CURRENCIES ● EM ASIA
13 July 2018HSBC FX research maintains that the USD rally is not yet over. The year-end forecast of 1.13
for EUR-USD implies another 2-3% upside for the DXY index. We had earlier thought that USD-
Asia may not follow the DXY index so closely. But even the RMB weakened sharply after trade
tensions escalated in June, in view of the negative implications for China’s growth (see Qu
Hongbin’s Preparing for the worst – China-US trade war escalating, 11 July 2018), current
account and yield advantage. The RMB’s beta to external developments has risen, reflecting
the maturity of the FX market and policymakers’ commitment to a “clean floating” FX regime.
We now expect USD-RMB to end the year at 6.70, instead of 6.40. It follows that adjustments
should be made to other USD-Asia pairs too, given their correlation with USD-RMB (Chart 4).
Our end-2018 forecast changes for USD-RMB and other USD-Asia pairs should be seen as an
extension to an existing view (expounded in Asian FX Focus: New forecasts: Meat on the bone,
4 May 2018). After the powerful USD rally in Q2 which we expect to continue in the near-term,
we are mindful of the risks for a consolidation or even a reversal of fortunes at some later stage.
The USD is mired in a circuitous inter-play between the US financial and economic cycles (see
Chart 1 of Currency Outlook: The USD rally is not over, 7 June 2018). This means that at some
point, in reaction to the tightening effect of USD strength, US data may start surprising
on the downside (Chart 5), setting the stage for a USD correction. Hence, we pencil in a
lower USD-Asia profile in 2019. While current US financial conditions and USD valuation are not
yet at extreme levels (Chart 6), vigilance is nevertheless warranted.
Moreover, USD consolidation or reversal may take place at different times for different
currencies – earlier for those currencies that have already adjusted significantly – in both FX
valuation (Chart 7) and/or risk premium (real rates; Chart 8) – and later for those with less
compelling domestic stories (e.g. political uncertainty). We thus prefer intra-Asia relative
value trades, rather than buying USD-Asia outright.
Table 1: New Asian FX forecasts*
USD-CNY USD-INR USD-IDR USD-KRW USD-MYR USD-PHP USD-SGD USD-TWD USD-THB USD-VND USD-LKR
Q3 2018 – new 6.65 69.5 14500 1130 4.05 54.0 1.37 30.8 33.8 23100 161
Q3 2018 – previous 6.35 67.0 14100 1090 3.90 52.5 1.33 30.2 31.8 22900 159
Q4 2018 – new 6.70 70.0 14700 1140 4.10 54.5 1.38 31.0 34.0 23200 162
Q4 2018 – previous 6.40 66.0 14000 1100 3.95 52.0 1.34 30.5 32.0 22900 160
Q1 2019 – new 6.60 70.5 14700 1120 4.00 54.0 1.36 30.6 33.0 23200 163
Q1 2019 – previous 6.40 66.0 14000 1100 3.95 52.0 1.34 30.5 32.0 22900 160
Q2 2019 – new 6.50 71.0 14700 1100 3.95 53.5 1.34 30.4 32.5 23200 164
Q2 2019 – previous 6.40 66.0 14000 1100 3.95 52.0 1.34 30.5 32.0 22900 160
*First published in Currency Outlook: Rallying around the USD, 12 July 2018 Source: HSBC forecasts
1. Many Asian economies are involved in
the tech and autos global supply chains
2. Asian exports’ momentum seems to be
slowing down
See EM FX Roadmap: Trade – give peace a chance, 27 March 2018 Source: UNCTAD, HSBCSee Fred Neumann’s Asia Chart of the week: Exports, cycling down, 6 July 2018 Source: CPB, HSBC
0%
5%
10%
15%
20%
0%
10%
20%
30%
40%
MX
N
TW
D
PH
P
KR
WCADJPYSGDCZKHUF
MY
R
TH
B
GB
P
TR
Y
PLNZARIL
S
EU
R
CN
YINRIDR
Tech exports to the USTech exports to China
Autos to Americas, EU, JPAffected exports, % GDP (RHS)
% of all exports to world% GDP
86
90
94
98
102
106
110
114
Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
Asia exportsDM imports
trade volumes, indexed Jul-14=100CURRENCIES ● EM ASIA
13 July 2018
3. OECD leading indicators suggest EM growth
is rolling over, following Europe and Japan,
while the US economy is still powering ahead
4. Many USD-Asia pairs are sensitive to sharp
increases by USD-RMB
Source: OECD, HSBC
*We calculate the beta for episodes when the weekly appreciation rates in the DXY index and USD-RMB are above their respective 20th percentile levels. The sample period starts in 2006.
Source: HSBC
5. Will US economic data surprises hold up… 6. …if financial conditions tighten further
Source: HSBCSource: BIS, Chicago Fed, HSBC
7. Some Asian currencies have already
adjusted and are starting to look undervalued
8. How much more risk premium is needed
Note: We calculate the deviation of REER from all possible definitions of “historical average” beyond a five-year period. This gives us a range of outcomes, from which we take an
average. The REERs used are either unadjusted BIS REERs or TFP-adjusted REERS, depending on the stationarity properties of each currency’s REER.
Source: HSBC
Source: Bloomberg, HSBC
98.0
98.5
99.0
99.5
100.0
100.5
101.0
101.5
102.0
Jan-10Jan-12Jan-14Jan-16Jan-18
USG4 ex USEM-9
OECD CLI
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
DXYUSD-RMB
Betato DXY and USD-RMB(whenthey rise sharply*)
85
95
105
115
125
135
Jan-16Jul-16Jan-17Jul-17Jan-18
US economic surprise index
Eurozone economic surprise index
EM economic surprise index
Data better than
expected
Data worse than
expected
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
Jan-10Jan-12Jan-14Jan-16Jan-18
Chicago Fed's National Financial Conditions Index
HSBC's USD REER valuation estimate (RHS)
Tighter US financial conditions
-15%
-10%
-5%
0%
5%
10%
15%
US
D
CN
Y
KR
WTHB
SG
D
EU
R
MY
R
PH
P
NZ
D
TW
DIDR
AU
D
CA
DINR
GB
P
JP
Y
Avg of REER valuation range (Jul 2018)
Avg of REER valuation range (Jan 2018)
Overvalued
Undervalued
Average deviationfrom historical average
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
BR
L
RU
BIDR
ZA
RINR
MX
N
MY
R
SG
D
CN
Y
PH
P
TH
B
KR
WTRY
TW
D
Jun-18Dec-175Y Max
Real 10Y bondyields, %
CURRENCIES ● EM ASIA
13 July 2018Table 2: Timeline of trade actions – tensions escalated in Q2 and will likely persist in H2
US vs China US vs Rest of the world
22 JanuaryEffective date of US tariffs on imports of solar panels and washing panels –
under Section 201, Trade Act of 1974
22 March USTR concluded investigation on China’s technology policies – under
Section 301, Trade Act of 1974. US President Trump said remedial actions
will be taken
23 March USTR launched a WTO complaint on China for forced technology transfer Effective date of US tariffs on imports of steel and aluminium – under Section
232, Trade Expansion Act of 1962
2 April China retaliated to steel and aluminium tariffs by imposing tariffs on USD3bn
worth of metal and agriculture imports from the US
3 April USTR released a proposed list of Chinese imports worth USD50bn for 25%
tariffs – pending a public consultation period that could take 60 days
4 April China launched a WTO complaint and published a retaliation proposal
5 April US President Trump instructed USTR to investigate China’s proposed
retaliation under Section 301 and to consider remedial tariffs on USD100bn
of imports
17 MayUS Congress’s deadline on NAFTA renegotiation passed without a deal
23 MayUS Department of Commerce initiated a Section 232 probe on autos imports
29 May US President Trump said the list of products to come under Section 301
tariffs will be released by 15 June – a