Forex Investment and Currency Trading

USD-CNY
Spot had a central parity fixing of 6.9372 vs. Friday’s close of 6.9420. In May, the Chinese yuan (CNY) gained 0.66% against the USD, faster than the 0.35% appreciation in April, but much slower than the 4.2% appreciation in Q1. Market participants were concerned in April and May that the Chinese authorities may have changed their FX policy substantially, no longer favouring a strong currency. However, the current view is that this was not the case; that the authorities may well have changed, but rather in favour of a strong currency on a trade-weighted basis rather than just against the USD. Currently, the year-end USD-CNY NDF outright is around 6.7250, which is only implying around 3.2% appreciation. Granted, much will depend on what the USD does against the majors this year, but still looks overly conservative. Meanwhile, in the Economic Observer newspaper on the weekend, it was reported that the People’s Bank of China (PBoC), State Administration of Foreign Exchange (SAFE), Ministry of Commerce and the National Development and Reform Commission (NDRC) have together formed a research group to have another look at CNY policy. A PBoC report on the CNY was reportedly sent to the State Council.

USD-TWD
Spot remains under tremendous pressure and appears to be targeting the recent major low of 29.95. The expectation that fuel and electricity price hikes will add to inflation is encouraging the market to believe that the Central Bank of China (CBC) favours a strong Taiwan dollar (TWD) in order to limit the imported component of inflation. This week, the key data release in Taiwan is the May CPI report on Thursday. The market is expecting CPI to edge up to 4.10% y/y from 3.86% y/y previously. Market is looking for a slight decline from last month’s level to around 3.55% y/y on declines in fruit and vegetable prices, as well as due to a temporary cap on retail fuel prices. However, the government has adopted measures to lift the cap on gasoline with effect from 28 May and also plans to increase electricity prices in two stages, starting on 1 July.

USD-KRW
Spot drifted down to 1,026.50 before finding some temporary support. However, it remains heavy on continued position adjustment after the apparent about-turn by the South Korean authorities on FX policy, seemingly now favouring a more stable rather than a weak currency. The Q1 final GDP growth number came in at 5.8% y/y, marginally higher than the initial release of 5.7% y/y. However, private consumption was revised down to 3.4% from 3.5% y/y initially. Facility investment growth was revised down to 1.4% from 1.7%. Meanwhile, the May Trade balance showed a surplus of +USD 1.04bn. Export growth came in much higher than expected at 27.2% y/y compared to a consensus forecast of 22.6% y/y. Import growth was 28.8% y/y, in line with a consensus market forecast of 28.7% y/y.

USD-IDR
Spot spent much of last week trading around the 9,300 level as investors await the policy response from bank Indonesia (BI) to the fuel price hikes. On Monday, we get the May Inflation report. The market is expecting a number of around 9.90% y/y vs. 8.96% y/y previously. The general market expectation for core inflation is 8.66% y/y vs. 8.22% y/y previously.

USD-MYR
Spot continues to drift in a 3.20-28 range, but is setting lower highs. Positioning in USD-MYR – which had been heavily short USD-MYR – appears to have improved significantly, suggesting that it may keep this range for the time being. The key data release this week in Malaysia is the April Trade release, scheduled for Tuesday. Market expects export growth to pick up slightly to 7.20% y/y from 5.30% y/y previously and import growth to rise sharply to 7.00% y/y from 2.60% y/y. Meanwhile, the government will decide on Tuesday on a new mechanism for fuel subsidies and when to implement curbs on foreign motorists buying fuel at Malaysian petrol stations, Deputy Prime Minister Razak was reported on Sunday as saying. Separately, Malaysia wants to scrap its policy of subsidising fuel at the pump and instead give discounts to individuals based on their needs, according to local press reports on Sunday citing Domestic Trade Minister Samad.

USD-PHP
Spot came well off the highs on Friday and remains heavy, in line with a general pullback in USD-AXJ. The market is very long this pair so we could well see an extended correction lower at some point. Meanwhile, we get the May CPI report and the Central Bank of the Philippines (BSP) monetary policy decision on Thursday. Market is expecting the CPI to continue higher in May, coming in at 9.00% y/y vs. 8.30% y/y previously. However, market looks for the BSP to maintain unchanged policy interest rates at 5.00% on the view that inflationary pressures should peak soon and gradually abate in H2. A Star article today suggested that the BSP is comfortable with the government’s extra spending of PHP 93.6bn this year and considers current money supply growth below average. This appears to support the view that BSP remains firmly on hold in terms of policy interest rates.

USD-INR
Spot gapped lower in early Monday trading, retesting initial support at 42.18. Near term, USD-INR appears to have put in a major top and may retrace lower on a combination of factors. Firstly, what appeared to be heavy intervention by the Reserve Bank of India (RBI) above the 43 level seemed to discourage speculators from extending long positions. In addition, the RBI was reported on the newswires as saying that it would conduct open market operations to reduce “lumpy demand” for foreign exchange in the market from the oil importers. More specifically, the RBI said it will provide FX at market rates to Indian refiners in exchange for the socalled oil bonds to help them meet the rising cost of crude oil, while ensuring the stability of the financial system. The RBI will reportedly buy the securities, issued to oil companies by the government as compensation for selling fuel below cost, through designated commercial banks and provide equivalent amount of foreign exchange. Such purchases will be subject to a limit of INR 10bn a day. The relaxation on external commercial borrowing (ECB) should also be helpful for the Indian rupee (INR) near term. Finally, WPI through 17 May came in higher than expected at 8.10% y/y vs. 7.82% y/y previously and a consensus market forecast of 7.96% y/y. Near term, market expects USD-INR to extend lower, back towards key support at 41.75/70.