JPY against changes in the Japanese Nikkei stock market index, US-Japan government bond yield differentials, and HSBC’s risk on – risk off (RORO) factor. The notable change over the last couple of months has been the resurgence of the RORO factor, shown in red in the chart. The JPY may be a diminished safe haven because of the distorting influence of the Bank of Japan’s aggressive monetary policy, but recent events have shown it still retains that appeal in times of uncertainty. If markets remain nervous about

emerging markets, the consensus will have to revisit their expectations. Safe haven flows fall under the wider issue of what capital flows mean for the JPY. When the Bank of Japan loosened policy aggressively and set an inflation target last April, some in the market expected that this would encourage a large portfolio outflow as Japanese investors increased their purchases of overseas assets in anticipation of a weaker JPY. While the JPY did weaken, Japan has seen significant portfolio inflow. The majority of this inflow has been in equities as overseas buyers increased their holdings of Japanese

5. Portfolio flows are strongly inwards

Japan Portfolio balance (4Q MA, % of GDP) 6.0%

6.0%

4.0%

4.0%

2.0%

2.0%

0.0%

0.0%

-2.0%

-2.0%

-4.0%

-4.0%

-6.0%

-6.0%

-8.0%

-8.0%

-10.0%

-10.0% 1997

Source: HSBC, MoF

6

1999

2001

2003

2005

2007

2009

2011

2013


abc

Macro Currency Strategy February 2014

6. Direct investment outflows continue

Japan Direct Inv estment balance (4Q MA, % of GDP)

0.0%

0.0%

-0.5%

-0.5%

-1.0%

-1.0%

-1.5%

-1.5%

-2.0%

-2.0%

-2.5%

-2.5%

-3.0%

-3.0% 1997

1999

2001

2003

2005

2007

2009

2011

2013

Source: HSBC, MoF

equities and domestic investors repatriated funds into the domestic market (chart 5).

insufficient to cover the inflows from the current account and portfolio flows.

So where did the capital outflow come from? Part of the answer lies in direct investment flows. Japan has run a deficit on direct investment for many years and this has been increasing recently as Japanese companies have increased their investments abroad (chart 6). However, even at its recent level of about 2.5% of GDP it is

Short-term outflows have dominated Because the balance of payments must balance, it is possible to estimate the implied short term flows as a residual. In Japan’s case the current position as a percent of GBP is roughly: Short term outflow = Current account (+2%) + Portfolio Flow (+4%) + Direct investment (-2.5%)

7. Implied short term outflows dominate at about 4% of GDP

Japan Implied short term flow s (4Q MA, % of GDP) 8.0%

8.0%

6.0%

6.0%

4.0%

4.0%

2.0%

2.0%

0.0%

0.0%

-2.0%

-2.0%

-4.0%

-4.0%

-6.0%

-6.0% -8.0%

-8.0% 1997

1999

2001

2003

2005

2007

2009

2011

2013

Source: HSBC, MoF

7


abc

Macro Currency Strategy February 2014

8. IMM positions are already significantly short

JPY - IMM net non-commercial positions ('000 contracts)

100

100

50

50

0

0

-50

-50

-100

-100

-150

-150

-200

-200

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Jan-14

Source: HSBC, Bloomberg

The implied short term outflow is thus about 3.5% of GDP. Chart 7 shows the implied short term flow for Japan since 1997. Between 2004 and 2007 (the heyday of the carry trade) the short term flow was persistently negative and reached nearly 6% of GDP by 2007. During the crisis, the short term flow turned very positive (up to 8% of GDP) as carry trades were unwound and safe haven flows moved into the JPY. Now, the short term flow has become sharply negative again. This implies that the main driving force behind the JPY’s fall has been flows that can slow or even be reversed very rapidly. In some ways, the JPY’s situation is the mirror of that seen in sterling. The recent strength of GBP has been largely driven by short term inflows while the current account deficit has widened. In the same way that we see downside risks for sterling based on its vulnerability should short term inflows dry up, we see upside risks for the JPY should short term outflows fall back. Further evidence of the short term nature of the flows currently driving the JPY is shown in chart 8. This shows the net IMM positions in the JPY (in number on contracts). This measure reached a

8

maximum short position in 2007 at about 180,000 contracts, just ahead of the crisis. The current short position is around 130,000 contracts, so it is again becoming extreme.

Conclusion The large fall in the JPY since mid-2012 has been driven by a growing market belief that the Japanese authorities are seeking a weaker JPY as part of their attempt to get the Japanese economy out of a protracted period of weak growth and deflation. Expectations are that this weakness will be extended in 2014. However, the structure of the Japanese external accounts suggests that the risks are for a recovery in the JPY as the year progresses. The Japanese current account surplus is likely to improve again as the trade balance recovers, and the capital outflow that recycles this surplus has been heavily dependent on short-term flows which can be rapidly reversed. In our view it would be unwise to bet against the JPY in 2014.


abc

Macro Currency Strategy February 2014

FX: taking stock of any shock Winners and losers when equities weaken We examine how currencies behave when equity markets are falling. At the moment, we are witnessing the green shoots of a RORO revival. A damaging cocktail of emerging market political risk, US tapering fears, and some softer China activity data has created a new debate about whether we might be on the cusp of prolonged and widespread emerging market weakness. We believe not (see ‘The EM sell-off’, 27 January 2014), but one side-effect of this trauma has been a rediscovery of the RORO concept, most evident in the sharp decreases seen across equity markets in late January. At the other end of the scale, global bond markets have regained their safe haven allure, returning us to the more familiar spread of asset market behaviour evident during the heights of RORO.

While the actual bounce in the RORO index has been rather small so far, financial markets appear to once again see the world from a RORO perspective. This is not so surprising. After all, if you are freshly worried about the world, the easiest reflex is to return to the investment approach you adopted when you were last terrified about the world. RORO is that model. For FX, this means it may be an opportune time to re-visit the winners and losers should the poor start for equity markets persist. One method would simply be to calculate the correlations that various currencies have with daily changes in a stock market, for example the S&P 500. The deficiency of this approach is that it captures the currency behaviour both when equity markets are rising and when equity markets are falling. All we are interested in is what happens when equity markets are falling.

1. “Risk on – risk off” is becoming (a little) more important

RORO Index 0.50 0.45 0.40 0.35 0.30

0.50 0.45 0.40 0.35 0.30

0.25 0.20 0.15 0.10 0.05 0.00

0.25 0.20 0.15 0.10 0.05 0.00

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: HSBC, Bloomberg

9


abc

Macro Currency Strategy February 2014

2. FX performance during specified periods of equity market weakness

FX performance v s USD during the three chosen periods of equity market w eakness ov er 2000-2013 Rank

Highest / low est ranking

Av erage ranking

Rank

CHF

CNY CZK

DKK

EUR HKD

SGD JPY

0

HUF ILS

5

0

PEN TWD

5

NOK GBP

10

PLN

10

CAD MYR

15

NZD SEK

15

IDR ARS

20

CLP COP

20

INR AUD

25

MXN

25

RUB KRW

30

ZAR BRL

35

30

TRY

35

Source: HSBC, Bloomberg

So an alternative approach is to identify periods of equity market weakness and then rank how currencies performed against the USD. We have chosen three periods of stock market declines:1

Mar 2000-Oct 2002: Dot-com bubble bursting

2

Oct 2007-Mar 2009: Global financial crisis

3

May 2013-Jun 2013: Initial taper fear

Chart 2 shows the average ranking of currencies against the USD over these three periods. For example, the CHF has the highest ranking, most often at the top of the league table. The TRY and ZAR, by contrast, are more frequently ranked among the biggest losers. The bands around this average show how the ranking has varied over the three periods. Those at the extremes tend to display rather small variations suggesting some consistency in behaviour when equity markets are falling. Interestingly, the vulnerable currencies towards the left of the chart overlap to a large extent with those currencies at the heart of today’s concerns regarding current account fragilities. The KRW and the MXN also feature, reflecting their historical reputation as equity market plays. The safe-haven CHF, CZK and CNY are prominent, but it is surprising to see the variance in the JPY

10

as it fell quite sharply during the dot.com bubble burst.

Finding your pain threshold A short-coming of this analysis is that the results could be different if we selected additional or different periods of equity market weakness. To overcome this, we now look at FX behaviour during periods of equity market weakness in a less arbitrary way. We look at how currencies1 have performed when the S&P 500 has fallen by a given percentage in a week. In this way, we can examine whether the behaviour of currencies is different when the stock market is falling modestly compared to periods when the stock market is falling swiftly. Chart 3 shows the results for G10 currencies, and there is basically a 50:50 split between the winners and the losers.

1

For G10 currencies, we use equally-weighted indices. For example, the CAD index is made up of an equally weighted index of the CAD against the other G10 currencies. In turn, this helps prevent the results for CAD being distorted disproportionately by USD-CAD which would be the case were we to use trade-weights or GDP weights. For EM, we examine their performance versus the USD.


abc

Macro Currency Strategy February 2014

FX v s S&P declines

S&P 500 has fallen

% of times the currency has risen when the

3. G10 FX performance when S&P500 is falling USD

100%

100%

JPY

80%

80%

CHF

60%

60%

40%

40%

20%

20%

0%

0%

GBP EUR NOK SEK CAD

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

-8.0

-9.0

-10.0

AUD NZD

% weekly change in S&P 500

Source: HSBC, Bloomberg

The order of these currencies shown in the legend on the right reflects their performance when the S&P500 has fallen by 10% or more in a week. The results are not surprising, and likely reflect most people’s perception about where these currencies would lie on such a spectrum of risk aversion. However, a 10% or greater weekly decline is a very rare event. USD to take over safe haven duties

What is more interesting is the relative performance for smaller declines in the S&P500, say by 3% or 4% in a week. Here, the CHF and the JPY reign supreme, offering the most consistent upside against their G10 peers. Their ability to behave in this way again, however, is now constrained. The CHF has limited room to appreciate given the SNB’s EUR-CHF floor of 1.20. The JPY is also limited by central bank action, with the BoJ’s active monetary expansion providing a headwind to any sustained gains. The threat of intervention should the JPY strengthen excessively on a safe haven bid also looms large. Thus, it is possible that were equity market weakness to persist, the CHF and JPY could not flex to the same extent as in the past, and the “go to” currency could be the USD.

GBP and EUR could also capitalise

We are bearish GBP and EUR against the USD, but one risk to this view is the prospect that GBP and EUR could be favoured as safe havens. History suggests it takes very big declines in equity prices to encourage the market in EUR and GBP. But the diminished potency of the CHF and JPY as safe havens may mean that GBP and EUR may enjoy this support even when stock market declines are not so large. NOK neutrality…to a point

Among the losers, some aspects are worth highlighting. The NOK has rather a neutral behaviour when equity market declines are relatively modest. When the drops become more pronounced, its performance deteriorates sharply. One explanation is that the safe haven allure of Norway’s strong current account and fiscal surpluses is overwhelmed by concerns about its lack of liquidity during periods of pronounced global unease.

11


abc

Macro Currency Strategy February 2014

when the S&P 500 has fallen

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0% 0

-1

ARS CZK ILS IDR

-2

-3

BRL HUF ZAR MYR

-4 -5 -6 -7 % weekly change in S&P CLP RUB CNY PHP

MXN RON HKD SGD

-8

-9

-10

COP TRY TWD THB

PEN PLN KRW VND

% of times the currency has risen

60%

when the S&P 500 has fallen

% of times the currency has risen

4. Forget the detail, all EM currencies mostly fall against the USD when equity markets are falling

VEF EGP INR

Source: HSBC, Bloomberg

EM FX would become a battle of the uglies

Local factors struggle to get traction among G10 losers

The price action of the “risk on” currencies is not especially differentiated, especially for the more modest declines in the stock market. For the more traumatic periods, the AUD and NZD fare worse than the CAD and Scandies. It would be tempting to argue that the NZD should outperform on the basis of it stronger economy and rising interest rates, but should equity markets continue to fall, history suggests that the market will hit the more

We adopt a similar approach for EM FX in chart 4, the principal difference is that we have confined the analysis to these currencies’ behaviour against the USD. Chart 4 is clearly far busier than chart 3 given the multitude of currencies on display, so please do not become disheartened if you cannot discern the performance of a particular currency. That is not the aim of the chart. For now, we are less interested in the performance of individual currencies. Instead, the issue is the overwhelming

illiquid NZD hardest.

5. EM FX battle of the uglies

% of times currency has risen v s USD w hen S&P500 has fallen 4% or more in a w eek

Source: HSBC, Bloomberg

12

CZK

ILS

CNY

THB

HUF

HKD

VND

SGD

TWD

INR

PLN

CLP

RUB

MYR

PEN

0% IDR

0% TRY

10%

ZAR

10%

RON

20%

COP

20%

PHP

30%

ARS

30%

MXN

40%

KRW

40%

BRL

50%

VEF

50%


abc

Macro Currency Strategy February 2014

6. Relationships and causality between FX and other markets can change

US 10Y gov t bond y ield % (LHS) Index of USD v s 'fragile fiv e' ex change rates (BRL, IDR, INR, TRY and ZAR), 100=01 May 13 (RHS) 3.3

124

3.1 119

2.9 2.7

114

2.5 2.3

109

2.1 1.9

104

1.7 1.5

99

01-May 21-May 10-Jun 30-Jun 20-Jul 09-Aug 29-Aug 18-Sep 08-Oct 28-Oct 17-Nov 07-Dec 27-Dec 16-Jan 05-Feb Source: HSBC, Bloomberg

consistency of response. When the US stock market is falling, all emerging market currencies more often weaken against the USD than strengthen. All are below the 50% line. So while G10 has a 50:50 split between winners and losers, for EM FX, the pattern is exclusively bearish. Now we can drill down to individual currency performance. Chart 5 examines how EM FX fare against the USD when the decline in the S&P500 is 4% or more in a given week. Such a decline would be consistent with a troubled equity market, but not necessarily a traumatised one. The pecking order is similar to that shown in Chart 2 when we confined ourselves to three somewhat arbitrary periods of equity market weakness. However, the ZAR, TRY and RUB are not quite so poorly rated. The CZK, ILS and CNY remain the relative EM safe havens.

Spare a thought for causality The supposition of much of the earlier discussion is that in a RORO world, the FX market takes its cue from the stock market. However, as we have seen recently, the FX market can sometimes be the leader rather than the follower.

Chart 6 shows the currency performance of the “fragile five� against US 10-year government bond yields. Since May 2013, when tapering fears began to take their toll on EM FX, the fortunes of the fragile five have been determined by US government yields. The higher the yields, the worse the performance of these vulnerable currencies. However, more recently, the relationship has flipped. Currency weakness for the fragile five has seen US yields fall due to a safe haven bid. Rather than yields driving FX, currencies are now driving bond prices. Extending this logic further highlights a more problematic and damaging causality. We illustrate this in chart 7. Under normal conditions, the economy might drive interest rates and the stock market, and this in turn could determine the performance of the currency. However, under a currency crisis situation, the causality can run in the opposite direction. The currency dictates the move in interest rates which in turn determines the fortunes of both the stock market and the economy. FX can rule the roost.

13


abc

Macro Currency Strategy February 2014

7. In a crisis, FX can become the driver to economic fortunes

1. Normal Conditions Economy

Rates

FX

Equities 2. Crisis Conditions Economy

Rates Equities

Source: HSBC

Conclusion The decline in equity markets since the start of the year has revived RORO as a driver to global currencies. In examining how currencies behave during periods of stock market declines, the usual suspects feature among the safe havens and “risk on� plays. But with the CHF and JPY constrained by local policy choices, the USD may surface as the safe haven of choice, perhaps joined by EUR and GBP. In emerging market FX, it will remain a battle of the uglies, with all currencies historically struggling against the USD when the US stock market is weak. But it is also important to remember that FX need not always be a follower of other markets. US Treasury yields used to drive EM FX, now they follow it. In normal times, the economy drives FX, but the danger is that should the FX crisis intensify, it will be currencies that dictate economic fortunes, not the other way around.

14

FX


abc

Macro Currency Strategy February 2014

Long-term forecasts Long term planning assumptions We normally publish FX forecasts with about an 18-24 month time horizon. The purpose of these forecasts is to give customers a very short hand way of identifying where we see the principal risks in the FX market over the next year or so. As always, we would caution against taking our point forecasts too seriously. They are only designed to show whether we see the principal risk as being that a currency goes up or down, a little or a lot over the coming year. Long experience has shown us that when we are basically right on market direction, the market moves further and more quickly than we dare forecast, and one year targets can be reached very quickly. When we have the direction wrong, we can be wrong for a very long time. Given the problems of forecasting out one year, many are understandably reluctant to venture a view for further out. However, we are aware that a number of our customers have a need for some indication of the likely FX market direction over a longer term horizon for planning purposes. So again, with some trepidation, we publish longer term forecasts. If our one year forecasts need to be treated with caution, it goes without saying that

Methodology The forecasts presented on the following two pages are based on the following methodology: 1

Short-term forecasts to the end of 2015 are taken from our existing numbers

2

We estimate long term ‘fair value’ exchange rates based on a rate that would be consistent with long term external balance sustainability. These are essentially PPP values adjusted for some notion of sustained long term capital flows and are sometimes called fundamental equilibrium exchange rates (FEERs). For a discussion of these, and alternative estimates, see Peterson Institute for International Economics, Policy Brief, June 2010.

3

We assume a gradual convergence to the long term ‘equilibrium’ levels over the five years beyond our short-term forecast horizon.

Compared with the last time we reviewed our long term forecasts (see Currency Outlook ‘August 2013’, August 2013), the major changes have been in the EM currencies, in particular the so-called ‘fragile five’ group. In the G10 space, we see Sterling and the euro as already close to long term ‘fair value’ levels.

the longer term numbers are even less to be relied upon. Nevertheless, we are aware that decisions and plans have to be made, and that a defensible set of forecasts may be of some value.

15


abc

Macro Currency Strategy February 2014

Long term forecasts versus USD 2016f

Average year Americas x x x x

x Canada (CAD) Mexico (MXN) Brazil (BRL) Argentina (ARS) Venezuela (VEF) Chile (CLP) Colombia (COP) Peru (PEN) Uruguay (UYU)

x

2017f x

2018f x

2019f

2020f

x

1.12 12.90 2.69 15.40 22.50 560 2020 2.70 24.30

1.10 13.00 2.79 17.90 30.00 570 2040 2.70 25.20

1.10 13.10 2.87 20.00 30.00 580 2060 2.70 26.00

1.10 13.20 2.94 22.30 45.00 590 2080 2.70 26.60

1.10 13.30 3.01 24.90 60.00 600 2100 2.70 27.25

Eurozone (EUR*) x UK (GBP*) Sweden (SEK) Norway (NOK)

1.25 x 1.50 6.64 5.76

1.25 x 1.50 6.64 5.76

1.25 x 1.50 6.72 5.76

1.25 x 1.50 6.72 5.76

1.25

Russia (RUB) Hungary (HUF) Turkey (TRY)

37.8 223 2.15

39.0 224 2.15

40.1 224 2.20

41.3 224 2.25

42.6 224 2.25

x Japan (JPY) India (INR) Australia (AUD*) New Zealand (NZD*)

95 60.0 0.85 0.80

90 58.0 0.80 0.75

90 55.0 0.75 0.70

90 55.0 0.75 0.70

90 55.0 0.75 0.70

China (CNY) Hong Kong (HKD) Taiwan (TWD) South Korea (KRW)

5.80 7.80 29.5 1070

5.70 7.80 30.0 1130

5.60 7.80 30.0 1200

5.50 7.80 30.0 1200

5.50 7.80 30.0 1200

34.0 3.38 12000 47.0 1.24

33.5 3.42 11600 48.5 1.22

33.5 3.45 11200 50.0 1.20

33.5 3.45 11200 50.0 1.20

33.5 3.45 11200 50.0 1.20

10.00

10.00

10.00

10.00

10.00

Western Europe Other Western Europe x x x x Emerging Europe x x x Asia/Pacific

1.50 6.72 5.76

North Asia

x x ASEAN 5 x x x Africa x Source: HSBC

16

x Thailand (THB) Malaysia (MYR) Indonesia (IDR) Philippines (PHP) Singapore (SGD) x South Africa (ZAR)


abc

Macro Currency Strategy February 2014

Long term forecasts versus EUR and GBP average year Vs euro Americas x x Europe x x x x x x x x Asia/Pacific x x x

x x US (USD) Canada (CAD) x UK (GBP) Sweden (SEK) Norway (NOK) Switzerland (CHF) Russia (RUB) Poland (PLN) Hungary (HUF) Czech Republic (CZK) x Japan (JPY) Australia (AUD) New Zealand (NZD)

Vs sterling Americas x x Europe x x x x x Asia/Pacific x x x

x x US (USD) Canada (CAD) x Eurozone (EUR) Sweden (SEK) Norway (NOK) Switzerland (CHF) x Japan (JPY) Australia (AUD) New Zealand (NZD)

2016f

2017f

2018f

2019f

2020f

x x 1.25 1.40

1.25 1.38

1.25 1.38

1.25 1.38

1.25 1.38

0.83 8.30 7.20 1.30 47.3 3.80 290 26.0

0.83 8.30 7.20 1.35 48.8 3.70 280 25.0

0.83 8.40 7.20 1.40 50.1 3.60 280 24.5

0.83 8.40 7.20 1.40 51.6 3.60 280 24.0

0.83 8.40 7.20 1.40 53.3 3.60 280 24.0

119 1.47 1.56

113 1.56 1.67

113 1.67 1.79

113 1.67 1.79

113 1.67 1.79

1.50 1.68

1.50 1.65

1.50 1.65

1.50 1.65

1.50 1.65

0.83

0.83

0.83

0.83

0.83

10.0 8.6 1.56

10.0 8.6 1.62

10.1 8.6 1.68

10.1 8.6 1.68

10.1 8.6 1.68

143 1.76 1.88

135 1.88 2.00

135 2.00 2.14

135 2.00 2.14

135 2.00 2.14

Source: HSBC

17


abc

Macro Currency Strategy February 2014

Macro Health Check This is an extract from the full report: ‘Macro Health Check: Scanning for warning signs in the global economy’, 24 January. The recent emerging markets experience is a clear example of how focusing on the most likely outlook for growth we lose track of vulnerabilities that are accumulating. When global liquidity was cheap and abundant emerging market growth appeared unstoppable. However, the very mention of Fed tapering and reversal of global capital flows revealed serious deficiencies including ballooning current accounts and infrastructure weakness. We try to assess whether current growth in the 39 countries we cover is 'healthy' and sustainable or whether downside risks are emerging. We highlight any countries which receive a number of ticks on the checklist below:  Balanced growth – We consider whether GDP has moved up from trend and whether the labour market has become much tighter. We then look at some of the details of GDP considering if either investment or consumption have materially gained momentum relative to the trend seen in the five years before.  Borrowing from the future – Here we focus on any deficits or surpluses that are accumulating in the country’s current account positions and changes in FX reserves. Holdings of FX reserves are arguably more important for emerging economies. We then look at sectoral deficits considering government finances, broad money growth

18

and lending by the household and corporate sector.  Structural issues – The variables so far described tell us something about the pressures of demand. But supply side of the economy is just as important. A demand shock coupled with supply side problems and bottlenecks is more likely to quickly escalate into inflation. We were able to identify that above trend GDP growth, credit growth, investment booms and deteriorating current account positions are the most reliable indicators of potential future trouble. By contrast, inflation and fiscal positions often remain benign providing false signals of health.

The diagnosis Following the checklist above some of the challenged countries we identify are: Indonesia, Brazil, Turkey and India: The problems in these economies have been well covered in recent months with their precarious current account positions receiving most attention. Markets have moved significantly but the economic ‘adjustment’ has barely begun. The recent rate hikes have reduced credit availability to corporates which brought slowdown in investment spending. Yet given the state of infrastructure in all these economies this is where spending is required. Inflation remains sticky. The currency declines have no doubt contributed by pushing up headline inflation while capacity is still tight with unemployment near record. Corporate liquidity has deteriorated markedly in

Karen Ward Senior Global Economist HSBC Bank plc +44 20 7991 3692 karen.ward@hsbcib.com James Pomeroy Economist HSBC Bank plc +44 20 7991 6714 james.pomeroy@hsbc.com


abc

Macro Currency Strategy February 2014

Turkey, India and Brazil in the past year, leaving firms vulnerable to further interest rate hikes should they be required. Further, for all these economies fiscal deficits remains a major drag on growth. With elections this year in all these economies, rebalancing the fiscal books and structural reform are unlikely to be policy priorities. So far this has caused the central bank to take the main role in attracting capital, rather than the fiscal macro and micro adjustment required to really alter the course. South Africa is the other country that collectively makes up what the market has come to refer to as ‘the fragile five’. However, on our health check it raises fewer concerns than others in the club. The economy has already slowed a long way, credit growth is moderating and the corporate and banking sectors look less vulnerable. Philippines and Malaysia: These economies have been under the radar in the recent EM sell-off because they are not in the ‘current account deficit club’. But there are still reasons for closer scrutiny. Growth remains extremely strong, indeed Malaysian consumption grew at almost 9% last year. Investment is also bumper, so much so that the fact growth is not higher implies productivity is falling. The Philippines has seen a massive pick up in broad money growth following FX intervention, but it isn’t clear if this intervention is being adequately sterilized given corporate liquidity ratios have deteriorated. Both economies are running a current account surplus, although the size of Malaysia’s surplus fell markedly in 2013. The fiscal positions in both countries are somewhat less healthy. Japan: ‘Abenomics’ has managed to kick-start the Japanese economy. Growth has picked up but despite the massive decline in the yen the current account position hasn’t improved and the fiscal deficit remains large. The question is whether

growth can be maintained beyond the consumption tax hike in April. There has so far been a very limited pick up in any measures of money growth or credit. Most of the promise of higher productivity lay with Abe’s third arrow –structural reform. However, disappointingly, Japan’s ease of doing business rank is not only low by developed world standards but getting worse. UK: After years of stagnation, the UK’s recovery has finally begun. However, the foundations of growth are not strong. Despite the weakness of sterling, the UK’s current account position hasn’t improved. Indeed, only Colombia, Turkey and South Africa’s current account positions were worse in 2013. With considerable policy stimulus still in the system, attention is turning to the Bank of England’s exit strategy. However the UK’s fiscal position remains dire, which begs the question whether the removal of stimulus shouldn’t be fiscal withdrawal. Colombia & Chile: Colombia and Chile have both performed well in recent years and appear to be at capacity. The labour markets are particularly tight. Both have seen a material deterioration of their fiscal positions and credit growth is rapid. The quality of lending is of particular concern in Chile. Measures of corporate liquidity have deteriorated markedly and there is a relatively poor level of capital to risk-weighted assets in the banking system. In Colombia the structural problems are of more concern. Infrastructure is both poor and deteriorating. The high level of youth unemployment raises the potential for social unrest. Egypt & Argentina: Serious concerns are apparent but also well known for Egypt and Argentina. Rapid money growth to fund large fiscal deficits and falling FX reserves are all components of the story.

19


abc

Macro Currency Strategy February 2014

Asian FX: what would make us think differently? This is an extract from the full report: Asian FX Focus: What would make us think differently?, 28 January 2014. For some time, we have preferred North Asian currencies. The relatively sound balance of payment positions and undervalued status of the KRW and the TWD are key sources of attraction. Although we expect the divergence between North Asian currencies and others in the region to persist in 2014, we acknowledge that there are potential developments that could make us change our mind. There are two factors that could hinder the performance of North Asian currencies, in particular the KRW and the TWD: 1

A significantly weaker JPY

Although, significant JPY weakness is not our central case, if happens, this could be negative for its North Asian neighbours. For instance, in Korea persistent JPY weakness in 2013 raised concerns over corporate earnings and thus equity performance of large Korean exporters. While we believe that the KRW has become more of a “bond currency” in recent years, there is still a link between equity flows and the KRW. For Taiwan, export data continue to disappoint (despite moderate improvements in export orders) and the trade surplus shrunk in December 2013.

20

The degree of sensitivity of both currencies to the JPY weakness will also depend on the pace and nature of JPY depreciation. If Japanese corporates respond to on-going JPY weakness via downward price adjustments it could be more telling for the KRW and the TWD. But so far there has been little evidence (see ‘Chart of the Week: Why are Japanese exports not booming?’, 24 January 2014). But even then, the negative impact of a weaker JPY should not be overstated. Although Korea and Taiwan both export similar goods to Japan, on a bilateral basis, both are net importers from Japan and a weaker JPY could help to reduce import costs. 2

A slower Chinese economy

The bigger risk for both currencies is from a sharper slowdown in China’s growth and import demand. Compared to the rest of the countries in the region, Korea and Taiwan’s exports to China as percentage of their total exports are among the highest. Weaker Chinese economy would clearly impact many other currencies too, but the first impact would likely be a much weaker KRW and TWD. The nature of a China slowdown also matters. If China’s growth slows in terms of exports and investment but domestic demand and imports both hold up well, then Taiwan and Korea’s exports may not suffer as badly. One possible offsetting factor to slower growth in China is that both Taiwan and Korea are net commodity importers. They could therefore benefit from lower commodity prices.

Paul Mackel Head of Asian FX Research The Hongkong and Shanghai Banking Corporation Limited +852 2996 6665 paulmackel @hsbc.com.hk Ju Wang Senior Asian FX Strategist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4340 juwang@hsbc.com.hk Dominic Bunning Senior Asian FX Strategist The Hongkong and Shanghai Banking Corporation Limited +852 2822 1672 dominic.bunning@hsbc.com Julia Wang Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6568 juliarwang@hsbc.com.hk Aditya Jagati FX Associate Bangalore


abc

Macro Currency Strategy February 2014

RMB to remain resilient, but forwards are too low

remains elevated for much of the region. Should we see faster-than-normal deleveraging, coupled with structural reforms, conditions would likely warrant a more optimistic view towards Asian currencies that have struggled.

As far as the RMB is concerned, a slower Chinese economy is less likely to harm the currency. In such a scenario, the RMB would likely prove to be resilient due to China’s relatively closed capital account, high interest rate advantage, solid FX reserve coverage, and a still positive current account. The rising concern over domestic leverage and growth slowdown will likely hurt the currency’s long-term appreciation outlook. However, we see limited depreciation risk as policymakers are likely to put financial stability and the RMB’s internationalisation ahead of exports.

The initial impact of slower credit growth may not be positive for the local currency but it would point to a higher probability of better external balances appearing further out. This has been happening to an extent for some countries already, especially in India. This helped reduce the depreciation pressures on the INR in 2013.

US Treasury yields & FX hedging

3

Finally, another factor to bear in mind for currencies such as the KRW and the TWD is the potential for the acceleration in outward investments by domestic investors if US yields continue to move higher. This could see more outflows, and potentially less FX hedging on the investments, putting pressure on their currencies.

Southern Asia: deleveraging, inflation and valuation What could act as an impetus for Southern Asian currencies to move onto a sounder footing? 1

The inflation backdrop of those currencies suffering from negative real rates

Most Southern Asian economies are facing rising price pressures and monetary policy may still need to play catch up (India and Indonesia are two obvious cases). Some of the others are also suffering from negative real interest rates (Malaysia, the Philippines and Singapore). If policymakers deliver tighter monetary policy amidst a calmer market, this may further increase the attractiveness of their assets and currencies. However, we also need to connect this to what is needed to change the credit cycle. In a few countries credit growth has softened, although it

2

Improvement in external balances

More attractive valuations of either the currencies or respective local assets

For now, the INR alone stands out as relatively inexpensive from a REER perspective. Most other currencies in the region have cheapened since the middle of 2013. However, few are signalling material value just yet, and most still appear to be overvalued compared to North Asian currencies.

Watch the DM recovery Something that matters for all EM Asian currencies, is how broad-based a USD rally will be in 2014. If US data were to turn for the worse and US Treasury yields would come back down, this could lead to a renewed hunt for higher returns. This would likely benefit the Southern Asian currencies more than their North counterparts. Moreover, we think North Asian currencies have benefited more from the recently strong EUR via trade competitiveness and the FX policy channel. However, we believe that the USD will “spread its wings” against the EUR (see ‘Currency Outlook: USD rally to spread its wings’, 8 January 2014) and this could take away some support for North Asian currencies.

21


abc

Macro Currency Strategy February 2014

Dollar Bloc CAD: weaker now and later The Canadian dollar’s weakening trend in late2013 accelerated in January, putting the currency at its lowest levels against the USD in four-and-a-half years. The CAD’s more pronounced declines have placed it as the worst performing G10 currency against the USD in the year-to-date (-3.5%) (chart 1), and by a wide margin. That is partly a function of a change in Bank of Canada rhetoric, which encouraged additional CAD declines on top of those already stemming from prior shifts in broader fundamental conditions. We have been bearish on the CAD but its declines have already reached some of our late-year targets. As such, we are adjusting our forecasts and now expect USDCAD to reach 1.15 later this year.

reducing its bond buying program. That event supported the USD and contributed to downward pressure in a broad range of currencies, including the CAD. That was followed later last year by the Bank of Canada’s decision to drop its tightening bias, a dovish shift by the Bank and one that was accompanied by a shift in US-Canada interest rate differentials that reduced the CAD’s interest rate cushion. The BoC’s shift was in fact prompted by sluggish growth and low inflation in Canada’s own economy, another drag on the CAD. And broader shifts have also been seen in Canada’s trade position – from surplus to deficit earlier in the global financial crisis – as well as the peak and subsequent decline in the global commodity cycle.

The Bank of Canada weighs in With those cyclical and structural factors weighing in, the CAD had been falling slowly but steadily, most notably since Q4-2013 but really since late-2012. However, in January the Bank of Canada added another element of stress to its currency. In its January policy statement, the BoC

Markets have certainly become aware of the changing backdrop for the CAD. Some of the shift away from persistent years of CAD strength followed the Federal Reserve’s comments in May and June of 2013 indicating its intention to begin

1. CAD is the worst performer in G10 so far this year

3

%

G10 FX performance v s USD, 2014 YTD, %

%

2.62

2

1.33

2

1.28

1

3

1

-0.02

0

0 -1

-0.61

-0.64

-0.77

-1 -0.9

-2

-2

-3

-3

-4

-3.53 JPY

Source: HSBC, Bloomberg

22

AUD

NZD

SEK

CHF

GBP

EUR

NOK

CAD

-4


abc

Macro Currency Strategy February 2014

retained its neutral bias, contrary to scattered speculation they could adopt an easing bias. But with inflation expected to remain well below the 2% target for “some time,” the downside risks to inflation have become more important. In the wording of its forward guidance, it removed the phrase, “the Bank judges that the substantial monetary policy stimulus currently in place remains appropriate,” and in deciding to keep the overnight target rate at 1%, said instead, “The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks”. That is still a neutral bias, but the new statement opens the door for a possible policy easing that previous guidance did not. And the current stance is no longer is described as representing “substantial monetary policy stimulus.”

CAD weakness welcomed On the currency, the accompanying Monetary Policy Report noted the “persistent strength” of the CAD, and said that despite the currency’s recent depreciation, it “remains strong and will continue to post competitiveness challenges for Canada’s non-commodity exports.” In a press conference that followed, BoC Gov. Poloz was more specific. While acknowledging that US conditions are the key driver of exports, he said that CAD weakness is still a benefit to the Canadian economy, and that the decline in the currency is “icing on the cake” for the country’s exporters. Although he attempted to highlight the much greater weight/importance of US demand dynamics in terms of supporting the country’s exports and exporters, FX market participants will judge his comments as ones that welcome weakness in the currency.

A shift in rhetoric and emphasis Further, when Poloz took over as Governor in mid-2013, he made some changes to the way the Bank characterized the currency. In parliamentary

testimony that June, responding to a question about the CAD in relation to potential support to the country’s exporters, he said, “I won’t offer a running commentary on the Canadian dollar, where it is and where it should be.” And he backed that up in July 2013 by removing what had been a long standing reference to the CAD’s “persistent strength” in the Bank’s periodic policy statements. However, these more recent developments represent a change to that initial guidance. And somewhat surprisingly, the MPR’s new characterization that the CAD “remains strong” followed the currency’s 6%-plus depreciation versus the USD since last summer. The BoC’s shift in emphasis, and its timing, has understandably received the market’s attention and will add to headwinds for the CAD. During the global financial crisis, as the CAD appreciated during several rounds of Fed QE and the associated USD weakness, we often referred to Canada as the ultimate “good sport” in the world’s currency wars that occasionally flared. We used that description because Canadian authorities, unlike those from many other countries, generally refrained from being drawn into that war. They tended not to criticize the global effects of easy Fed policy or complain about CAD strength. But now, with global conditions normalizing (or at least evolving), and with the CAD’s “overvaluation” reversing, the shift in the BoC’s language marks a potentially quite important shift by policy makers.

Inflation data takes on greater weight All of the economic data can matter but the inflation data are particularly important, as low inflation has received greater emphasis from the BoC. The latest CPI data showed a rise to 1.2% YoY in December from 0.9% YoY in November. That reading at least brings it back up into the BoC’s target band (1%-3%) but still leaves inflation too low for the BoC’s liking. Headline

23


Macro Currency Strategy February 2014

CPI has ranged from 0.4% to 1.2% since Q3 of 2012. Of course, the BoC targets future inflation, not current inflation. But the persistently low readings of headline CPI have clearly raised more concern about overall inflation backdrop. As such, the upcoming inflation data and inputs to it will take on potentially more significance to interest rates and the CAD, with even lower readings increasing the perceived risk of easing and weighing on the currency, while higher readings would reduce easing expectations and likely work to the currency’s advantage.

Conclusion We noted at the outset that the CAD was the worst performing currency against the USD in the year-to-date. It is also the case that positioning data shows a significant increase in short CAD positions. Those conditions increase the potential for some near-term consolidation in USD-CAD, rather than type of accelerated gains as were seen in January. But the broader fundamental and policy backdrop is one that should continue to work against the CAD in the coming year. As a result, we expect further upward pressure on USD-CAD, and now expect it to finish 2014 at 1.15, up from our previous forecast of 1.10.

24

abc


abc

Macro Currency Strategy February 2014

AUD: upside surprises are limited Up until the beginning of February the AUD has been on a clear downward path (chart 1). In particular, during the recent EM FX rout the AUD was one of the G10 currencies that suffered the most. Although, despite falling 1% against the USD during the period of 22-28 January, the currency has actually been one of the best performers in the G10 arena following the emerging market sell-off. We believe that any upside potential from the current level of around 0.90 is limited. The RBA’s shift towards a more neutral policy bias is clearly a positive development for the AUD. However, occasional disappointing news from China and the broader uncertainty surrounding emerging markets are likely to temper any significant upward moves in the AUD. The AUD performed extremely well over the first two weeks of February appreciating 2% against the USD. The main catalyst for the rally was a shift away from the previous easing bias at the RBA’s 4 February meeting. The central bank left the cash rate unchanged but added forward guidance by saying that the 'most prudent course is likely to be a period of stability in interest rates'. They also dropped the repeated comment that the AUD is ‘uncomfortably high’. The commitment to maintain

1. Up until recently AUD-USD was trending downwards

stability in the interest rate path is likely persist, while the tone regarding the level of the AUD may change swiftly. Were the level of AUD to rise, we may see the RBA trying to talk the currency down again, and as previous evidence suggests, they tend to be successful. Australia economic fundamentals still remain wobbly. On 13 February, jobs numbers surprised on the downside again with employment falling by 4K against expectations of a 15K rise while the unemployment rate was higher than consensus (6.0% vs exp 5.9%). With patchy local data, the AUD would be vulnerable to any fresh ‘risk off’ mood in global markets. Another point of worry is Australia’s close relationship with the economic performance of Asia and, particularly, China. Chart 2 shows that trade-weighted AUD has closely followed China’s PMI manufacturing data since 2011. The flash HSBC manufacturing PMI eased by more than expected, to a six-month low of 49.6 in January. This was a second disappointing PMI release form China as December data showed some slowdown. While a Chinese slowdown is not our central case scenario, if the data continues to disappoint, this will certainly weigh negatively on the AUD.

2. There is a link between the AUD and China PMI data

Trade-w eighted AUD HSBC China PMI manufacturing

AUD-USD 0.97 0.94 0.91

0.97 0.94 0.91

0.88

0.88

0.85

0.85

Sep-13 Oct-13 Nov -13 Dec-13 Jan-14 Feb-14 Source: HSBC, Bloomberg

30%

6m rolling % change

30%

20%

20%

10%

10%

0%

0%

-10%

-10%

-20%

-20%

-30%

-30%

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: HSBC, Bloomberg

25


abc

Macro Currency Strategy February 2014

NZD: trapped between ‘risk off’ and ‘carry’ The combination of the RBNZ’s ‘no change’ policy announcement and the EM FX troubles has seen the NZD particularly choppy so far in 2014. We believe that the NZD is trapped between two opposing forces in the medium-term. The local factors such as sound fundamentals and higher rate expectations point towards NZD outperformance, but the uncertainty surrounding emerging markets and the possible continuation of risk-off mood could temper the currency’s move higher. However, in our view, as the year progresses and domestic interest rates begin to rise the carry phenomenon should bring further support for the currency, and this should see the NZD higher. Similarly to the AUD, the Kiwi performance since EM FX calmed down was mainly driven by the outcome of the central bank meeting. On 29 January the RBNZ left its cash rate unchanged at 2.50%. The unchanged policy rate disappointed the market, although a hike at that meeting was a minority view. The central bank was noticeably more upbeat on the outlook for domestic activity, although they said that they don’t believe the current level of exchange rate is ‘suitable in the long run’. This was viewed as the main reason for them to leave the rates on hold. Despite the concerns over the high level of the

2. The NZD looks stretched on the valuation basis

0.80

Source: HSBC, Bloomberg

26

Jan-14

Feb-14

Source: HSBC, Bloomberg

JPY

0.80

CAD

0.81

AUD

0.81

NOK

0.82

USD

0.82

EUR

0.83

CHF

0.83

% gap betw een current trade-w eighted REER and 5y r MA 12% 12% 8% 8% 4% 4% 0% 0% -4% -4% -8% -8% -12% -12% -16% -16% -20% -20% -24% -24% SEK

0.84

GBP

NZD-USD 0.84

Dec-13

However, there is an external threat which for now could limit the NZD’s outperformance. The currency historically has had a high correlation with RORO, and alongside the AUD and CAD is most likely to lose out in G10 if there is a renewed bout of ‘risk off’. Another thing worth highlighting is that from the valuation standpoint, the deviation of the NZD REER from its 5yr moving average indicates that the NZD is currently around 11% overvalued (Chart 2). This measure also suggests that the NZD is more overvalued than any other currency in the G10 space. As a result, given caution on the risk front in the markets and significant overvaluation we expect the NZD to stay range-bound in the medium-term.

NZD

1. NZD has been choppy so far in 2014

currency, the central bank flagged that interest rates will need to rise and that they expect to ‘start the adjustment soon’. The market is currently pricing a 25bps rate hike to be delivered in March, and an additional 50bps by the end of the year. The NZD continues to be a carry currency and, therefore, higher interest rate expectations should help support the currency. Moreover, as Cash Rate starts to rise we should see this link strengthen further.


abc

Macro Currency Strategy February 2014

G10 at a glance CHF

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0

1.8 1.6 1.4 1.2 1.0 0.8

EUR- CHF (LHS)

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

0.6

USD- CHF (RHS)

Switzerland: Constrained by the floor and EM worries  The CHF regained some of its allure as a safe haven amid the renewed concerns about emerging market FX early in 2014. Its behaviour reinforces our view that EUR-CHF will struggle to deviate far from 1.25, constrained on the downside by the EUR-CHF floor, and to the topside by periodic bouts of nervousness in global markets.  The stabilisation in Eurozone peripheral bond markets should provide some upward impetus to EUR-CHF but this story may already have run its course, with spreads to bunds showing signs of stabilisation over the last few weeks rather than additional tightening.  The lacklustre growth backdrop in the Eurozone is unlikely to encourage Swiss investors to move capital out of Switzerland, a pre-condition for any meaningful rally in EUR-CHF. The threat of ECB policy easing will also cap EUR-CHF topside.

Source: Bloomberg

EUR-NOK

8.5

8.0

8.0

7.5

7.5

7.0

7.0 Jan-13 Jan-14

8.5

Jan-11 Jan-12

9.0

Jan-09 Jan-10

9.5

9.0

Jan-07 Jan-08

9.5

Jan-05 Jan-06

10.0

Jan-03 Jan-04

10.5

10.0

Jan-02

10.5

Norway: More stable, but risk-off mood is a headwind  The NOK has begun to stabilise lately, but concerns about the cyclical slowdown and low FX liquidity remain a potent offset to the currency’s strong structural fundamentals.  Norway’s mainland economy is expected to outpace most of Europe’s in 2014, interest rates remain higher than its trading peers and inflation is high enough to suggest interest rate cuts are unlikely. However, the recent run of data has been generally softer than expected, meaning growth expectations are on the retreat, despite being relatively high compared to other countries.  The NOK is also increasingly behaving like a “risk on” currency, as fears about its low level of liquidity means periods of unease are a headwind to NOK gains. Ultimately, we believe the combination of strong, albeit slowing, Norwegian growth and the very healthy current and fiscal surpluses will allow NOK to rally against a EUR which we expect to be undermined by future ECB easing.

Source: Bloomberg

EUR-SEK

Jan-13 Jan-14

Jan-11 Jan-12

Jan-09 Jan-10

Jan-07 Jan-08

Jan-05 Jan-06

Jan-03 Jan-04

12.0 11.6 11.2 10.8 10.4 10.0 9.6 9.2 8.8 8.4 8.0 Jan-02

12.0 11.6 11.2 10.8 10.4 10.0 9.6 9.2 8.8 8.4 8.0

Sweden: Further strength ahead  The SEK has stabilised so far in 2014, and we expect the currency to strengthen later in the year.  For now, the Riksbank’s focus is on the low level of inflation rather than the early signs that activity may have bottomed in the Swedish economy. The resultant dovish rhetoric will make it hard for the currency to strengthen in a marked way until the disinflation threat has receded. In addition, the Finance Ministry has recently emphasised that a weaker SEK would be beneficial in promoting exports, thereby reducing the reliance on consumption and the associated surge in house prices.  Nonetheless, we also do not expect any further weakness in the SEK as we believe the rate cutting cycle is already complete and the central bank’s dovishness is in the price. GDP growth expectations for 2014 have held steady at 2.4% for 2014, and both the PMI manufacturing and PMI services indices remain consistent with accelerating activity.

Source: Bloomberg

27


abc

Macro Currency Strategy February 2014

Asia – regional overview It has been a lacklustre start to the year for Asian currencies. Even with softer US Treasury yields, Asian currencies have been unable to deliver a decent "New Year rally", unlike in previous years. This price action is concerning and points to the challenging path for most of the region's currencies this year. The structurally sounder nature of North Asian currencies should still see them outperform their regional peers through the course of 2014. But the risks are rising that even these could lose some of their shine. Our base case scenario has been that regional differentiation amongst Asian currencies would prevail. This is based on the idea that the North Asian countries' balance of payments is better and the KRW and TWD are comparatively cheaper on long-term valuation measures. The RMB is on a slightly different path but should remain relatively strong as well, supported by high real interest rates and FX policy, despite some signs of being overvalued. The rest of Asian FX (INR and the ASEAN currencies) have also, for the most part, traded disappointingly, especially taking into account the lack of a meaningful rally after the softer US payrolls data and the fact that Q1 is usually a period where higher yielding and higher beta currencies outperform in Asia. That fact that the likes of the INR and IDR have only been able to tread water versus the USD is a concern. As for ASEAN currencies such as the MYR, PHP and SGD, we continue to view their ongoing softness as a reflection of their negative real rate backdrops. For the THB, while external balances have been stabilizing somewhat, uncertain local political situation will continue to pose a challenge, though central bank activity will likely curb any aggressive movements in the currency.

28

But while we still think this divergence between North Asia and Southern Asia will persist through 2014, it is also worth considering what could make us alter our view. That is: what could make us think that North Asian currencies will materially underperform those in the South? Some key possible developments would include:  Significant JPY depreciation and the FX policy response in North Asia  The impact of slower Chinese demand  Higher US Treasury yield leading to greater outward investments and potentially less FX hedges from Korea and Taiwan  Tighter monetary policies in Southern Asia and possibly a faster deleveraging process  Better valuation in Southern Asian FX or other local assets  The possibility of a broader USD rally, especially in G10, whereby all Asian currencies would underperform to a similar degree For more details please see Asian FX Focus: What would make us think differently?, 28 January 2014 and Asian FX Focus: 2014 outlook: Survival of the fittest, 8 January 2014.


abc

Macro Currency Strategy February 2014

Asia at a glance USD-CNY

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0 Jan-05

8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0

China (CNY): Holding up  The RMB has started the year on a stronger footing than most of its regional peers. The currency continues to stay supported by high interest rates, a policy preference for a stable currency and a resilient current account surplus.  As none of these factors are likely to change in the near term, we see USD-CNY ending 2014 at 5.98. The current account surplus is likely to remain sizable, although seasonality suggests that trade surplus is typically much smaller in Q1. In addition interest rate liberalization will likely keep respective interest rates elevated and continue to attract inflows. Stable currency will still be preferred, although recent comments suggest greater willingness to adapt to market forces.  We believe bold FX reforms are needed to reduce the onesided appreciation pressures on the CNY and create greater RMB volatility. RMB internationalisation will accelerate in 2014, suggesting the path towards currency convertibility will quicken.

Source: Bloomberg

USD-CNH

6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14

6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00

China (CNH): A plan for Shanghai  On 2 December 2013, the PBoC published a proposal for the Shanghai Free Trade Zone (FTZ) which opened a number of new channels for broader cross-border flows.  Residents of the FTZ can set up free trade accounts (FTA) denominated in both CNY and foreign currencies, and non-residents are allowed to set up non-resident free trade accounts (NFTA). Transactions between these accounts and offshore accounts are free. Transactions between FTAs and onshore accounts are treated as cross-border. A number of other earlier restrictions will also be liberalised including with regards to cross-border lending and investments (see China: It's now official: Beijing is accelerating the pace of RMB convertibility, 3 December 2013 for full details).  We continue to expect a quick pace of FX internationalisation and liberalisation in 2014.

Source: Bloomberg

USD-MYR

4.8

4.8

4.4

4.4

4.0

4.0

3.6

3.6

3.2

3.2

2.8

2.8

2.4

2.4 97

99

01

03

05

07

09

11

13

Malaysia: Lingering concerns  As a result of a smaller current account surplus, the deterioration of MYR’s FX cover has been significant in recent years. Quarterly current account surpluses have declined from over USD20bn two years ago to less than USD10bn now. But just as important has been an ongoing widening of the income deficit. This has left the currency vulnerable to the reversal/FX hedging of capital flows.  The removal of fuel and sugar subsidies, whilst positive for the fiscal outlook, has resulted in higher inflation pressures since late 2013. As the BNM has opted for a wait and see mode, onshore real rates are now in slightly negative territory. This could hurt the MYR via either FX hedging or foreign investors trimming onshore positions.  The liquid nature of the onshore FX and bond markets and relative ease of market access means that the MYR will continue to be sensitive to cautious sentiment towards EM. The less interventionist nature of the BNM also means that MYR will remain volatile with bias towards depreciation in 2014.

Source: Bloomberg

29


abc

Macro Currency Strategy February 2014

Asia at a glance continued USD-INR

70 66 62 58 54 50 46 42 38 34

70 66 62 58 54 50 46 42 38 34 97

99

01

03

05

07

09

11

13

India: Past the worst  Since late 2013, India’s trade deficit has narrowed significantly and the outlook for the current account deficit is improving. The RBI has stood by its pledge and raised policy rate by another 25bps in January. A panel recommendation to formally adopt a CPI-targeting regime also raised some hopes.  Having said this, parliamentary elections (scheduled to take place before May this year) might make it difficult to see progress on fiscal prudence and structural reforms. The recent state elections registered a favourable outcome for the current opposition and the focus will be if a similar result occurs in the national election.  In terms of FX policy, the RBI’s willingness to use pockets of appreciation to build FX reserves is prudent. While the INR may have passed the worst, the nature of the capital account is very portfolio dependent. As a result the currency will remain sensitive to sudden changes in broad risk dynamics.

Source: Bloomberg

USD-IDR

16000

16000

14000

14000

12000

12000

10000

10000

8000

8000

6000

6000

4000

4000

2000

2000 97

99

01

03

05

07

09

11

13

Indonesia: No easy way out  The IDR lost nearly 20% against the USD in 2013 and the fundamentals remain more fragile than most of its peers’.  As we have been saying for some time, the large income deficit, driven by equity dividends and bond coupon payments, has been a significant pressure point for the IDR. These flows are much harder to tackle as they cannot be easily reduced by tighter monetary policy or changes to import or export policies. However, tighter monetary policy may still be needed to calm investors who are still concerned about inflation although recent release of Q4 GDP data has showed some signs that domestic demand is starting to slow. There is a silver lining, however, as some of the recent trade data has improved.  We think the IDR will remain the more vulnerable to any tightness in global liquidity. The legislative election slated for April 2014 adds further uncertainty with regards the government and more importantly its policy direction.

Source: Bloomberg

USD-KRW

2000

2000

1800

1800

1600

1600

1400

1400

1200

1200

1000

1000

800

800 97

99

Source: Bloomberg

30

01

03

05

07

09

11

13

South Korea: Temporary weakness  The KRW started the year with more pronounced weakness than we have expected, even though we have noted the tendency of a less supportive current account surplus in Q1.  We think several factors have led to the currency’s recent underperformance. After a period of sustained appreciation by the KRW, markets are now taking the opportunity of a reversal in equity flows (-USD2.4bn year to date) and weaker BoP seasonality to adjust positions. More importantly, higher frequency data out of China has been less positive, which has led to concerns over impact on Korea’s exports and growth.  Having said that, we still think the currency’s underperformance is likely to be temporary. We still expect solid fundamentals to help the currency outperform its regional peers this year. The sharp reduction in external liabilities after the financial crisis has made the currency much more resilient to tighter USD liquidity than others in the region.


abc

Macro Currency Strategy February 2014

Latam– regional overview Room to differentiate The start of this year has been characterized by continued outflows of capital from EM that have accelerated as a result of a cocktail of poor political and economic events. Political tensions in Thailand and Ukraine were compounded by weaker than expected data from China and the US, as well as the Argentine central bank’s decision to allow the ARS to depreciate 15% last month. Beyond the ARS, the worst performer year-to-date has been the CLP, followed by the COP, both down around 5%. The MXN and BRL are only down a little over 2% while the PEN is off just 1%. This broadly fits with our view that the CLP is the most vulnerable currency in the region, exposed to declining interest rate differentials, concerns over domestic tax policy changes, and slowing Chinese growth. The COP’s fundamentals support a more stable price action as growth is rebounding and flows remain resilient, but with the CB still buying dollars and officials consistently touting the need for a weaker currency, it will be hard for the COP to rally unless broader EM sentiment improves. The MXN and BRL have reasons to outperform other EM currencies, and we believe this trend can continue. Mexico offers a strong cyclical growth story (HSBC 2014 GDP forecast is at 4.1%). Beyond that, the structural reforms enacted last year bode well for longer-term improvements in Mexico’s potential growth. A recovery in the US should also help Mexican exports. We recently took profit on our long MXN vs CLP trade after Moody’s upgraded Mexico’s sovereign debt rating to A3 from Baa1. Meanwhile, we see

the BRL’s pace of depreciation moderating in 2014 and outperforming other EM currencies based on higher interest rate differentials, relatively cheap valuations, and steady intervention from the BCB (USD1bn per week). While Brazil has many structural problems to address before we can call an end to the depreciation trend of the BRL, we still see it trading more stably in a risk-off period supported by the factors above and also by how expensive it is to short. We expect the PEN to keep outperforming the region. While Peru’s central bank (BCRP) may marginally increase its tolerance for a weaker PEN as its trading partners’ currencies soften, BCRP is also mindful of the private sector’s relatively high exposure to USD-held debt. As such, we expect intervention to continue to hold USD-PEN around the 2.80-2.83 area. Finally, our outlook for the ARS is for more weakness to come. Rapidly dwindling FX reserves, an appreciating currency on a real, inflation-adjusted basis, as well as continued capital outflow pressures, all call for further weakening of the ARS’s nominal rate vs the USD. We do not consider it sound for the authorities to defend the 8.0/USD rate indefinitely due to the high cost of reserves sales this would require. Moreover, the lack of nominal anchor (in the absence of tight fiscal policy) keeps pressures for a weaker ARS ahead.

31


abc

Macro Currency Strategy February 2014

Latin America at a glance USD-MXN

10.5

9.5

9.5

8.5

8.5 Jan-14

11.5

10.5

Jan-12 Jan-13

11.5

Jan-10 Jan-11

12.5

Jan-09

13.5

12.5

Jan-07 Jan-08

13.5

Jan-05 Jan-06

14.5

Jan-03 Jan-04

15.5

14.5

Jan-02

15.5

Mexico: Moody’s upgrade provides a lift  We have long argued that the MXN should outperform the rest of the region’s currencies based on its more attractive growth and balance of payments metrics. While growth last year was disappointing, we expect to see a strong rebound this year (our economists expect GDP growth of 4.1% in 2014), and recent high frequency data has begun to show signs of improvement.  Mexico’s better longer-term prospects were also recognised by the earlier-than-expected ratings upgrade from Moody’s in early February, taking the country’s foreign currency long term rating to A3 from Baa1. Moody’s cited the strong structural reform agenda, improved fiscal outlook and better credit metrics.  Valuations too are relatively attractive, and we favour buying the MXN against other currencies in the region, particularly the CLP, or elsewhere in EM on a relative value basis. We see room for the MXN to recover to 12.60/USD by year-end.

Source: Bloomberg

USD-CLP

Jan-14

Jan-13

Jan-12

Jan-11

400 Jan-10

400 Jan-09

500 450 Jan-08

500 450 Jan-07

600 550

Jan-06

650

600 550

Jan-05

650

Jan-04

750 700

Jan-03

800

750 700

Jan-02

800

Chile: Under pressure from various fronts  Our view that the CLP will underperform against both the USD and the rest of the LatAm currencies has been playing out.  We believe this underperformance will continue due to: a) Lower copper prices and subsequent weaker terms of trade; b) Narrowing of the interest rate differential between the CLP and USD; and c) Political uncertainties associated with the proposed changes tax and, possibly, foreign investment policies. Private sector external debt is also the highest in the region, at 40% of GDP (double the next highest country, Peru), which means further CLP weakness could induce more stress via this channel.  Going forward we see China economic data – particularly PMIs – as being the key variable setting CLP sentiment. Slowing China growth will likely weigh on commodities, weakening Chile’s terms of trade and putting additional downward pressure on the CLP. Any further rate cuts could also serve to undermine the currency.

Source: Bloomberg

USD-ARS

Source: Bloomberg

32

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Jan-02

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0

Argentina: Look for more depreciation  We remain defensive the ARS directionally but disengaged from a strategy perspective. As long as policies to control inflation are not introduced, the risks are for more currency weakness to come.  While the timing of the next leg higher in USD-ARS is difficult to predict, we would be biased to call for a move sooner rather than later. This is because we think that the current pace of USD sales by the BCRA is unsustainable. The longer the central bank tries to defend a stable ARS at 8.0/USD, the higher the probability we would see another stepped move higher in USD-ARS.  At the margin, the government can rely on new regulations to increase FX supply in the short term, but this would be only a temporary stop-gap to further depreciation. We have revised our year-end forecast to ARS10.0/USD from 8.5.


abc

Macro Currency Strategy February 2014

EMEA – regional overview Monetary policy normalisation Turkey’s and South Africa’s central banks have raised interest rates in January in the face of weakening currencies and rising inflation risks. Other countries such as Hungary and Russia have been also under severe pressure as the market started to question the logic of their monetary policy stance in a context of Fed tapering. We consider that all countries cannot be put in the same bucket. In the case of Turkey, The substantive tightening of monetary policy and the steps towards a more orthodox framework were required. We believe the sharp increases in rates are likely to support the TRY. The Turkish central bank has restored a risk premium, the carry is now attractive and the high interest rates will support the much needed macroeconomic rebalancing. It is worth highlighting that a strong increase in interest in any form has, historically, led to a significant and lasting TRY appreciation. Substantive rate hikes have supported the TRY in previous periods of TRY weakness

REER

Index 135

Index 135

130

Ov erv aluation

130

125

territory

125

120

120

115

115

110

CBRT hikes 350bp in

110

105

Oc t 11

105

100

CBRT hikes 400bp in Jun 06

95 Jan-05

100

The rate hike in South Africa is more debatable given the persistence weakness of the economic activity. The 50bp rate hiked decided in January is a response to a deterioration of the inflation outlook but we do not think that macro fundamentals justify a significant tightening of the monetary conditions in the upcoming period. If anything, the rate hike is ZAR positive at the margin. The FX market may indeed consider the adjustment of the SARB’s policy is healthy given an inflation rate foreseen to break the 3-6% target range in 2014. But for a ZAR stabilisation, a reduction of the current account deficit remains the pivotal element. We keep the view it will materialise in coming quarters leading to a moderate ZAR appreciation by year-end. In Hungary, the accommodative monetary policy and the bias of the central bank to reduce rates further are under market scrutiny and explain partly the recent HUF weakness. Although we consider that the depreciation relatively to macro fundamentals is excessive, the HUF may remain under pressure in the near-term if the ‘monetary policy normalisation’ remains a market theme. Similarly, the sharp RUB weakening raised the question of possible rate hikes whilst the Russian central bank said that it has no intention to scrap the RUB basket corridor before 2015. We do not see a hike and retain our directional RUB-bearish view although a consolidation is possible in the near-term.

95 Jan-07

Jan-09

Jan-11

Jan-13

Source: HSBC, Bloomberg

33


abc

Macro Currency Strategy February 2014

EMEA at a glance USD-TRY

Jan-14

Jan-13

1.1 Jan-12

1.1 Jan-11

1.3 Jan-10

1.5

1.3 Jan-09

1.5

Jan-08

1.7

Jan-07

1.9

1.7

Jan-06

2.1

1.9

Jan-05

2.1

Jan-04

2.3

Jan-03

2.5

2.3

Jan-02

2.5

Turkey: Central Bank sharply raised its interest rates  The Central Bank of Turkey (CBRT) sharply raised interest rates after an interim meeting on 28 January. They also took a step towards simplifying the policy mix, stating that the majority of funding to the banking sector will now be provided via the one-week repo rate of 10.0%, instead of via the overnight lending rate.  The substantive tightening and the steps towards a more orthodox policy framework is a crucial change for the FX market, in our view. The re-pricing of political risk amid a lack of action from the CBRT had created a vicious cycle for the TRY.  In the near-term, there are still persistent domestic and global risks. However, in the medium-term the change in the monetary policy is likely to support the TRY. Tighter monetary policy will contribute to the re-balancing of the economy. The high carry can also no longer be overlooked. It is also worth adding that in the past such a sharp rise in interest rates has led to a significant FX appreciation in the following months.

Source: Bloomberg

USD-ZAR

Jan-14

Jan-13

5 Jan-12

6

5 Jan-11

6 Jan-10

7

Jan-09

8

7

Jan-08

8

Jan-07

9

Jan-06

10

9

Jan-05

11

10

Jan-04

11

Jan-03

12

Jan-02

12

South Africa: Towards a monetary policy normalisation?  The South African central bank unexpectedly hiked its policy rate by 50bps in January. The Governor G. Marcus justified the hike by a deteriorating inflation outlook but also the need to normalise the monetary policy, while the Fed started to reduce its asset purchases.  One of the important variables behind the recent upward revision of SARB’s inflation projections is the ZAR weakness. The SARB seems to believe that the ZAR may weaken further, leading eventually to higher inflation.  Fundamentally, we do not think that much higher rates are required given the persistent weakness of economic activity. However, steps towards ‘monetary policy normalisation’ could be another way in a combination with a competitive currency to re-balance the economy. Ultimately, that should lead to a moderate FX appreciation.

Source: Bloomberg

EUR-PLN

Source: Bloomberg

34

Jan-14

Jan-13

3.0 Jan-12

3.0 Jan-11

3.4

Jan-10

3.4

Jan-09

3.8

Jan-08

3.8

Jan-07

4.2

Jan-06

4.2

Jan-05

4.6

Jan-04

4.6

Jan-03

5.0

Jan-02

5.0

Poland: A good barometer of market sentiment vis-à-vis EM  The Polish zloty has been rather resilient to the recent turmoil in emerging markets. From macro fundamental standpoint, the PLN has no reason to weaken, rather the opposite.  We stay on constructive on the PLN and keep our year-end forecast of 3.90 for EUR-PLN. If the PLN was to weaken significantly in the upcoming period, it would be for other reasons than for macro fundamental issues. The main threat to the PLN is related to the global capital flows dynamics to emerging markets. A sustained and profound reallocation of capital from EM to developed economies would certainly hurt the PLN. Poland has been one of the largest beneficiaries of capital flows to EM in recent years.  Hence, we consider that the PLN is a good barometer of investors’ sentiment vis-à-vis emerging markets.


abc

Macro Currency Strategy February 2014

HSBC Volume-Weighted REERs For full details of the construction methodology of the HSBC REERs, please see “HSBC’s New Volume-Weighted REERs” Currency Outlook April 2009.

The value of a currency Since FX prices are always given as the amount of one currency that can be bought with another, the inherent value of a currency is not defined. For example, if EUR-USD goes up, this could be because the EUR has increased in value, the USD has decreased in value, or a combination of both. One possible method for getting some insight into changes in the value of a currency is to look at movements in the value of a basket of other currencies against the currency of interest. For example, if EUR-USD increased over some time period, one could see how EUR had performed against a range of other currencies to determine whether EUR has become generally more valuable or whether this was simply a USD-based move. An effective exchange rate is an attempt to do this and to represent the moves in index form. There are two main approaches to building an effective exchange rate: Nominal Effective Exchange Rates (NEERs) and Real Effective Exchange Rates (REERs). NEERs simply track the weighted average returns of a basket of other currencies against the currency being investigated; REERs deflate the returns in an attempt to compensate for the differing rates of inflation in different countries. The reason for doing this is that, particularly over long time frames, inflation can have a large impact on the purchasing power

How should we weight the basket? If we are trying to create an index for the change in value of a currency against a basket of other currencies, we now need to decide on how to weight our basket. One possible solution would be to simply have an equally-weighted basket. The rationale for this would be that there is no a priori reason for choosing to put more emphasis on any one exchange rate. However, this could clearly lead to the situation where a large move in

Mark McDonald FX Strategist HSBC Bank plc +44 20 7991 5966 mark.mcdonald@hsbcib.com

a relatively small currency can strongly influence the REERs and NEERs for all other currencies. To avoid this, the indices are generally weighted so that more “important” currencies get higher weighting. This, of course, begs the question of how “importance” is defined.

Trade Weights Weighting the basket by bilateral trade-weights is the most common weighting procedure for creating an effective exchange rate index. This is because the indices are often used to measure the likely impact of exchange rate moves on a country’s international trade performance.

Volume Weights The daily volume traded in the FX market dwarves the global volume of physical trade. From this it is possible to make a convincing argument that the weighting which would be really important would be to weight the currency basket by financial market flows, rather than bilateral trade.

of a currency.

35


abc

Macro Currency Strategy February 2014

To do this properly would require us to have accurate FX volumes for all currency pairs considered in the index. However, these are not available. The BIS triennial survey of FX volumes only gives data for a small number of bilateral exchange rates. However, the volumes are split by currency for over 30 currencies. From these volumes we can estimate financial weightings for each currency. We believe that this gives another plausible definition for “importance�, and one which may be more relevant for financial investors than trade weights. We call this procedure volume weighting and the indices produced through this procedure we call the HSBC volume-weighted REERs. We would argue that if you are a financial market investor, the effective value of a currency you would be exposed to is more accurately represented by the HSBC volume-weighted index rather than the trade-weighted index.

36

Data Frequency This is something which is rarely considered when constructing REERs – inflation data is generally released at monthly frequency at best so the usual procedure is to simply create monthly indices by default. However, some countries release their inflation data only quarterly. The usual procedure for these countries is to simply pro-rata the change over the period. Here there is an implicit assumption that the rate of inflation changes slowly. We take this assumption one step further and assume that it is valid to spread the inflation out equally over every day in the month.


abc

Macro Currency Strategy February 2014

HSBC Volume – Weighted REERs USD REER index

EUR REER index

USD Trade-Weighted REER

EUR Volume-Weighted REER

USD Volume-Weighted REER

1996=100 160

1996=100 160

140

140

120

120

100

100

80

80

Jul-95

Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

120

120

110

110

100

100

90

90

80

80

70

70

60

60 Jul-95

Jul-98

Source: HSBC

Source: HSBC

JPY REER index

GBP REER index

JPY Trade-Weighted REER

JPY Volume-Weighted REER

1996=100 120

1996=100 120

Jul-01

Jul-04

GBP Trade-Weighted REER

1996=100 140

Jul-07

Jul-10

Jul-13

GBP Volume-Weighted REER 1996=100 140

130

130

120

120

110

110

100

100

90

90

105

105

90

90

75

75

60

60 Jul-95

EUR Trade-Weighted REER 1996=100

1996=100

Jul-98

Source: HSBC

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

80 Jul-95

80 Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

Source: HSBC

37


abc

Macro Currency Strategy February 2014

CAD REER index

CHF REER index

CAD Trade-Weighted REER 150

CAD Volume-Weighted REER 1996=100 150

130

130

140

140

120

120

130

130

110

110

120

120

100

100

110

110

90

90

100

100

80

80

90

90

70

70

80

60

1996=100

80 Jul-95

Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Jul-95

Jul-13

Source: HSBC

AUD Volume-Weighted REER

1996=100 160

60 Jul-98

Jul-01

Jul-04

NZD Volume-Weighted REER

1996=100 160

140

Jul-07

Jul-10

Jul-13

NZD Trade-Weighted REER

1996=100 140

1996=100 140

140

120

120

100

100

80

80

60

60 Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

100

100

80

80

60

60 Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

NOK REER index

SEK Trade-Weighted REER

SEK Volume-Weighted REER

1996=100 110

NOK Trade-Weighted REER

1996=100 110

100

100

90

90

80

80

70

70

60

60

Source: HSBC

120

Source: HSBC

SEK REER index

Jul-98

120

Jul-95

Jul-13

Source: HSBC

38

1996=100

NZD REER index

AUD Trade-Weighted REER

Jul-95

CHF Trade-Weighted REER

Source: HSBC

AUD REER index

Jul-95

CHF Volume-Weighted REER 1996=100

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13

NOK Volume-Weighted REER

1996=100 130

1996=100 130

120

120

110

110

100

100

90

90

80

80

70 Jul-95

70 Jul-98

Source: HSBC

Jul-01

Jul-04

Jul-07

Jul-10

Jul-13


abc

Macro Currency Strategy February 2014

HSBC forecasts vs forwards EUR-USD vs forwards

EUR-CHF vs forwards

EUR-USD 1.60

Forward

EUR-USD 1.60

Forecast

EUR-CHF

Forward

EUR-CHF

Forecast

1.50

1.70

1.70

1.40

1.40

1.60

1.60

1.30

1.30

1.50

1.50

1.20

1.20

1.40

1.40

1.10

1.10

1.30

1.30

1.20

1.20

1.10

1.10

1.50

1.00

1.00

0.90

0.90 0.80 Jan-00

0.80 Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

1.00 Jan-00

Jan-14

1.00 Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Source: Thomson Financial Datastream, Reuters, HSBC

Source: Thomson Financial Datastream, Reuters, HSBC

GBP-USD vs forwards

EUR-GBP vs forwards

GBP-USD 2.10

Forward

GBP-USD 2.10

Forecast

EUR-GBP 1.00

Forward

Jan-12

Jan-14

EUR-GBP 1.00

Forecast

2.00

2.00

0.95

0.95

1.90

1.90

0.90

0.90

0.85

0.85

0.80

0.80 0.75 0.70

1.80

1.80

1.70

1.70

1.60

1.60

0.75 0.70

1.50

1.50

0.65

0.65

1.40

1.40

0.60

0.60

1.30 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

1.30

0.55 Jan-00 Jan-02 Jan-04

0.55 Jan-06 Jan-08

Jan-10

Source: Thomson Financial Datastream, Reuters, HSBC

Source: Thomson Financial Datastream, Reuters, HSBC

USD-JPY vs forwards

EUR-JPY vs forwards Forward

USD-JPY

Forecast

USD-JPY

140

140

130

130

120

120

110

110

100

100

90

90

80

80

70

70

60 Jan-00

60 Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Source: Thomson Financial Datastream, Reuters, HSBC

Jan-12

Jan-14

EUR-JPY

Forward

Jan-12

Jan-14

EUR-JPY

Forecast

175 165

175 165

155 145

155 145

135 125

135 125

115 105

115 105

95 85 Jan-00

95 85 Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Jan-14

Source: Thomson Financial Datastream, Reuters, HSBC

39


abc

Macro Currency Strategy February 2014

Short rates 3 M on th M o ney

en d perio d N o rth A m er ica x x L atin A m erica x x x W estern Eu ro p e Eur oz on e Oth er W estern Eu ro p e x x x EM EA

A sia/Pacific x x x

2010 Q4 x 0.3 1.2 x 4.6 11.1 3.3 x 0.9 x 0.8 2.6 1.8 0.2

2011 Q4

2012 Q4

2013 Q3

Q4

2014 Q1f

Q2f

Q3f

Q4f

x U S (U SD) C anada (C AD) x M ex ic o (M XN ) Braz il (BR L) C hile (C LP) x x x U K (GBP) N orw ay (N OK) Sw eden (SEK) Sw itz erland (C HF)

2009 Q4 x 0.3 0.5 x 5.5 8.7 0.5 x 0.7 x 0.6 2.2 0.5 0.3

0.5 1.4 x 4.4 10.4 5.1 x 1.3 x 1.1 2.9 2.7 0.1

0.4 1.3 x 4.4 7.1 4.9 x 0.1 x 0.5 1.9 1.6 0.0

0.2 1.2 x 3.7 9.4 4.8 x 0.1 x 0.5 1.7 1.2 0.0

0.2 1.2 x 3.9 10.3 4.3 x 0.3 x 0.5 1.7 1.0 0.0

0.3 1.2 x 3.9 10.5 4.1 x 0.2 x 0.6 1.7 1.0 0.0

0.3 1.2 x 3.9 10.5 4.1 x 0.2 x 0.6 1.7 1.0 0.0

0.3 1.2 x 4.0 10.5 4.1 x 0.2 x 0.6 1.8 1.0 0.0

0.3 1.2 x 4.2 11.0 4.1 x 0.2 x 0.7 1.8 1.1 0.0

Hungary (HU F ) Poland (PLN ) R uss ia (R U B)* T urk ey (TR Y) U k raine (U AH) South Afric a (Z AR ) x J apan (J PY) Aus tralia (AU D) N ew Z ealand (N Z D)

6.0 4.2 6.6 7.5 16.1 7.1 x 0.3 4.0 2.8

5.9 4.0 4.1 6.7 9.1 5.5 x 0.2 5.0 3.2

7.2 5.0 6.4 10.1 21.5 5.5 x 0.2 4.5 2.7

5.8 4.1 7.5 5.5 18.3 5.2 x 0.2 3.0 2.6

3.6 2.7 6.8 6.9 18.3 5.4 x 0.2 2.6 2.7

3.0 2.7 6.9 7.8 12.3 5.2 x 0.1 2.6 2.7

2.8 2.7 6.7 9.5 10.3 5.2 x 0.2 2.6 3.0

2.8 2.7 6.8 9.5 9.3 5.1 x 0.2 2.6 3.2

2.8 2.7 6.6 9.5 9.3 5.1 x 0.2 2.9 3.3

2.9 2.7 6.4 9.5 9.3 5.1 x 0.2 3.1 3.4

C hina (C N Y) Hong Kong (HKD) T aiw an (T WD) South Korea (KR W)

1.7 0.5 0.5 2.8

2.3 0.3 0.7 2.8

3.1 0.4 0.9 3.6

2.6 0.4 0.9 2.9

2.6 0.4 0.9 2.7

2.6 0.4 1.1 2.7

2.6 0.5 1.1 2.7

2.6 0.5 1.5 2.7

2.6 0.5 1.1 2.8

2.6 0.5 1.5 3.0

India (IN R ) Indonesia (IDR ) M alay sia (M YR ) Philippines (PHP) Singapore (SGD) T hailand (T HB) x South Afric a (Z AR )

4.6 7.1 2.2 3.9 0.7 1.4 x 7.1

9.0 6.6 3.0 0.8 0.4 2.2 x 5.5

9.8 5.3 3.2 1.6 0.4 3.2 x 5.5

8.2 5.0 3.2 0.6 0.4 2.9 x 5.2

9.7 7.2 3.2 0.5 0.4 2.6 x 5.4

9.2 7.6 3.2 0.5 0.4 2.4 x 5.2

8.7 7.7 3.3 0.6 0.4 2.3 x 5.2

9.5 7.8 3.4 0.6 0.4 2.4 x 5.1

8.0 7.8 3.5 0.6 0.4 2.5 x 5.1

7.7 7.8 3.7 0.6 0.4 2.6 x 5.1

N orth Asia x x x South As ia x x x x x A frica x

N o tes: * 1-m o nth m o ney. So urc e: H SB C

Important note This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a good indication of policy rates.

40


abc

Macro Currency Strategy February 2014

Emerging markets forecast table Latin America vs USD

x

13-Feb-14

2013

last

Q3

Q4

Q1f

Q2f

Q3f

Q4f

Q1f

Q2f

Q3f

Q4f

x

x

x

x

x

x

x

x

x

x

x

x

2014

2015

Argentina (ARS)

7.81

5.79

6.50

8.00

8.50

9.25

10.00

10.75

11.50

12.20

12.90

Brazil (BRL)

2.43

2.23

2.36

2.35

2.40

2.45

2.50

2.52

2.55

2.58

2.60

Chile (CLP)

552

505

525

530

535

540

545

550

550

550

550

Mex ico (MXN)

13.37

13.17

13.00

12.90

12.80

12.70

12.60

12.60

12.60

12.60

12.60

Colombia (COP)

2031

1828

1923

1935

1940

1950

1960

1970

1980

1990

2000

Peru (PEN)

2.82

2.79

2.80

2.80

2.80

2.75

2.75

2.75

2.75

2.75

2.75

Venezuala (VEF)

6.29

6.29

6.30

15.00

15.00

15.00

15.00

15.00

15.00

15.00

15.00

Czech Republic (CZK)

27.5

25.7

27.0

27.0

27.0

27.0

27.0

26.8

26.5

26.0

26.0

Hungary (HUF)

312

297

300

295

295

290

290

290

290

290

290

Russia v s USD (RUB)

35.0

32.3

32.9

33.5

34.7

34.8

35.4

36.1

37.6

37.1

37.3

Romanian (RON)

4.49

4.40

4.50

4.40

4.35

4.30

4.30

4.30

4.30

4.30

4.30

Turkey v s USD (TRY)

2.20

2.02

2.15

2.30

2.20

2.15

2.10

2.15

2.15

2.00

2.00

4.18

4.23

4.20

4.10

4.00

4.00

3.90

3.90

3.90

3.90

3.90

Eastern Europe vs EUR

Simple rate

Poland (PLN)

x

x

x

x

x

x

x

x

x

x

Egy pt (EGP)

6.96

x

7.00

6.95

6.80

6.80

7.00

7.00

7.35

7.35

7.35

7.35

Israel (ILS)

3.51

3.55

3.50

3.60

3.55

3.55

3.50

3.50

3.50

3.50

3.50

11.08

10.06

10.60

10.60

10.60

10.40

10.40

10.00

10.00

10.00

10.00

Middle East vs USD

x

Africa vs USD South Africa (ZAR) Interest rates

Source: HSBC

41


abc

Macro Currency Strategy February 2014

Exchange rates vs USD end period

2010 Q4

2011 Q4

2012 Q4

2013 Q3

2014 Q1f

Q4

Q2f

Q3f

2015 Q1f

Q4f

Q2f

Q3f

Q4f

Americas

x

x

Canada (CAD)

0.99

1.02

1.00

1.03

1.06

1.12

1.13

1.15

1.15

1.15

1.15

1.15

1.15

x

Mex ico (MXN)

12.36

13.97

12.87

13.17

13.00

12.90

12.80

12.70

12.60

12.60

12.60

12.60

12.60

x

Brazil (BRL)

1.67

1.88

2.04

2.23

2.36

2.35

2.40

2.45

2.50

2.52

2.55

2.58

2.60

x x

Argentina (ARS)

3.97

4.30

4.92

5.79

6.50

8.00

8.50

9.25

10.00

10.75

11.50

12.20

12.90

Western Europe

x

x

Eurozone (EUR*) Other Western Europe x

x 1.34

x

x 1.30

x

x 1.32

x

x 1.35

x

x 1.37

x

x 1.35

x

x 1.33

x

x 1.30

x

x 1.28

x

x 1.25

x

x 1.25

x

x 1.25

x

1.25 x

x

UK (GBP*)

1.57

1.55

1.63

1.62

1.66

1.65

1.61

1.55

1.50

1.47

1.47

1.47

1.47

x

Sw eden (SEK)

6.72

6.86

6.51

6.42

6.47

6.52

6.47

6.46

6.48

6.56

6.56

6.56

6.56

x

Norw ay (NOK)

5.81

5.97

5.57

6.01

6.10

6.15

6.09

6.00

5.94

5.92

5.92

5.92

5.92

x x

Sw itzerland (CHF)

0.93

0.94

0.92

0.90

0.90

0.93

0.94

0.96

0.98

1.00

1.00

1.00

1.00

Em erging Europe

x

x

Russia (RUB)

30.5

32.0

30.5

32.3

32.9

33.5

34.7

34.8

35.2

36.1

37.6

37.1

37.3

x

Poland (PLN)

2.95

3.43

3.09

3.12

3.07

3.04

3.01

3.08

3.05

3.12

3.12

3.12

3.12

x

Hungary (HUF)

207

242

221

220

219

219

222

223

227

232

232

232

232

x x

Czech Republic (CZK)

18.7

19.6

19.0

19.0

19.7

20.0

20.3

20.8

21.1

21.4

21.2

20.8

20.8

Asia/Pacific

x

x

Japan (JPY)

x

Australia (AUD*)

x

x

New Zealand (NZD*)

North Asia

x

x

x

x

x

x

x

x

x

x

x

x

x

81

77

86

98

105

106

103

103

101

99

99

99

99

1.03

1.03

1.04

0.94

0.90

0.89

0.88

0.87

0.86

0.86

0.86

0.86

0.86

0.78 x

0.78 x

0.83 x

0.83 x

0.83 x

0.84 x

0.85 x

0.86 x

0.87 x

0.88 x

0.88 x

0.88 x

0.88 x

x

China (CNY)

6.59

6.29

6.23

6.12

6.05

6.04

6.02

6.00

5.98

5.96

5.94

5.92

5.90

x

Hong Kong (HKD)

7.77

7.77

7.75

7.76

7.76

7.80

7.80

7.80

7.80

7.80

7.80

7.80

7.80

x

Taiw an (TWD)

30.4

30.3

29.0

29.6

29.8

30.3

30.2

30.0

29.8

29.7

29.6

29.5

29.4

x x

South Korea (KRW)

1121

1159

1064

1075

1053

1040

1035

1030

1025

1020

1015

1010

1000

South Asia

x

x

x

x

x

x

x

x

x

x

x

x

x

x

India (INR)

44.7

53.0

55.0

62.6

61.9

61.0

61.0

62.0

62.0

63.0

63.0

64.0

64.0

x

Indonesia (IDR)

9010

9068

9638

11580

12170

11750

12000

12250

12500

12500

12500

12500

12500

x

Malay sia (MYR)

3.08

3.17

3.06

3.26

3.28

3.25

3.28

3.30

3.33

3.35

3.35

3.35

3.35

x

Philippines (PHP)

43.6

43.8

41.1

43.5

44.4

44.5

44.8

45.0

45.2

45.4

45.4

45.4

45.4

x

Singapore (SGD)

1.28

1.30

1.22

1.26

1.26

1.25

1.26

1.27

1.28

1.28

1.28

1.28

1.28

x

Thailand (THB)

30.1

31.6

30.6

31.3

32.7

33.0

33.3

33.6

34.0

34.3

34.5

34.5

34.5

Vietnam (VND)

19498

21037

20835

21119

21080

21100

21100

21100

21100

21100

21100

21100

21100

Africa

x

x

South Africa (ZAR)

Source HSBC

42

x

x 6.62

x 8.07

x 8.48

x 10.06

x 10.60

x 10.60

x 10.60

x 10.40

x 10.40

x 10.00

x 10.00

x 10.00

10.00


abc

Macro Currency Strategy February 2014

Exchange rates vs EUR & GBP end period

2010

2011

2012

2013

2014

2015

Q4

Q4

Q4

Q3

Q4

Q1f

Q2f

Q3f

Q4f

Q1f

Q2f

Q3f

Q4f

Vs euro Am ericas x x Europe x x x x x x x x Asia/Pacific x x x

x x US (USD) Canada (CAD) x UK (GBP) Sw eden (SEK) Norw ay (NOK) Sw itzerland (CHF) Russia (RUB) Poland (PLN) Hungary (HUF) Czech Republic (CZK) x Japan (JPY) Australia (AUD) New Zealand (NZD)

1.34 1.33

1.30 1.32

1.32 1.31

1.35 1.39

1.37 1.45

1.35 1.44

1.33 1.45

1.30 1.43

1.28 1.41

1.25 1.40

1.25 1.40

1.25 1.40

1.25 1.40

0.86 9.02 7.80 1.25 40.9 3.96 278 25.1 x 109 1.31 1.72

0.84 8.90 7.75 1.21 41.6 4.46 315 25.5 x 100 1.27 1.66

0.81 8.58 7.34 1.21 40.2 4.08 291 25.1 x 114 1.27 1.60

0.84 8.69 8.14 1.22 43.8 4.23 297 25.7 x 133 1.45 1.63

0.83 8.86 8.36 1.23 45.1 4.20 300 27.0 x 144 1.52 1.65

0.82 8.80 8.30 1.25 45.2 4.10 295 27.0 x 143 1.52 1.61

0.83 8.60 8.10 1.25 46.2 4.00 295 27.0 x 137 1.51 1.56

0.84 8.40 7.80 1.25 45.2 4.00 290 27.0 x 134 1.49 1.51

0.85 8.30 7.60 1.25 45.1 3.90 290 27.0 x 129 1.49 1.47

0.85 8.20 7.40 1.25 45.2 3.90 290 26.8 x 124 1.46 1.42

0.85 8.20 7.40 1.25 47.1 3.90 290 26.5 x 124 1.46 1.42

0.85 8.20 7.40 1.25 46.4 3.90 290 26.0 x 124 1.46 1.42

0.85 8.20 7.40 1.25 46.7 3.90 290 26.0 x 124 1.46 1.42

Vs sterling Am ericas x x Europe x x x x x Asia/Pacific x x x

x x US (USD) Canada (CAD) x Eurozone (EUR)

x x 1.57 1.56 x 0.86

x x 1.55 1.58 x 0.84

x x 1.63 1.62 x 0.81

x x 1.62 1.66 x 0.84

x x 1.66 1.76 x 0.83

x x 1.65 1.77 x 0.82

x x 1.61 1.76 x 0.83

x x 1.55 1.70 x 0.84

x x 1.50 1.65 x 0.85

x x 1.47 1.65 x 0.85

x x 1.47 1.65 x 0.85

x x 1.47 1.65 x 0.85

x x 1.47 1.65 x 0.85

10.53 9.10 1.46 x 127 1.53 2.00

10.65 9.27 1.45 x 120 1.52 1.99

10.57 9.05 1.49 x 141 1.57 1.97

10.40 9.74 1.46 x 159 1.73 1.94

10.74 10.13 1.49 x 174 1.84 2.00

10.75 10.14 1.53 x 175 1.85 1.96

10.42 9.82 1.51 x 166 1.83 1.90

10.01 9.29 1.49 x 160 1.78 1.80

9.72 8.90 1.46 x 151 1.74 1.72

9.65 8.71 1.47 x 146 1.71 1.67

9.65 8.71 1.47 x 146 1.71 1.67

9.65 8.71 1.47 x 146 1.71 1.67

9.65 8.71 1.47 x 146 1.71 1.67

Sw eden (SEK) Norw ay (NOK) Sw itzerland (CHF) x Japan (JPY) Australia (AUD) New Zealand (NZD)

Source: HSBC

43


Hsbc fx macrostrat 14 2 14