Economics Markets Strategy - the DBS Vickers Securities Equities ...

Economics – Markets – Strategy
Currencies
The Good ...
The three Asian currencies that have consistently held up so far this year were
the Chinese yuan (CNY), the Singapore dollar (SGD) and the Taiwan dollar (TWD).
These three currencies share one common feature. All three favour stronger
exchange rates to fight inflation.
Of the three currencies, we like the TWD most on a relative basis. As at Jun 9,
the TWD is still the Asia’s best performing currency this year. Our optimism is
based on the return of the Kuomintang government. Since the presidential
elections in March, Cross-Straits relations have improved with policymaking
returning focus towards boosting the Taiwan economy.
On the other hand, we are wary of the SGD’s strong correlation with major
currencies, which we expect will bow to the USD’s recovery especially when the
US start hiking rates again. At witnessed in 2005, a higher USD/SGD is also not
inconsistent with an appreciating SGD NEER policy, which started in Apr 2004.
... the Bad ...
The three Asian currencies that have consistently underperformed this year were
the high yielders - Indian rupee (INR), Korean won (KRW) and the Philippine
peso (PHP). Last year’s winners - INR and PHP - turned out to be this year’s losers.
The KRW’s depreciation, which started in 2007, turned from bad to worse.
Due to increased external borrowings over the past few years, KRW and INR are
vulnerable any unwinding of JPY carry trades and shortages of USD liquidity. In
terms of international liquidity position, the KRW is considered to be more
vulnerable because external debt overtook foreign reserves in Korea, while India’s
foreign reserves continued to outpace external borrowings. Both INR and PHP
are more sensitive to downsides in their stock markets compared to the KRW.
Since they were the first to start, these three currencies are also likely to be the
first to finish returning some of the past years’ gains to the USD. Once the
correction is completed, these currencies have a track record of consolidating in
a wide range, as they await their peers in the region to do likewise.
... and the Ugly
The market is looking for the Vietnamese dong to suffer a devaluation of 20%
to 40% over the coming year. For now, we do not consider this to be an imminent
risks and sees a full-year devaluation of 5% instead in 2008. Although Vietnam
has the worst inflation and trade deficit in Asia, FDI inflows still appear to be
covering the latter.
Political risks to watch
There are three currencies with political risks that we are paying close attention
to. (1) Post-election Thai baht (THB) is persistently troubled by rumours of another
military coup, which have the potential to distract the government from the
economy. (2) Post-election Malaysian ringgit (MYR) is worried about leadership
challenges confronting its weakened prime minister. Barring political uncertainties,
the MYR is actually a fundamentally sound currency that the US Treasury considers
as undervalued. (3) The INR will be vulnerable if the protests to inflation and
higher fuel prices become loud enough for the communist allies to pull its
support from the government ahead of next year’s elections.
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