2018 FX Outlook - Seeing Through the Volatility for FX ...app.pmgasia.com/InvestAsean2018/pdf/FX...

2018 FX Outlook -

Seeing Through the Volatility for FX

- Synchronised Growth vs Higher Rates

Saktiandi Supaat

Head of FX Research & Strategy| Global Markets Singapore

28 Mar 2018

[email protected]

mailto:[email protected]

Overview

2

G7 FX Outlook

Global Monetary Policy Stimulus Removal

Asia FX Outlook Concluding Remarks

Of Inflation, Policy Normalisation and Synchronised Global Recovery

3

Synchronised global recovery supporting robust exports recovery in Asia could further translate into investment recovery for Asia in 2018

Continuation of synchronised global recovery, robust exports recovery and potential investment recovery for Asia, strong corporate earnings supporting asset valuation, relatively subdued inflation and relatively low market vols should continue to favor the hunt for selected AXJs at the expense of a weaker USD

In particular, trade-dependent countries such as MYR, KRW, TWD, SGD and to some extent, THB should benefit. Though risk of trade war could pose downside pressure on SGD and KRW.

Should export recovery translate into investment recovery, MYR, and THB could stand to benefit further Export recoveries are more correlated with machinery & equipment investments (rather than buildings

& structures) An export-led growth recovery in 2017 will likely spark a revival in private investment, which will sustain

growth in 2018-19. Thailand and Malaysia may see the largest uplift, given the greater GDP weight for trade and machinery & equipment investment

On global monetary policy stimulus removal, we believe normalisation will take shape at differing pace - Fed, BoE, BoC could tighten further; RBA and ECB could normalize this year while RBNZ and BoJ may

still keep policy status quo amongst G7 Majors - Amongst ASEANs, BSP and MAS could tighten monetary policies while others are likely to hold this year

Broad Macro Thematic

Markets Pivoting Between Goldilocks and Monetary Tightening Environment

4

Note: This grid –scenario is in the context of US economy and does not take into consideration black swan events such as trade wars, etc. Source: Maybank FX Research & Strategy

Growth Momentum Picks Up Pace

Growth Momentum Slows

Pace of Inflation Accelerates

Pace of Inflation Decelerates

Monetary tightening could pick up pace

Repricing of market expectation for faster pace of rate hike could lead to USD strength first

But markets can withstand a slightly tighter pace

of monetary tightening amid firmer growth => Countercyclical Play should see a resumption

of USD weakness


Worries of Recession risks

could support risk aversion flows favouring long JPY, USD

Goldilocks Environment

Short USD Long Carry Proxies including AXJs

such as MYR and Antipodeans such as AUD, NZD

Worries of Stagflation risks

could lead to extended sell-off in risk assets including equities and commodities

Long JPY and USD

Short risk FX proxies (i.e. AUD, KRW)

NZD, IDR FX and KR Bonds Highly Sensitive to US 2y2yf Increases

5

Note: Regression on weekly changes between FX percentage changes and rates levels changes over the period of Jan-2015 to Mar-2018, using weekly data Source: Bloomberg, Maybank FX Research & Strategy

FX and 10Y Yield Sensitivity to US 2y2y forward rates

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

-0.4 -0.3 -0.2 -0.1 0 0.1 0.2

XXXUSD sensitivity (beta) to US 2y2yf rates

10Y bond sensitivity (beta) to US 2y2yf rates

NZD

IDR

AUD

CNY

KRW

SGD

TWD

PHP THB

MYR


NZD, AUD, KRW, IDR Most Vulnerable to Rate Increases and Equity Decline

6

Note: Regression on weekly changes in percentage over the period of Jan-2015 to Mar-2018, using weekly data Source: Bloomberg, Maybank FX Research & Strategy

FX Sensitivity to Changes in US 2y2y forward rates and S&P500

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

-0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4

XXXUSD sensitivity (beta) to US 2y2yf rates

XXXUSD sensitivity (beta) to S&P500

GBP

CNY

THB

MYR

TWD

SGD

EUR

JPY

PHP

KRW

AUD

IDR

NZD

INR


Trade tensions rising could favor long JPY and EUR

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

-0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14

KRW

IDR

GBP SGD

PHP

THB INR

CHF

JPY

EUR

CNH

CNY NZD

TWD

XAU

AUD

Trading In A Fluid Risk Environment

7

Note: Regression on weekly changes in percentage over the period of Jan-2015 to Mar-2018, using weekly data Source: Bloomberg, Maybank FX Research & Strategy

FX Sensitivity to Oil(Brent) Vs. Equities (S&P 500)


In times of Risk-off, we would prefer to hold these safe haven currencies.

In times of some uncertainties, these currencies are worth diversifying into as they are relatively more resilient to risk.

Coast is Clear, Rotate into Risk-sensitive Currencies

FX Sensitivity to S&P 500

FX Sensitivity to Brent

ZAR

MYR

CAD

CAD

Pace of Inflation, Monetary Policy Shifts Are Risks to Our Outlook

8

* RBA, RBNZ, BoC, BoE and ECB are expected to step up pace of monetary policy normalisation amid further signs of inflation pick up and economic growth Source: Bloomberg, Maybank FX Research & Strategy

Near Term Risk

2015 2016 2017 2018

Global Growth

Momentum

Growth Downgrades

from IMF, ADB

Lesser Downgrades

from IMF, ADB;

Growth “not hot not

cold”

Synchronised Global

Economic Recovery

for First time in 7

years

Synchronised Global

Economic Recovery

But momentum to

moderate into 2H

Pace of Inflation

Increase – Faster or

Slower than

Expected

Deflation Risks; US

CPI picked up slightly

from 3Q-2015

Subdued Globally; but

Inflation in US picked

up and stabilized in 1

– 1.5% range

Price pressures Rose

at slower pace than

expected; Stabilized

in Slightly Higher

Range; VIX fell to all-

time low of below 10

Faster than expected

pick-up in inflation

and wage growth; VIX

jumped above 50; 10Y

UST yield nearly

touched 3%

Monetary Policy

Expectation

Most central banks on

accommodative

monetary policies;

First Fed rate Hike

since GFC

Most central banks on

accommodative

monetary policies;

Second Fed rate Hike

since GFC

BoC, BoE, BoK joined

Fed in slowly

normalising monetary

policies; Fed Hiked 3x

More monetary

stimulus removal

expected from more

central banks*; Fed

still expected to hike

3x

Impact on FX/ Asset

Classes

Broad USD strength

against most

currencies; Oil price

declined to 10Y low

Year of 2 Halves as

USD fell in 1H 16

before ending the

year higher

Broad USD Decline;

Carry Trade was the

preferred play amid

goldilocks

environment

Partial Unwinding of

Carry Trade with

bouts of USD Strength

within Broad USD

Downtrend

Higher Rates Negative for Risk Sensitive G10 and EM assets if Equity Market Weakens

9

AUD, KRW and NZD most vulnerable G10 due to real rates weakness, FX over-valuation and highly responsive government bond market

In EM space, CNY seems to be least vulnerable. FX sensitivity to global equities is relatively low for CNY.


10

USD – Broad Downtrend to Persist amid Synchronous Global Economic Recovery

EUR – Gradual Up-move towards 1.30 Possible on Reserve Diversification, ECB Policy

Normalisation amid Broadening Growth; but political risks to weigh near term

GBP – Tug of War between Brexit Negotiations and Hawkish BoE; 1.3950 – 1.45 Range in

the Interim but Expect a Recovery towards 1.45 – 1.48 Levels Over time

AUD – Temporary Risk of Correction; Bias to Buy Dips towards 0.75 Levels

JPY – Supported by risk aversion flows and falling confidence of Abenomics; 105 a Key

support before 101

SGD – Supported by export-led recovery, MAS Policy Normalisation but fear of trade war

could hurt. Expect range of 1.30 – 1.33

MYR – Positive Outlook on Improving sentiment, sound fundamentals, firmer oil prices

amid Correction towards its Fair Value of 3.70

CNY – More Two-Way Direction and Volatility amid Inclination for Market Reforms; Look

to Play 6.20 – 6.40 Range

Key FX Views

11

G7 FX Outlook

USD Underperforms When Global Growth is Well

12

Source: Bloomberg, Maybank FX Research & Strategy

When global IP declines, USD Strengthens

When global IP recovers, USD Weakens

G7 FX Outlook : USD

Global IP, US IP, USD Index (Inverted, RHS) 70

75

80

85

90

95

100

105

110-16

-11

-6

-1

4

9

Sep

-02

Feb

-03

Jul-

03

De

c-0

3

May

-04

Oct

-04

Mar

-05

Au

g-0

5

Jan

-06

Jun

-06

No

v-0

6

Ap

r-0

7

Sep

-07

Feb

-08

Jul-

08

De

c-0

8

May

-09

Oct

-09

Mar

-10

Au

g-1

0

Jan

-11

Jun

-11

No

v-1

1

Ap

r-1

2

Sep

-12

Feb

-13

Jul-

13

De

c-1

3

May

-14

Oct

-14

Mar

-15

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

World IP (YoY %)

US IP (YoY %)

USD Index (RHS Inverted)

USD is a Countercyclical Currency Play

13

Note: Correlations between exchange rates and GDP are calculated using quarterly data and HP trend filtered series. Two-tail tests with significance at 10 percent level are used to divide the countries into procyclical (positive and significant correlation), countercyclical (negative and significant correlation) and acyclical (non-significant). Sample period for CCI is between 1975 and 2013. Source: What Makes a Currency Procyclical? (World Bank), Maybank FX Research & Strategy

Currency Cyclicality Index (CCI) - World Bank

Countercyclical Play

“refuge” advanced economies such as

Switzerland, Germany/Eurozone, Japan and

the US have countercyclical currencies

Procyclical currencies are more common among

emerging economies and commodity exporting

countries including Australia, NZ, Brazil, Russia

G7 FX Outlook : USD

FX Reserve Diversification Away From USD Weighs on USD Outlook

14

Source: IMF, Bloomberg, Maybank FX Research & Strategy

Central banks’ reserve diversification is underway and USD holdings

has declined from 66% in 2015 to 63.5% in 3Q 2017

58

60

62

64

66

68

70

72

74

70

75

80

85

90

95

100

105

110

115

120

De

c-9

5

De

c-9

6

De

c-9

7

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

Global Central Bank FX Holdingsin USD as % of Total (IMF, RHS)

DXY Curncy

Reallocation towards EUR, JPY, CAD, AUD and CNY

Picked Up and Could Continue

G7 FX Outlook : USD

Lesser Reliance on USD for Settlement/Payment Also Weigh on USD

15


75

80

85

90

95

100

105

28

30

32

34

36

38

40

42

44

46

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

DXY Index Level % of total SWIFT payments

SWIFT USD Payments DXY Curncy

G7 FX Outlook : USD

USD Typically Underperforms in Periods of Expansionary Fiscal Policies

16


USD Index (LHS), Federal Budget Deficit/ Surplus % of GDP,

Debt to GDP (Inverted)

G7 FX Outlook : USD

Expectations of Twin Deficits Deteriorating Further Weighs on USD

17


USD Index (RHS), Federal Budget Account as % of GDP, Current Account as % of GDP

G7 FX Outlook : USD

Broad USD Down Trend 15 Months into the Cycle

18


The Current Episode of USD Rally since 2011 Appears to be Shorter than Previous Cycles in 1978

and 1995 where USD Rally Typically Took 78 Months

78 Month Rally 68 Month Rally?

1978 1985 1995 2002 2011

78 Month Rally

G7 FX Outlook : USD

USD Downtrend to Face Obstacle at 88.25 Support

19


Signs of Falling Wedge Pattern Forming – Typically a Bullish Reversal

DXY (Monthly Chart)

G7 FX Outlook : USD

Weekly Chart

20

AUD: Softer Iron Ore May Provide Buying Opportunities for AUD

As base effects fade and prices stabilize, expect the same as well for the commodity-linked antipode AUD. We still look for AUD to break above 0.80 in the first half of the year

-100

-50

0

50

100

150

200

250

300

Jan

-11

Au

g-1

1

Mar

-12

Oct

-12

May

-13

Dec

-13

Jul-

14

Feb

-15

Sep

-15

Ap

r-1

6

No

v-1

6

Jun

-17

Jan

-18

China's Imports of Metal & Energy

Iron Ore Copper Coal Crude LNG

China’s demand for metal and energy have come off its peak in the past two years.

Recent fall in iron ore prices Also weighed on AUD

G7 FX Outlook : AUD

21

AUD: Threat of Rising Inflation to Lift Rates and AUD

Capacity Utilization Rate Has Been Rising Persistently

0

1

2

3

4

5

6

62.0

64.0

66.0

68.0

70.0

72.0

74.0

76.0

78.0

80.0

82.0

Ap

r-0

8

Oct

-08

Ap

r-0

9

Oct

-09

Ap

r-1

0

Oct

-10

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

Ap

r-1

7

Oct

-17

Capacity Utilization Rate Vs. AU CPI

AU CPI (yoy rhs) Mfg (%)

Construction (%) Services (%)

2.10%

0.55%

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

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

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Wage Price Index (yoy)

Wage Price Index (qoq rhs)

Wage Price Index Gave The First Sign of Bottoming Last Quarter

Source: CEIC, Australian Industry Group, Australian Bureau of Statistics, Bloomberg, Maybank FX Research & Strategy

G7 FX Outlook : AUD

EUR: Constructive Outlook; Political Risk a Tailwind

22

We maintain a constructive outlook on EUR in the medium term:

(1) receding political risks in Europe (Germany managed to form coalition government with Merkel elected as Chancellor again for the 4th term though Italy government formation remains a source of uncertainty);

(2) sustained signs of economic recovery broadening in Europe, supported by private consumption, business sentiment, construction investment, sizeable current account surplus (3.5% of GDP) and export recovery;

(3) signs of growing demand for EUR as a share of world FX reserves amid ongoing reserve diversification and

(4) ECB’s gradual pace of policy normalisation is expected to proceed as planned

Formation of coalition government in Italy expected to be a long-drawn process and prospects of a populist-led government could weigh on investor sentiment and pose temporary downside pressure on EUR

Key support to watch at 1.2120, 1.2020 levels. We believe downside risks present opportunities for “buy on dips” play, targeting a move back towards 1.24-1.25 levels in the interim before 1.30 levels

G7 FX Outlook – EUR Outlook

Real EU-UST Yield Differentials (adjusted for CPI) Driving EUR Again

23



1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

-2

-1.5

-1

-0.5

0

0.5

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Real 10Y Yield Differentials (Adj for headline CPI) EUR (RHS)

EU Inflation Projected to Inch Higher Supports Case for ECB to Normalize

24

Source: Eviews, Bloomberg, Maybank FX Research & Strategy


-0.5

0

0.5

1

1.5

2

2.5

3

3.5

1q

20

15

2q

20

15

3q

20

15

4q

20

15

1q

20

16

2q

20

16

3q

20

16

4q

20

16

1q

20

17

2q

20

17

3q

20

17

4q

20

17

1q

20

18

2q

20

18

3q

20

18

4q

20

18

1q

20

19

2q

20

19

3q

20

19

4q

20

19

1q

20

20

2q

20

20

3q

20

20

4q

20

20

UK Inflation

NZ Inflation

EU Inflation

JP Inflation

Forecast

Central Bank Inflation Target : 2%

-0.5

0

0.5

1

1.5

2

2.5

3

3.51

q 2

01

5

2q

20

15

3q

20

15

4q

20

15

1q

20

16

2q

20

16

3q

20

16

4q

20

16

1q

20

17

2q

20

17

3q

20

17

4q

20

17

1q

20

18

2q

20

18

3q

20

18

4q

20

18

1q

20

19

2q

20

19

3q

20

19

4q

20

19

1q

20

20

2q

20

20

3q

20

20

4q

20

20

UK Inflation

NZ Inflation

EU Inflation

JP Inflation

Forecast

Central Bank Inflation Target : 2%

GBP Caught in Tug of War for Now But Should Recover Eventually

25

Short Term Fluctuations Primarily Driven by: Brexit negotiations a main source of volatility But BoE hawkish on rates outlook and optimistic on growth assessment

Medium Term: Optimistic Outlook Looking for a Move Back towards 1.48 Levels On Orderly Brexit Improvement in labour market; real wages improving Greater tolerance from policymakers for GBP strength and higher rates to arrest inflation ERM 1992 experience saw GBP recovery about 4 – 6 years later

FX View

1

1.2

1.4

1.6

1.8

2

2.2

70

75

80

85

90

95

100

105

110

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

GBP Effective Exchange Rate Index GBPUSD (RHS)

UK exit from ERM GFC 2008 UK Exit from EU

Buoyant domestic demand fueled by rapid growth of wealth, credit and money


Safe-Haven Plays To Limit JPY Downside

26

Key driver of the JPY include:

(1) Ultra-loose monetary policy to remain in place until 2% inflation target is achieved sometime around FY2019 (i.e. Apr 2019-Mar 2020) (2) Market bets in the currency future market for further JPY weakness, though such bets have moderated slightly currently (4) Global synchronous export recovery (3) Positive risk sentiments encouraging foreign investment in equities (4) Re-appointment of Kuroda as BOJ governor suggests policy continuity

Still, risks have risen that could keep the JPY supported and limit JPY moves lower,

including

(1) Re-emergence of global risk aversion or geopolitical risks, spurring safe- haven flows (2) Any signals of end/tapering of current monetary policy

G7 FX Outlook – JPY Outlook

27

Expectations Of Further JPY Strength Spurring Sell-Off In Overseas Assets


Baker Hughes Oil Rig Count (RHS)

Japanese Sales Of Overseas Portfolio Asset Is Supportive Of JPY

Investors Have Cut Their Net Short-JPY Positions Sharply

Ongoing market speculation on BOJ exit strategy and risk sentiments is putting downside pressure on the

USDJPY – manifested in CFTC data showing investors paring their net short-JPY positions (-21,999

contracts)

With its peers either already removing monetary stimulus or planning to do so makes it unlikely that such

bets on further JPY strength will dissipate

Domestic investors have been net sellers of overseas assets so far this year, supportive of the JPY. Year-to-

date, they have sold USD18bn and USD6.9bn in overseas equities and debt


100

105

110

115

120

125-150000

-100000

-50000

0

50000

100000

5/1/

2016

16/2

/201

6

29/3

/201

6

10/5

/201

6

21/6

/201

6

2/8/

2016

13/9

/201

6

25/1

0/20

16

6/12

/201

6

17/1

/201

7

28/2

/201

7

11/4

/201

7

23/5

/201

7

4/7/

2017

15/8

/201

7

26/9

/201

7

7/11

/201

7

19/1

2/20

17

30/1

/201

8

13/3

/201

8

Market has been bearish on the JPY for 2017 -increasing their net

T

USDJPY (inverted, rhs)

CFTC net short-

JPY positioning

(no. of contracts)100

102

104

106

108

110

112

114

116

118

120

-30000

-20000

-10000

0

10000

20000

30000

40000

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-17

Jan

-18

MT

D M

ar-2

018

Equity (USDmn) Debt (USDmn) USDJPY (rhs)

28

USDJPY Could Return To Track FX Vols Lower Once Risk Dissipates



Rising Global Risk Sentiments Spurring Safe-Haven Plays Have Led To Divergence Between USDJPY & FX Vols

USDJPY (Inverted, lhs)

FX Vols


29

Global Monetary Stimulus Removal

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Jun

-01

De

c-0

1Ju

n-0

2D

ec-

02

Jun

-03

De

c-0

3Ju

n-0

4D

ec-

04

Jun

-05

De

c-0

5Ju

n-0

6D

ec-

06

Jun

-07

De

c-0

7Ju

n-0

8D

ec-

08

Jun

-09

De

c-0

9Ju

n-1

0D

ec-

10

Jun

-11

De

c-1

1Ju

n-1

2D

ec-

12

Jun

-13

De

c-1

3Ju

n-1

4D

ec-

14

Jun

-15

De

c-1

5Ju

n-1

6D

ec-

16

Jun

-17

De

c-1

7Ju

n-1

8D

ec-

18

Jun

-19

De

c-1

9Ju

n-2

0D

ec-

20

Fed May Be Constrained to Embark on Aggressive Tightening as Inflation Remains Subdued

30

Note: Sample period over past 47 years between 1970 and 2017 using quarterly data Source: Eviews, Bloomberg, Maybank FX Research & Strategy

Our estimation shows US Core PCE may pick up over

the next 1-2 qtrs but is still projected to stay below

its Long-Term Average and Fed’s Target


17-Year Average

Fed’s 2% Target

Core PCE % y/y

1% Increase in Core PCE Corresponds with

+1.3% Increase in Fed Fund Rate

Forecast simulated using ARIMA based on sample period of 1990 – 2017

(quarterly data)

Forecast

ECB and RBA Likely to Normalise Monetary Policies This Year

31


Note: Policy Slack Ratio takes into account the time for headline inflation to get to central bank target and the respective country’s median policy transmission lag; Our policy slack ratio correctly predicted BoE to raise rate for the first time in Nov-2018 (hence the exclusion from the current study) Source: Bloomberg, Maybank FX Research & Strategy

Central bank has ample time and can afford to be more

patient before tightening

Central Bank behind the curve in tightening

monetary policies and could tighten within the

next 2 quarters

Policy Slack Ratio: Period for Inflation to get to target = Median Policy Transmission Period

RBA ECB RBNZ BOJ

Of the remaining G7 central banks that have yet to normalise/tighten, policy unwinding is expected to take shape at differing pace

RBA is slightly behind the curve in tightening but concerns on household debt and slow pace of wage growth may well keep the RBA on hold for the next 3 – 6 months. We expect RBA to raise rates possibly in Aug 2018 or risk abrupt tightening in future.

ECB is expected to stay the course in normalising its monetary policy with Asset Purchase Program likely to end in 4Q-2018 and rate normalisation likely to begin in 1Q 2019, as inflation is projected to creep higher towards ECB inflation objective

RBNZ is likely to remain on hold for at least the next 6 months amid lack of clarity on future monetary policy stance due to new governor and RBNZ banking act is currently under review. Though inflation is projected to inch higher, forecast fall short of sustained upticks above 2%

BoJ is stuck with its easy monetary policy bias as inflation remains subdued. BoJ needs to continue with its powerful easing and is likely to remain the laggard amongst its G7 peers.

Our Study Shows BoJ Can Afford to be Patient; RBA, ECB and RBNZ Next in Line to Normalise

Slowing Pace of Inflation Trajectory Suggests Gradual Pace of Policy Normalisation

32


Note: We caution that oil price surge beyond $70 - $75/bbl could add to upside pressure on inflation Source: Eviews, Bloomberg, Maybank FX Research & Strategy

US Inflation projected to spike up in the near term before easing towards 2.2% into 2019 (still above Fed’s target)

-0.3

0.2

0.7

1.2

1.7

2.2

2.7

3.2

1Q

20

15

2Q

20

15

3Q

20

15

4Q

20

15

1Q

20

16

2Q

20

16

3Q

20

16

4Q

20

16

1Q

20

17

2Q

20

17

3Q

20

17

4Q

20

17

1Q

20

18

2Q

20

18

3Q

20

18

4Q

20

18

1Q

20

19

2Q

20

19

3Q

20

19

4Q

20

19

1Q

20

20

Inflation Forecast

2% Inflation Target

UK Inflation

Canada Inflation

US Inflation

For the 3 major central banks that have tightened monetary policies (Fed, BoE and BOC), we look into whether these central banks could potentially quicken the pace of normalisation. Judging from headline inflation projection (via ARIMA) into 2020, UK inflation remains well above its target inflation of 2% but is projected to ease towards 2% in 2019. We expect BoE to hike at least once more possibly as early as in May to arrest rising prices. BoE could also allow for GBP to strengthen to curb imported price pressures. For US, headline inflation could potentially inch higher in 1Q-2Q 2018. As such there are risks of markets pricing in a more aggressive pace of tightening (and could result in USD strength). But looking at medium term trajectory, inflation is expected to converge towards its 2% target and this suggests Fed may not alter from its current stance of gradual pace of tightening (i.e. 3 rate hikes this year). Moreover Fed’s preferred gauge of inflation is core pce rather than headline CPI. For BOC, inflation trajectory suggests little sign of aggressive tightening. We think 1 rate hike is possible this year.

33

PH & SG Could Be Poised To Normalise Monetary Policy

Source: CEIC, Maybank FX Research & Strategy

Higher Inflation Could Prompt Need To Reconsider Monetary Accommodation in 2018

Note: (1) * Inflation gauge used by MAS is core inflation (2) Official inflation forecasts used here are the mid-points of the forecast range

3.8% 3.8%

2.9%

1.4%

0.6%

3.5%

3.0% 3.0%

1.5%

2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1 2 3 4 5

Inflation (12MMA) Official Inflation Forecast

Indonesia Malaysia Philippines Singapore* Thailand

Likely to be among the next to normalise monetary policy

Global Monetary Stimulus Removal – Asean Perspective

34

Asia FX Outlook

Of Inflation, Policy Normalisation and Synchronised Global Recovery

35

Synchronised global recovery supporting robust exports recovery in Asia could further translate into investment recovery for Asia in 2018. MYR and THB could stand to benefit further

Continuation of synchronised global recovery, robust exports recovery and potential investment recovery for Asia, strong corporate earnings supporting asset valuation, relatively subdued inflation and relatively low market vols should continue to favor the hunt for selected AXJs

In particular, trade-dependent countries such as MYR, KRW, TWD, SGD and to some extent, THB should benefit. Though risk of trade war could tamper gains on SGD and KRW.

Amongst AXJs, we prefer to stay away from IDR and PHP as current account balances deteriorates amid fears of trade war

RMB: More Two-Way Direction and Volatility amid Inclination for Market Reforms; Look to Play 6.20 – 6.40 Range

Asia FX Outlook

36

Room for ASEAN FX to Strengthen amid Favourable Growth Conditions

Source: Bloomberg, CEIC, Maybank FX Research & Strategy

Asia FX Outlook – From a Growth Perspective

Note: (1) OECD Leading Indicators (Major 5 Asia ) refers to China, India, Indonesia, Japan and Korea (2) ASEAN 5 FX is comprised of IDR, MYR, PHP, SGD & THB and are equally-weighted


ASEAN FX Have Generally Tracked the OECD Leading Indicators

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

95

96

97

98

99

100

101

102

Jan

00

Jul 0

0

Jan

01

Jul 0

1

Jan

02

Jul 0

2

Jan

03

Jul 0

3

Jan

04

Jul 0

4

Jan

05

Jul 0

5

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

Jan

11

Jul 1

1

Jan

12

Jul 1

2

Jan

13

Jul 1

3

Jan

14

Jul 1

4

Jan

15

Jul 1

5

Jan

16

Jul 1

6

Jan

17

Jul 1

7

Jan

18

OECD CLI ( Major 5 Asia) OECD CLI (Overall) ASEAN 5 FX

ASEAN FX 17-Year Average (RHS)

(RHS)

Though ASEAN FX has appreciated by about 7% since start of 2017, the current level of ASEAN FX is still 5% below its historical average. This suggests there is still room for ASEAN FX to strengthen if growth conditions stay favourable

Investment Recovery Needed for Next Phase Of Growth & FX Driver …

37

Source: Maybank FX Research & Strategy

The recovery in the G3 and China has led to an improvement in external demand for ASEAN

products

This has allowed economies that are trade dependent like Singapore, Malaysia and Thailand to

accelerate

For growth to be sustained beyond exports, there needs to be a concomitant pick-up in

investment, which had slumped in most of the ASEAN economies since 2012-13

Indications so far point to a recovery in investment in ASEAN

This in turn could spur private consumption spending, further reinforcing growth in ASEAN

An Investment Recovery Will Determine Growth & FX Path In ASEAN

Export-led recoveryin ASEAN

Investment Recovery

Pick-up in G3 + China

ConsumptionTake-Off

Domestic Growth Peters Off

Sustainable Domestic Growth

Sluggish Investment

Lacklustre Consumption

Investment –

Next Growth

Phase

The move beyond trade could bode well for economies embarking on infrastructure spending in 2018, particularly MY, PH and TH, bolstering the MYR, PHP and THB.

Export recovery usually leads investment pick-up by 6-12 months

Asia FX Outlook – From a Infrastructure Spending/ Investment Perspective

38

… And the Future looks Promising with Infrastructure Projects on Hand


Infrastructure Spending should kick-Off Growth

Note: Time frame for infrastructure spending: (1) Indonesia – 2018 (2) Philippines – 2017-2022 (3) Thailand – 2016-2022

0

20

40

60

80

100

120

140

160

180

200

Indonesia Philippines Thailand

USD bn

Projects on Hand: Indonesia

37 priority projects lined up for 2018 (total value USD181.6bn), including toll roads in Sumatra, Probolinggo, Yogyakarta; LRT in Jakarta; Power Plant (in 6 provinces), water supply; waste to energy porgramme in 8 cities, among others

Philippines

Expected spending equivalent to 6.7% of GDP in 2018, including the Davao City Coastal Road and Mindanao Logistic Infrastructure Network (involving construction or improvement of 2567km of roads)

Thailand

Key focus is the Eastern Economic Corridor where a high-speed railway project is underway to connect to Don Mueang, Suvarnabhumi and U-Tapao airports, third phase of Map Ta Phut port; third phase of Laem Chabang deep-sea port totalling around THB400bn

Asia FX Outlook – From a Infrastructure Spending/ Investment Perspective

Most of ASEAN can Benefit from the Youth Dividend

Source: Andrew Rose and Saktiandi Supaat, 2007. “Fertility and Real Exchange Rate”, MAS Sraff Paper No. 46., CEIC, Maybank FX Research & Strategy

39

With the exception of Singapore and Thailand, most of the ASEAN economies have a young working population that is more than 30 % of the population. These economies could reap a youth dividend that includes a sustained strong domestic private consumption. That should drive growth in the region and keep ASEAN FX supported.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Indonesia Malaysia Philippines Thailand Singapore

Young Working Population (15 to 34 years old) Key to Higher Potential Growth that could be supportive of ASEAN FX

Risk to Watch: Decline in its fertility rate can be expected to have higher savings, lower investment, a current account surplus, and accordingly a real depreciation. Point estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately .15% in the real effective exchange rate.

Asia FX Outlook – From a Youth Dividend Perspective

30%

50%

70%

90%

110%

130%

150%

170%

190%

210%

230%

30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80%

Domestic Resilience **

Eco

no

mic

Op

enn

ess

*

Most Vulnerable Less Vulnerable

Least VulnerableNot Vulnerable

Philippines

Indonesia

Malaysia

Singapore

Thailand

40

SG & TH are Most Vulnerable to Trade Disruption/Protectionist Measures



Greater Domestic Resilience Could Mitigate Disruption From Trade

Note: * Proxied by Total Trade as % of GDP ** Proxied by Private Consumption as % of GDP

Asia FX Outlook – Economic Openness vs. Domestic Resilience

Recent Protectionist Measures has had Limited Impact on Asian FX

41

Source: CEIC, Reuters, Wood Mackenzie, Maybank FX Research & Strategy

Asian steel exports account for only about 25%

of total steel exports to the US …

… Asian steel exports to the US make up just a

small proportion of total exports …


16.7

13.2

9.7 9.4

8.1

5.64.9

3.73.2 2.9

2.4

20.2

0

5

10

15

20

25

Can

ada

Bra

zil

So

uth

Ko

rea

Mex

ico

Ru

ssia

Tu

rkey

Jap

an

Ger

man

y

Tai

wan

Ch

ina

Ind

ia

Oth

ers

6.2

6

4.2

3.4

2.4

0 1 2 3 4 5 6 7

India

Korea

Japan

Taiwan

China

% of Total

Exports

JPYKRW the FX Proxy Play for Fear of Trade War

42



Fears of protectionism measures escalating could hurt sentiment – a risk factor that may derail gains in AXJs and result in risk-aversion flows to favor long JPY and CHF (via the sentiment channel – changes on equity and bond yields should be closely monitored). On relative value plays, JPYKRW is a proxy trade for fear of trade war. USD impact is expected to be mixed amid trade tensions rising – likely to stay soft vs. JPY, CHF and EUR to some extent but to stay supported vs. AXJs including KRW and antipodeans (AUD and NZD). Rising trade tensions (at risk of turning into trade war) could pose risks to synchronised economic recovery and derail broad USD downtrend temporarily. That said we expect broad USD downtrend to resume on unwinding of trade tensions. Bias remains to sell USD on rally. Unwinding of trade tensions is supportive of ASEAN FX. In particular, we look for further strengthening of the THB and SGD. THB continues to be lifted by net foreign portfolio inflows into Thai assets, especially its debt on higher real domestic yields. SGD should find support in the lead up to the Apr meeting on expectations of a MAS shift to a ‘slight appreciation bias’. We remain bias to long the THB and SGD vs. short-USD.

43

Lure Of Higher Real Returns From Debt Lifts THB



Real Yield Differentials between 10Y UST & ASEAN Debt are Widening, Making ASEAN Assets Less Attractive

Asia FX Outlook – Yield Differentials

-400

-300

-200

-100

0

100

200

300

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Jul-

17

Oct

-17

Jan

-18

SG MY ID PH TH

Jan 2010 = 100

44

Do Not Expect Oil Prices to Impact ASEAN FX Similarly



MYR should Remain Supported as Oil Price Rises, But Weighs on IDR & THB

Our examination of the impact of oil prices on ASEAN currencies (controlling for currency and other effects) showed that impact of oil has changed over the different time period.

Positive oil elasticities for SGD and PHP have fallen since 2010, reflecting the smaller role that oil plays in the two economies in recent years and the diversification of energy sources.

Oil elasticities for the IDR and THB remains negative as both are oil importing economies, with the rise in oil prices leading to a decline in the IDR and THB Note though that the negative oil elasticity for the IDR is now decreasing, while that for the THB is increasing.

Oil elasticity for the MYR continues to rise, reflecting the importance that oil plays in the economy.

Our base line assumption for oil prices (averaging USD60-65/bbl) remains.

Note: OLS regression using reduced form equation: X = c + aY1 + bY2 + dY3 9 where x = log of ASEAN currency vs. USD Y1 = log of Brent crude oil price Y2 = log of USD Index Y3 = log of ASEAN currency vs. USD lagged one period

Asia FX Outlook – FX Sensitivity to Oil Price Changes

-0.003

-0.002

-0.002

-0.001

-0.001

0.000

0.001

0.001

0.002

0.002

0.003

0.003

2000-2004 2005-2010 2011-2015 2016-2018

IDR MYR PHP SGD THB

45

USD/ASEANs Still Tracks USDCNY Moves



Impact of USDCNY on USD/ASEANs has Eased with Removal of “Counter-Cyclical Factor”

Asia FX Outlook – Impact Of USDCNY Moves

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1 Jan-30 Apr 2017 1 May 2017 to 7 Jan2018

8 Jan-20 Mar 2018

USDMYR USDTHB USDSGD USDIDR USDPHP

Pre-"Counter-cyclical Factor"

Post-"Counter-cyclical Factor"

"Counter-cyclical Factor"

In the period prior to addition of the “counter-cyclical factor” to the PBoC’s yuan fixing formula, USD/ASEANs did not track the USDCNY significantly

₋ volatility in the CNY in Jan 2017 triggered heavy intervention from the PBoC that eventually kept the CNY broadly sideways

₋ ASEAN FX tracked sentiments as represented by the JPY instead

During the “counter-cyclical factor” period, the USDCNY had a positive impact on almost all the USD/ASEAN except for the USDIDR and USDPHP

₋ “counter-cyclical factor” helped to soften the impact of sharp market swings, and weaken possible ‘herd effects’ in the FX market, keeping the RMB stable and helped anchor the USD/ASEANs

₋ USDIDR and USDPHP though were affected by idiosyncratic factors namely concerns about their twin deficits

In the post-“counter-cyclical factor” regime, the USD/ASEANs still track the USDCNY positively but not as significantly as before as USD/ASEANs are more exposed to market forces

₋ USDPHP remains the outlier as focus remains on its domestic shortcomings, namely twin deficits.

Foreign Inflows Into Debt Supportive of MYR & THB; MY & PH By Equities

46

MY & PH Supported by Foreign Inflows into Equities,

while ID & TH Weighed By Sell-Off …

… MY & TH Benefiting from Foreign Interest in

Debt, while Flows Into ID & PH Debt is Falling


USDJPY (lhs)

Nikkei 225 (rhs)

USDJPY (lhs)

Four-Quarter Moving Average

Asia FX Outlook – Portfolio Flows

-2000

-1500

-1000

-500

0

500

1000

1500

2000

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

QT

D

ID MY PH TH

Four-Quarter Moving Average

-4000

-2000

0

2000

4000

6000

8000

Dec

-201

0M

ar-2

011

Jun

-201

1S

ep-2

011

Dec

-201

1M

ar-2

012

Jun

-201

2S

ep-2

012

Dec

-201

2M

ar-2

013

Jun

-201

3S

ep-2

013

Dec

-201

3M

ar-2

014

Jun

-201

4S

ep-2

014

Dec

-201

4M

ar-2

015

Jun

-201

5S

ep-2

015

Dec

-201

5M

ar-2

016

Jun

-201

6S

ep-2

016

Dec

-201

6M

ar-2

017

Jun

-201

7S

ep-2

017

Dec

-201

7M

ar-2

018

QT

D

ID MY PH TH

Macroeconomic Underpinnings Supportive of SGD

47

We remain positive on the SGD as macroeconomic fundamentals continue to be supportive:

- Synchronised export recovery is expected to extend to investment recovery, supporting growth in 2018 - Expansionary fiscal policy together should put a floor on the SGD - Persistent current account surpluses and quasi-safe haven inflows as a consequence of being the only Triple-A rated economy in Asia - Policy normalisation to a ‘mild appreciation’ bias in Apr 2018 should be supportive - Upswings in USDCNY could weigh on the SGD

There are risks to the SGD should

- Domestic growth and/or core inflation uptick stall, accommodative monetary policy could be extended for longer - External headwinds (lower global growth in the region, China and G3) weighs on the economy - Aggressive Fed rate hikes and balance sheet reduction could strengthen the USD even more

House View on the SGD

Forward Market Points To Downside Pressure On USDSGD Investors Still Pricing In SGD Strengthening Ahead


48

Asia FX Outlook – SGD Outlook

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

Apr 1

1

Ju

n 1

1

Aug

11

Oct 1

1

Dec

11

Fe

b 1

2

Apr 1

2

Ju

n 1

2

Aug

12

Oct 1

2

Dec

12

Fe

b 1

3

Apr 1

3

Ju

n 1

3

Aug

13

Oct 1

3

Dec

13

Fe

b 1

4

Apr 1

4

Ju

n 1

4

Aug

14

Oct 1

4

Dec

14

Fe

b 1

5

Apr 1

5

Ju

n 1

5

Aug

15

Oct 1

5

Dec

15

Fe

b 1

6

Apr 1

6

Ju

n 1

6

Aug

16

Oct 1

6

Dec

16

Fe

b 1

7

Apr 1

7

Ju

n 1

7

Aug

17

Oct 1

7

Dec

17

Fe

b 1

8

Apr 1

8

Ju

n 1

8

Aug

18

Oct 1

8

Dec

18

SGD NEER Mid Upper Lower Taylor Rule SGD NEER

Oct 142015: Slope reduced slightly. No change to the width or centre of the band.

.

Apr 142016: Slope reduced to zero. No change to the width or centre of the band.

.

3Q 2018: TR SGD NEER: 129.36

(1.2900)

1Q 2018: TR SGD NEER: 128.36

(1.3000)

Jan 28 2015: Surprise intermeeting reduction in slope of policy band.No change to the width or centre of the

band.

Oct 142015: Slope reduced slightly. No change to the width or centre of the band.

.

Apr 142016: Slope reduced to zero. No change to the width or centre of the band.

.

2Q 2018: TR SGD NEER: 128.71

(1.2966)

4Q 2018: TR SGD NEER: 129.55

(1.2882)

Jan 28 2015: Surprise intermeeting reduction in slope of policy band.No change to the width or centre of the

band.

Oct 14 2016 , Apr 13 2017 & 13 Oct 2017: No change to neutral policy.Slope of policy band at zero. No change to the width or centre of the band.

.

Policy Normalisation Should Take Place In Apr 2018 Our Taylor Rule Estimates Suggest SGD NEER Should Strengthen Ahead

Indicating A Shift In Policy Would Be Appropriate


49

SGD NEER Currently Trading Around

0.3% Above The Implied Mid-Point

Asia FX Outlook – SGD Outlook

MYR: Positive Outlook; Currency is 5 – 6% Fundamentally Undervalued

50

We maintain a positive outlook on the Ringgit on the back of improving domestic factors amid favourable external environment. Some of these domestic factors include:

(1) Sustained growth pick-up backed by consumption, investment and exports; (2) BNM initiatives (Apr-2017) to deepen and broaden domestic financial markets

were positive steps to restore foreign investors’ confidence; (3) BNM’s pre-emptive move in Jan described the hike as pre-emptive to ensure that

the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time;

(4) General election could lend further support for Ringgit. Typically Malaysian equities, MYR tend to strengthen in the lead-up to elections due to rising confidence;

(5) Sustained current account surplus and rising FX reserves to retained imports & short-term debt should also provide an anchor for Ringgit

Current external environment of monetary policy continuity, oil price increase and still

subdued inflationary pressures in US as well as synchronous global economic recovery should continue to bode well for robust exports recovery and benefit countries that are trade-dependent including the MYR.

Potential Challenges to Outlook include: If Fed embarks on more aggressive than expected pace of rate hikes or oil prices see renewed downside pressures

Asia FX Outlook – MYR Outlook

MYR Typically Strengthen Into Election

51

94

95

96

97

98

99

100

101

102

-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

2013 Election 2008 Election

MYR typically strengthened in the lead up to General Election

MYR Typically Strengthen 3 months into Election day but Gains Typically Reversed Post-Election

Election Day Weeks Before Weeks After



R 255 G 190 B 000

R 000 G 030 B 095

R 195 G 000 B 000

R 230 G 100 B 010

R 120 G 150 B 060

R 055 G 110 B 250

R 255 G 200 B 155

R 150 G 150 B 145

52

Source: Maybank IB-Research, Maybank FX Research & Strategy

Stable and Rising Oil Prices -> Positive for Ringgit

Ringgit Correlation with Oil Prices Pick Up Again

20

25

30

35

40

45

50

55

60

65

703.5

3.6

3.7

3.8

3.9

4

4.1

4.2

4.3

4.4

4.5

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

USDMYR Spot (Inverted) Brent (RHS)

MYR strengthens (weakens) when Brent Strengthens (weakens)

MYR-Brent positive correlation picks up again

Malaysia 2018 budget’s oil price assumption is conservative at $52/bbl; upside to oil prices supports oil-related revenue and MYR


R 255 G 190 B 000

R 000 G 030 B 095

R 195 G 000 B 000

R 230 G 100 B 010

R 120 G 150 B 060

R 055 G 110 B 250

R 255 G 200 B 155

R 150 G 150 B 145

53

Source: Maybank IB-Research, Maybank FX Research & Strategy

Return of Foreign Investors’ Appetite for Local Assets

3.8

3.9

4

4.1

4.2

4.3

4.4

4.5-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000Ja

n-1

6

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

De

c-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

De

c-1

7

Jan

-18

Foreign Portfolio Flow (Equity and Debt) Cumulative since Jan 2016 USDMYR (RHS, Inverted)

USDMYR (RHS, Inverted), Net Equity and Bond Inflow from Foreign Insti

(Cumulative as of Jan 2016 in MYR mil)

Ringgit Strength

MYR Supported on Foreign Inflow into Local Stocks and Bonds


54

MYR is “Cheapest” Amongst AXJs on REER Basis

MYR REER has significantly adjusted lower by about 15% since 3Q-2014 – competitiveness has improved

Current level of MYR REER is about 5% undervalued relative to 10-Y average

On Z-score basis, MYR REER is 0.8.standard deviation below its 10-year mean and remains “relatively

cheap” amongst AXJs

Note: z-score of the REER is the number of standard deviation from the mean that the latest REER is Source: Eviews, Bloomberg, Maybank FX Research

MYR REER (BIS)

1.70

1.40 1.35 1.30

0.95 0.92

0.28

0.00

-0.30

-0.80 -1

-0.5

0

0.5

1

1.5

2

TWD THB KRW INR CNY HKD SGD PHP IDR MYR

REER – Z score 2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

82.0

87.0

92.0

97.0

102.0

Jan

-07

Oct

-07

Jul-

08

Ap

r-0

9

Jan

-10

Oct

-10

Jul-

11

Ap

r-1

2

Jan

-13

Oct

-13

Jul-

14

Ap

r-1

5

Jan

-16

Oct

-16

Jul-

17

MYR REER

MYR REER 10Y Average

USDMYR (RHS, Inverted)


55

Current Level of Spot MYR ~5-6% Fundamentally Undervalued

Ringgit deviation from fair value not a reflection of fundamentals but market sentiment

Stability is gradually returning to Ringgit as political/ contingent liability risk subsides, fiscal

consolidation gains traction, oil prices continue to stabilize and uncertainty subsides

Economy still on track to expand at 5.5% y/y for 2017, underpinned by domestic demand resilience,

stronger investment growth and pick-up in government expenditure, amid accommodative monetary policy

Note: Maybank MYR fair value = f (Interest rate differential , inflation differential, Current account differential, reflation variable) Source: Eviews, Bloomberg, Maybank FX Research

Our fair value suggests MYR is about 5% undervalued

relative to medium term fair value of 3.70


56

Broad Downtrend for USDMYR Still Intact


Short term rebound risks towards 3.95 levels Not Ruled Out


Monthly

Bearish Trend Channel

3-month forward points



57

Carry Trades Weighs But Forward Points Suggest IDR Upside Ahead

Rising vols and JPY losing allure as funding currency of choice have led to unwinding of IDR carry trades,

leading to sell-off in Indonesian assets, particularly debt

Strong economic fundamentals supported by ongoing synchronous economic recovery and infrastructure

building should be supportive of the IDR in 2H 2018, together with government spending in preparation for

the Asian Games (18 Aug-2 Sep), campaign spending for local elections in Jun as well as for legislative and

presidential election in 13 Apr 2019.

This is reflected in the bets placed in the forward markets where despite current price action, the forward

points are signalling downside to the USDIDR in the 3-6 months ahead

Source: Bloomberg, Maybank FX Research

Unwinding Of Carry Trades Weighs On IDR Forward Points Suggests Downside Pressure

On USDIDR

Asia FX Outlook – IDR Outlook

13000

13100

13200

13300

13400

13500

13600

13700

13800-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-17

Jan

-18

MT

D M

ar-2

018

Equity (USDmn) Debt (Usmn) USDIDR (inverted, rhs)

58

PHP Weighed By Domestic & External Headwinds

Deteriorating current account deficit, underpinned by trade deficits (Jan: -USD3.3bn vs. Dec: -USD3.8bn),

softer overseas remittances (as seasonality factors weigh in 1Q) and elevated oil prices, should keep the PHP

above the 52-levels for now

Perception that the BSP is behind-the-curve in curbing inflationary pressures (they deem current inflation as

temporary) amid tightening monetary policy elsewhere is also adding downside pressure on the PHP

These concerns amid episodes of global risk aversion should trigger further sell-off in equities and weigh on

the PHP.


Further Downside Pressure On PHP Likely On

Deteriorating Current Account Deficit

Local Equity Sell-Off Weighs On The PHP

Asia FX Outlook – PHP Outlook

40

42

44

46

48

50

52

54

-6

-4

-2

0

2

4

6

8

1/6/

2005

1/2/

2006

1/10

/200

6

1/6/

2007

1/2/

2008

1/10

/200

8

1/6/

2009

1/2/

2010

1/10

/201

0

1/6/

2011

1/2/

2012

1/10

/201

2

1/6/

2013

1/2/

2014

1/10

/201

4

1/6/

2015

1/2/

2016

1/10

/201

6

1/6/

2017

Current Account (% of GDP) USDPHP (Inverted, rhs)

USDPHP broadly tracks the current account

44

45

46

47

48

49

50

51

52

53-800

-600

-400

-200

0

200

400

600

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

Ma

y-1

6

Ju

l-1

6

Se

p-1

6

No

v-1

6

Ja

n-1

7

Ma

r-1

7

Ma

y-1

7

Ju

l-1

7

Se

p-1

7

No

v-1

7

Ja

n-1

8

MT

D M

ar-

18

Equity Equity (6MMA) USDPHP (inverted, rhs)

USDmn

59

THB Lifted By Foreign Inflows Into Debt On Higher Real Yield

Real yields in Thailand are relatively high due to low inflation, making Thai debt attractive relative to its

peers in the region

Aside from low inflation, strong economic recovery (of at least 4%) and strong current account surpluses

(highest in ASEAN after Singapore) amid relative political stability makes Thailand an attractive investment

destination

Strong domestic economic fundamentals have spurred foreign inflows into Thai assets, particularly debt,

and market positioning for long-THB vis-à-vis its regional peers


Higher Thai Real Yield Vs. UST Real Yield

Is Supportive Of The THB

Further Foreign Inflows Into Thai Debt

Should Weigh On The USDTHB

Asia FX Outlook – THB Outlook

31.00

32.00

33.00

34.00

35.00

36.00

37.00-2.50

-2.00

-1.50

-1.00

-0.50

0.00

Jan

15

Mar

15

May

15

Jul 1

5

Sep

15

No

v 1

5

Jan

16

Mar

16

May

16

Jul 1

6

Sep

16

No

v 1

6

Jan

17

Mar

17

May

17

Jul 1

7

Sep

17

No

v 1

7

Jan

18

Spread (10Y UST-TH) USDTHB (inverted, rhs)

31.00

32.00

33.00

34.00

35.00

36.00

37.00

-4000

-3000

-2000

-1000

0

1000

2000

3000

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-17

Jan

-18

MT

D M

ar-2

018

Equities Debt USDTHB

USDmn USDmn

60

Firming CPI Poses Downside Risks to VND

After the rate cut last Jul, we do not expect any further monetary policy easing this year, especially in the backdrop of rising inflation (headline and core), underpinned by higher food costs. However, the rate cut comes at the expense of rising credit growth that could be unsustainable in the long term.

Inflation Creeping Higher, Risks To the Dong

Source: CEIC, State Bank of Vietnam, Maybank FX Research & Strategy

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17

Core Inflation Headline Inflation (yoy) Inflation Target

15.0

16.0

17.0

18.0

19.0

20.0

21.0

Outstanding Credit (yoy)

Asia FX-Outlook – VND Outlook

61


Cheaper Dong Has Its benefits

VND is getting more competitive against its trading partners. Nominal Effective Exchange Rate has fallen for most of 2017 into 2018. There are benefits from having a cheaper dong and SBV is likely to guide the currency on the weakening path in the near term to boost exports and increase the allure of Vietnamese assets to foreign investors.

Source: BIS, CEIC, Maybank FX Research & Strategy estimates. Note: Chart shows the NEER moves since Jan 2017

62

Slower Pace of FDI Inflow Matched By Stronger Portfolio Flows

Foreign Direct Investment inflows continue to underpin the Vietnamese economy but pace has slowed recently. However, this has been offset by the strong portfolio inflows seen in the past few months, albeit volatile. Strong output from the manufacturing sector and external demand in the backdrop of sustained global growth momentum, continued FDI inflows should underpin the VND in the medium term. Eyes risks of protectionist policies and firming inflation.

Dong Weakens Against Its Trading Partners


-200.0

0.0

200.0

400.0

600.0

800.0

Sep

-13

De

c-1

3

Mar

-14

Jun

-14

Sep

-14

De

c-1

4

Mar

-15

Jun

-15

Sep

-15

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

FDI (yoy) 3 per. Mov. Avg. (FDI (yoy))

19000

20000

21000

22000

23000-200

0

200

400

600

Mar

-10

Au

g-1

0

Jan

-11

Jun

-11

No

v-1

1

Ap

r-1

2

Sep

-12

Feb

-13

Jul-

13

De

c-1

3

May

-14

Oct

-14

Mar

-15

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

Feb

-18

Monthly Portfolio Flows

USDVND (inverted)

3 per. Mov. Avg. (Monthly Portfolio Flows)


63

RMB – Could Be Lifted by Better Growth

China To Slow Down But Economic Rebalancing Makes Progress

Source: Bloomberg Intelligence, National Bureau of Statistics, Maybank FX Research & Strategy Note: The China Real Activity indices are constructed to track the strength of monthly economic activity and the rebalancing of China’s economy. This China Real Activity Index is the weighted average of consumption of medicine, exports of vehicles, clean energy electricity production, communication equipment and computers production, and output of private enterprises.

Growth target was lowered to “around 6.5%” for 2018. As the economy matures, expect this headline number to stabilize. However, is the economy really slowing? The China Real Activity Index suggests that the growth of new sectors have been on the rise.

Asia FX Outlook – RMB Outlook

64

RMB Has Less Vulnerabilities Including Mitigating Banking Risks

64

China Might Be Making More Progress on Debt Than You Think

Source: Bank for International Settlements, Maybank FX Research & Strategy Note: The credit-to-GDP gap has found to be a reliable early warning indicator of banking crises or severe distress. The credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long-run trend. The credit-to-GDP ratio as published in the BIS database of total credit to the private non-financial sector, capturing total borrowing from all domestic and foreign sources, is used as input data. https://www.bis.org/publ/qtrpdf/r_qt1609c.htm

According to BIS, China is making progress on its debt. The credit-to-GDP gap to its long-run trend has actually fallen from its 2015 high. The fall is even steeper compared to Singapore and Canada’s. While this indicates that China is not out of the woods yet relative to peers, the government has made significant progress on mitigating financial systemic risks.


https://www.bis.org/publ/qtrpdf/r_qt1609c.htm

https://www.bis.org/publ/qtrpdf/r_qt1609c.htm

65

RMB is Supported by Stable FX Reserves To Support

In an environment of synchronous recovery, little USD strength, less fear of capital flight out of China. Sustained current account surplus could ensure stable FX reserves and RMB.


66

RMB: Resilient To UST Rates Increase and A Relatively High Carry

China-US 10y Spread Is Still Amongst The Highest

Carry trades were in vogue for most of 2017 and a rise in rates, coupled with volatility and uncertainty trigger the unwinding of carry trades.

Despite the rise in UST rates, CNY still holds one of the highest carry and is one of the least sensitive to changes in UST rates

CGB-UST Yield Differential One of The Least Sensitive To UST Rate Changes

beta

Source: Bloomberg, Maybank FX Research & Strategy Estimates


67

RMB: A More Favourable Environment But Not Without Risks

In a more favourable environment, we see more room for PBoC or State Council to revert back to the yuan internationalization goal. Already, there have been a few capital controls that have eased and we can look forward to gradual easing of more capital controls. The last time capital controls were relaxed in 2014, there was significant outflow recorded in the BOP net investment. We may see some pent up demand for foreign currency that could result in pockets of RMB weakness but we do not expect that to snowball into yuan depreciation bets like what we saw in the past.

Source: CEIC, State Administrative of Foreign Exchange, Maybank FX Research & Strategy


68

Concluding Remarks

Strategic Trade Ideas

69

EURUSD: Interim Downside Risks present Opportunity to Buy on Dips towards 1.20 for a move towards

1.30 Objective on receding political risks and monetary policy normalisation amid broadening growth

Buy GBPUSD on dips towards 1.37 – 1.38 Levels Targeting 1.45 – 1.48 Medium Term Objective

Past experience of UK leaving the ERM back in 1992 saw a period of consolidation (for a few years) at historical lows for GBP, before the eventual move higher in the following years, where GBP TWI traded above 100-levels in 1998 (from the lows of 80 in 1993-1996) due to buoyant demand fueled by rapid growth of wealth, credit and money. If history is a guide (assuming UK manages the transition well and takes the opportunity to correct its imbalances), its currency may start climbing higher.

Buy AUDUSD on dips towards 0.76 Levels Targeting Objective at 0.80 RBA to raise rate in Aug-2018 Wage Growth Bottoming to lead inflation higher

Buy AUDNZD on dips towards 1.0520 Levels Targeting 1.10 Objective RBA-RBNZ monetary policy may diverge in the 6-9 months horizon

Buy AUDSGD on dips towards Parity Targeting 1.05 Objective

On relative Asian value trade on basket basis, prefer to stay long CNY, MYR, THB vs. short IDR and PHP

Current account differentials Favourable yield differentials Net oil importers vs. exporters play Export Uplift translating into investment recovery cycle

FX Forecast

70

End Q1-18 End Q2-18 End Q3-18 End Q4-18

USD/JPY 108 107 106 105

EUR/USD 1.2400 1.2500 1.2800 1.3000

GBP/USD 1.4200 1.4400 1.4800 1.4800

AUD/USD 0.7850 0.8000 0.8100 0.8300

NZD/USD 0.7100 0.7400 0.7500 0.7600

USD/SGD 1.2800 1.2700 1.2500 1.2400

USD/MYR 3.8000 3.8500 3.7000 3.6500

USD/IDR 13200 13000 12900 12800

USD/THB 31.00 31.00 31.50 32.00

USD/PHP 51.00 50.50 50.50 50.00

USD/CNY 6.25 6.20 6.20 6.10

USD/HKD 7.80 7.80 7.80 7.80

USD/TWD 29.10 29.00 29.00 29.00

USD/KRW 1080 1050 1040 1060

USD/INR 64.50 63.50 63.00 62.50

USD/VND 22700 22600 22550 22500

DXY Index 89.69 88.91 87.18 86.18

FX Forecast – SGD and MYR Crosses

71

SGD Crosses End Q1-18 End Q2-18 End Q3-18 End Q4-18

SGD/MYR 2.9688 3.0315 2.9600 2.9435

SGD/IDR 10313 10236 10320 10323

SGD/THB 24.22 24.41 25.20 25.81

SGD/PHP 39.84 39.76 40.40 40.32

SGD/CNY 4.88 4.88 4.96 4.92

SGD/HKD 6.09 6.14 6.24 6.29

SGD/TWD 22.73 22.83 23.20 23.39

SGD/KRW 844 827 832 855

SGD/INR 50.39 50.00 50.40 50.40

MYR Crosses End Q1-18 End Q2-18 End Q3-18 End Q4-18

EUR/MYR 4.71 4.81 4.74 4.75

JPY/MYR 3.52 3.60 3.49 3.48

MYR/HKD 2.05 2.03 2.11 2.14

MYR/CNY 1.64 1.61 1.68 1.67

GBP/MYR 5.40 5.54 5.48 5.40

AUD/MYR 2.98 3.08 3.00 3.03

NZD/MYR 2.70 2.85 2.78 2.77

MYR/IDR 3473.68 3376.62 3486.49 3506.85

MYR/INR 16.97 16.49 17.03 17.12

MYR/KRW 284.21 272.73 281.08 290.41

MYR/PHP 13.42 13.12 13.65 13.70

CNY/MYR 0.6080 0.6210 0.5968 0.5984

72

Disclaimer This presentation is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a

solicitation of an offer to buy the securities or financial instruments referred to herein, or an offer or solicitation to any person to enter into any

transaction or adopt any investment strategy. Investors should note that income from such securities or financial instruments, if any, may

fluctuate and that each security’s or financial instrument’s price or value may rise or fall. Accordingly, investors may receive back less than

originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal

investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of

persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness

of investing in any securities and/or financial instruments or the investment strategies discussed or recommended in this report.

The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently

verified by Malayan Banking Berhad and/or its affiliates and related corporations (collectively, “Maybank”) and consequently no representation

is made as to the accuracy or completeness of this report by Maybank and it should not be relied upon as such. Accordingly, no liability can

be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank and its

officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the

securities and/or financial instruments referred to herein and may further act as market maker or have assumed an underwriting commitment

or deal with such securities and/or financial instruments and may also perform or seek to perform investment banking, advisory and other

services for or relating to those companies whose securities are mentioned in this report. Any information or opinions or recommendations

contained herein are subject to change at any time, without prior notice.

This presentation may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”,

“believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”,

“should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions

made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ

materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward

looking statements. Maybank expressly disclaims any obligation to update or revise any such forward looking statements to reflect new

information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

This presentation is prepared for the use of Maybank’s clients and may not be reproduced, altered in any way, transmitted to, copied or

distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank. Maybank

accepts no liability whatsoever for the actions of third parties in this respect.

This presentation is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any

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