Forex Investment and Currency Trading

USD-CNY
Spot had a central parity fixing of 6.8796 vs. Wednesday’s close of 6.8823. USD-CNY NDFs have seen two way price action this morning in Asia. The 1Y outright began the day at around 6.4950, was trading at 6.52 and then came off again, albeit on relatively thin volumes. With the Strategic Economic Dialogue (SED) coming to a close, the market will be watching to see whether or not we get the typical pattern of upside consolidation in USD-CNY spot and a correction higher in the NDFs. The one thing that might be different this time is that the Chinese authorities appear to be managing their currency on a trade-weighted or nominal effective exchange rate (NEER) basis. Thus, as the DXY trades lower on the back of reduced US interest rate expectations, USD-CNY falls even more sharply to offset the rally in EUR-CNY.

USD-TWD
Spot USD-TWD remains stuck in a very narrow range so far today. The market remains wary of pushing spot too quickly lower given wariness over central bank action. The 25.2% hike in electricity prices spread over two stages this year may make the Taiwanese authorities slightly more tolerant of Taiwan dollar (TWD) strength to stamp down on imported inflation. That said, TWD strength may be temporary as the external surplus is declining on a trend basis due to soaring oil import values and weakening external demand.

USD-KRW
Spot has drifted lower today on the back of exporter selling and continued reaction to recent intervention by the authorities to support the Korean won (KRW). Market expects the broad 1,010-1,050 range seen recently to hold for now. That said, the market remains relatively confused about Korean FX policy and not without reason given recent, conflicting comments on the subject. If there is a risk to the 1,010-1,050 range, it is probably to the topside. There is little data of note expected for release this week.

USD-IDR
Spot is looking quite heavy, trading just below 9,300. From here, support should come in near term at the 9,250-260 area, formed off the 55- and 200-day moving averages (MA). There is no significant data out before June inflation on 01 July. The risk is of a much higher June inflation number than the 10.38% y/y in May as June is the first full month after Indonesia raised fuel prices by an average of 28.7%. If this is the case, further monetary tightening will be needed from Bank Indonesia (BI). BI Deputy Governor Sarwono said the impact of fuel price hikes will last for two to three months and that inflation should slow after July. Sarwono said BI rate hikes on their own may not be enough to temper inflation and that a strong IDR is also needed.

USD-MYR
Spot has traded modestly higher on continuing political concerns. According to newswire reports, Malaysia’s ruling coalition will hold an emergency meeting today from 06.30 GMT after the Sabah Progressive Party (SAPP) said it would table a no-confidence motion against the Malaysian Prime Minister. By itself, the SAPP has little political clout, but the potential concern is that this move could spark a trend. May CPI came out at 3.8% y/y vs. 3.0% y/y previously. The high figure is in line with the price developments in the region on the back of rising food and energy prices. With the significant fuel price hike introduced in early June and the upcoming review of the subsidy programme by the government, we expect to see a significant spike in Malaysian inflation in the coming 12 months. Our full-year average CPI forecast in 2008 is 4.5% before moderating slightly to 4.0% in 2009. Expect USD-MYR to trade in a 3.20-3.30 range for now as the market digests the combination of rising inflation and increased political uncertainty.

USD-PHP
Spot is edging higher again after speculation on Wednesday that the Central Bank of the Philippines (BSP) actually bought USD-PHP around the 44.06-10 area. In the NDF curve, there has been some selling in the long end. Nevertheless, the market’s bias clearly remains to buy dips. The government reported a budget surplus of PHP 7bn in May down from a PHP 25.8bn surplus in April, but up from a deficit of –PHP 1.7bn in May 2007. However, better than expected fiscal data is likely to have limited impact on the Philippine peso (PHP) which will continue to be hit by negative real rates, slowing growth and a deteriorating balance of payment surplus (BoP). Expect spot to test 44.50 again near term followed by 45.00.

USD-SGD
Spot continues to trade close to the strong end of the Singapore dollar (SGD) NEER policy band. Only rumours that the Monetary Authority of Singapore (MAS) was buying USD-SGD limited the downside for the time being. It is estimated the strong end, the centre and the weak end of SGD NEER policy band at 1.3616, 1.3894 and 1.4171. There are no important local data out before May CPI on 23 June.

USD-THB
Thai Finance Minister Surapong said that FX can be used as a tool to fight inflation. This is the complete opposite of what the Bank of Thailand (BoT) said on Wednesday. However, Surapong did say that monetary policy is entirely up to the BoT and the Ministry of Finance will not interfere with their decisions. Meanwhile, politics is again becoming a concern for the Thai baht (THB). USD-THB is seen  retesting the 34.00 level and potentially the last major high at 34.65.

USD-VND
In a press release, Standard & Poor’s said that Vietnam is facing strong pressures and sentiment has
deteriorated in recent months. High inflation, rapid credit growth and a widening trade deficit suggest the possibility of a correction in economic growth. However, S&P said current data do not suggest a likely balance of payments’ crisis in the near term for Vietnam, noting that the country’s external debt burden is below the median in the BB-rating category and most of the debt has long maturities.