Focus

FX outlook 2018-19
The US dollar is Fed up
DBS Group Research 12 March 2018

Philip Wee
FX Strategist
The US dollar is making a comeback

The factors responsible for the US dollar’s depreciation

Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com
CNY: Not a one-way appreciation bet
HKD: In the weaker half of its convertbility band
INR: Volatility to pick up
IDR: A bit more volatility
MYR: Corrected 2016-17 depreciation
PHP: A new record low in 1-2 years
over the past year have started to reverse. The US 10-
year Treasury yield has been rising towards 3% since the
start of 2018, well above the 2.60% the same time last
year when the US Dollar Index (DXY) was above 100.
Unlike in 2017, we now have a Fed that is looking for US
inflation to rise towards its 2% target this year. Corporate
tax cuts and a new Fed chair in favour of expanding bank
credit to families/businesses should be net positive for
growth. With the DXY low at around 90 and “America
open for business”, President Donald Trump has stopped
complaining about a strong greenback but his
protectionist tendencies remain a concern. Nonetheless,
we have upgraded our US growth outlook and brought
forward our Fed hikes call by a quarter to March and
June.
The US dollar is oversold compared to a year ago
3.0 105

KRW: Not as won-derful as last year 2.5 US 10Y bond

100
2.0 (%, right)
SGD: Weaker against the basket
1.5 95
THB: No encore to last year’s solid performance 1.0 DXY Index
(right)
90
VND: Still stable, but not as much steady as last year 0.5
0.0 85
Jan-16 Jan-17 Jan-18
AUD: Weighed by negative rate differential vs the US
GBP: Pounded by Fed hikes &and Brexit The pressures on the Eurozone and Japan to bring
uncertainties forward monetary policy normalisation have receded
after the market volatility in early February. The Bank of
EUR: A pre-normalisation range b/w 1.15 and 1.25
Japan has pushed back against “stealth tapering”
JPY: Monetary divergence vs risk aversion allegations and reaffirmed its commitment to its
USD: Supported by the Fed’s improved outlook quantitative and qualitative easing as well as yield curve
control policies. Unless the euro surprises with more
appreciation, say to 1.30, the European Central Bank
(ECB) will not extend the end of its asset-purchase
programme (APP) from September to December.

For now, we assume that the euro has graduated into a

higher “pre-normalisation range” of 1.15-1.25 from its

Refer to important disclosures at the end of this report.

FX: The US dollar is Fed Up 12 March 2018

previous 1.05-1.15 band seen after the ECB launched More Asian currencies have depreciated this year
quantitative easing (QE) in 2015. As the focus on % YTD vs USD, as of 9 March 2018
6 4.0
normalisation turns from the ECB to the Fed, the euro 3.5
4 2.7
should start to retreat from the ceiling of its new range. 1.5 1.5
2
Don’t expect a repeat of last year’s political/economic 0
surprises. Eurozone growth has started to moderate -2 -0.2 -0.3 -0.3
-1.8 -2.0
from its six-year peak of 2.8% YoY in 3Q17. German -4
Chancellor Angela Merkel has finally formed a grand -6 -4.3
THB MYR CNY TWD SGD KRW VND HKD IDR INR PHP
coalition but she and her allies have been weakened by
the process. An increase in Euroscepticism was evident at exceed its official target amidst a record-wide trade
the Italian elections on 4 March, but this was more about deficit this year. Unlike in 2017, the rupee and the rupiah
voters rejecting establishment parties than about exiting will be less immune to Fed hikes due to rising inflation
the EU. and higher 10-year bond yields in the US. Between the
two, higher oil prices are more negative for the rupee,
EUR/USD: a higher pre-normalisation range which has started to feel the spillover effects of the sell-
1.40 off in India’s bond market.
1.35 Pre-normalisation
1.30 range: 1.15-1.25
South & Southeast Asia: Countries with widening twin
1.25
deficits are more vulnerable to rising US rates
1.20 QE range: 1.05-1.15
1.15 % of GDP for years 2017, 2018, 2019 CA: Current Account

1.10 4
3
1.05
2
1.00 1 Budget
CA Budget CA Budget CA Budget Budget
14 15 16 17 18 0
-1 CA CA
-2
The yen should also weaken back into its 110-115 range -3
as rate differentials reassert themselves again, on the -4
precondition that global equities do not falter and result IN ID PH MY VN

in a flight to safety into the yen.

The next Fed hike in March has scope to hurt the
Australian dollar, the Korean won, and the Thai baht,
the currencies with policy rates at the same level as the
Fed Funds Rate. Despite their more optimistic growth
outlook, inflation in these three countries are subdued
below their official targets. More importantly, the
Reserve Bank of Australia does not see a need to follow
other central banks in hiking rates. The Thai finance
ministry has upgraded its growth outlook on the
assumption for no rate hikes this year. The Bank of Korea
is not in a hurry to follow through on its last rate hike in
November.
The reflation-led rally in Asian currencies was tripped by
the global market volatility in early February. By 2
March, the Korean won, the Indian rupee, and the
Indonesian rupiah have joined the Philippine peso in
depreciating for the year. The rupee, the rupiah, and the
peso are the only three Asian currencies (that we track)
with twin current account and fiscal deficits. The peso
remains weak from overheating risks; inflation is set to
Conversely, the Vietnamese dong is likely to remain the
most stable Asian currency as long as its trade/current
account surpluses are intact. Some volatility could return
if equities falter and hurt the government’s privatisation
plans to support growth. As for the undervalued
Malaysian ringgit, it has not been known to buck the
trend when Asia’s currencies depreciate. On a positive
note, its current account surplus has stopped narrowing
for the first time in three years, thanks, in part also, to
higher oil prices.
Overall, 2018 will be a challenging year for Asian
currencies. GDP growth is expected to moderate with the
external sector, not helped by last year’s strong currency
appreciation also keeping inflation below target in many
countries. The scope to turn to monetary and fiscal
policies to support growth is less this year if equities fail
to rally amidst rising US rates.

Page 2
FX: The US dollar is Fed Up 12 March 2018

Chinese yuan The yuan is not a one-way appreciation bet

DBS forecasts • The Chinese yuan’s strong appreciation at the start

Year Q1 Q2 Q3 Q4 of 2018 is unsustainable. At its strongest level on 7
USD/CNY 2018 6.39 6.49 6.60 6.56
February, the yuan has risen to 6.2525 vs the US
2019 6.52 6.48 6.44 6.40
Policy rate 2018 4.35 4.35 4.35 4.35 dollar. This 4.1% YTD appreciation is untenable when
% 2019 4.35 4.35 4.35 4.35 compared to the full-year gain of 6.1% in 2017. At
10Y bond 2018 3.90 4.00 4.00 4.00 this level, the yuan had also recovered 94% of its
% 2019 3.95 3.90 3.85 3.80
post-devaluation losses.
2015 2016 2017 2018 2019
Real GDP 6.9 6.7 6.9 6.4 6.2
• Latest developments suggest that China is no longer
CPI 1.4 2.0 1.6 2.1 2.2
Curr a/c 2.8 1.8 1.4 1.2 0.9 overly concerned about capital outflows exerting
Budget -3.4 -3.4 -3.7 -3.7 -3.9 undue and severe depreciation pressures on the
% YoY for GDP & CPI, % of GDP for current account & budget balances yuan. First, China relaxed in January the counter-
DBS forecasts in red, historical data in black
cyclical adjustment factor (CCAF) to the calculation
of the USD/CNY fixing, which was introduced in May
USD/CNY 9 Mar: 6.3344
2017 to stabilise the yuan from outflows. Second, the
7.00 7.00
Qualified Limited Partnership (QDLP) plan, an
6.80 6.80 outbound investment scheme, was revived in
6.60 6.60 February after its suspension two years ago.

6.40 6.40 • Non-financial outbound direct investment (ODI)

6.20 6.20 rebounded 39.7% YoY in January after a 29.7%
contraction for the whole of 2017. There were no
6.00 6.00
Jan-15 Jan-16 Jan-17 Jan-18 new investments in unproductive projects linked to
real estate, sports or entertainment. About 11.4% of
Moving growth focus from quantity to quality January’s ODI were invested in 46 countries along
Real GDP, % YoY Shanghai Composite Index the Belt and Road. These investments were in line
7.2 5000 with the administrative measures for ODI published
7.1 4500 by the National Development and Reform
7.0 4000
6.9 Commission (NDRC) in late December.
3500
6.8
3000
6.7 • Having stabilised the yuan from depreciation
6.6 2500
6.5% growth target
2000
pressures, China will push towards a two-way
6.5
6.4 1500 exchange with China Inc less inclined to pursue
15 16 17 18 unilateral appreciation/depreciation bets. Hence, we
look for USD/CNY to remain flexible and stable
Interest rates are not too concerned about inflation within a 6.20-6.60 range this year.
6
CFETS 7D repo, %
5 • As GDP slows this year, there will be scope for some
4 3% payback in the yuan. With the exchange rate stable,
3
inflation target China will now proceed to shift the focus on the
Core economy from quantity to quality. There will be no
2 inflation hard economic targets for the next ten years. But the
% YoY
1
CPI, % YoY government is still commmitted to meeting its
0 current goal to double GDP in the decade to 2020. To
15 16 17 18
achieve this, growth would need to average 6.3%
over the next three years.

Page 3
FX: The US dollar is Fed Up 12 March 2018

Hong Kong dollar USD/HKD in the upper half of its convertibility band

DBS forecasts • We expect the HK dollar to remain in the weaker

Year Q1 Q2 Q3 Q4 half of its 7.75-7.85 convertibility band this year. US
USD/HKD 2018 7.82 7.83 7.83 7.82
interest rates have widened their differentials
2019 7.82 7.81 7.81 7.80
3mth Hibor 2018 1.40 1.65 1.65 1.90 against their HK counterparts but we don’t expect
% 2019 1.90 2.15 2.15 2.40 this to threaten the longstanding HK dollar peg to the
10Y bond 2018 2.30 2.30 2.30 2.35 US dollar.
% 2019 2.45 2.50 2.50 2.50
2015 2016 2017 2018 2019 • During the first two months of 2018, the 3-month
Real GDP 2.4 2.0 3.8 3.3 2.5
Libor-Hibor spread has widened to 90 bps from 38
CPI 3.0 2.4 1.5 2.0 2.5
Curr a/c 3.3 3.8 3.0 3.1 3.2 bps. The 3-month Libor spiked to 1.98% from 1.69%
Budget 1.9 3.3 7.5 1.6 1.4 on renewed expectations for three Fed hikes this
% YoY for GDP & CPI, % of GDP for current account & budget balances year. Conversely, the 3-month Hibor eased to 1.08%
DBS forecasts in red, historical data in black
from 1.31%, depressed by abundant liquidity from
capital moving into the territory’s markets and
USD/HKD 9 Mar: 7.8364
assets.
7.90 3M Libor less 3M Hibor 125
(bps spr, right) 100
7.85
• Until recent days, USD/HKD has been fairly stable
75
around the mid-point within the upper half of its
50
7.80 convertibility band. There is a distinct difference
25
USD/HKD (left) between a USD/HKD rate underpinned by positive
7.75 0
US-HK rate differentials and a HK dollar under
-25
depreciation pressure from capital outflows. With
7.70 -50
Jan-15 Jan-16 Jan-17 Jan-18 more Fed hikes coming, the Hong Kong Monetary
Authority (HKMA) is not likely to act until USD/HKD
Bond market volatility amidst a high stock market hits 7.85.
2.25 HK 10Y bond 35,000

2.00
(%, left) • Stress could, however, emerge if Fed hike
30,000 expectations turn too hawkish and trigger a sell-off
1.75
in global stock markets. If so, the HKMA will be
1.50 25,000
obligated to prevent the HK dollar from depreciating
1.25 out of its convertibility band. The HKMA could sell
20,000
1.00 Hang Seng Index Exchange Fund Bills (EFB) to lift short-term HKD rates
(right)
0.75 15,000 and narrow their differentials with their US
Jan-15 Jan-16 Jan-17 Jan-18 counterparts. The HKMA remains confident about
managing volatile markets and capital outflows, and
Growth moderates to official target range will be committed to defend the HKD peg at 7.85.
5 Real GDP, % YoY
4
Govt's 3-4%
• Finally, the HK dollar has yet to fulfill the four
3 growth forecast conditions listed by the HKMA to shift its peg
2
Govt's inflation forecast towards the Chinese yuan. These include 1) a fully
Underlying
3M Hibor inflation
convertible yuan; 2) a China with an open capital
1 % pa
CPI, % YoY
% YoY account without capital controls; 3) sufficient yuan
0
assets to support Hong Kong’s monetary base; and 4)
-1 a HK economy that is more synchronised with China
15 16 17 18
than the US.

Page 4
FX: The US dollar is Fed Up 12 March 2018

Indian rupee Rupee volatility to pick up

DBS forecasts • The Indian rupee has been stable within a 63-66
Year Q1 Q2 Q3 Q4 range vs the US dollar since 2Q17. This is unlikely to
USD/INR 2018 64.7 65.9 67.0 67.2
last. We expect rupee volatility to pick up this year
2019 67.4 67.6 67.8 68.0
Policy rate 2018 6.00 6.00 6.00 6.00 as India targets to lift GDP growth to 7-7.5% in FY19
% 2019 6.25 6.25 6.50 6.50 (ending March 2019) ahead of the general elections
10Y bond 2018 7.60 7.70 7.80 7.90 due in May 2019.
% 2019 7.95 8.00 8.00 8.00
FY15 FY16 FY17 FY18 FY19 • The central government led by the ruling Bharatiya
Real GDP 7.5 8.0 7.1 6.6 7.2
Janata Party’s (BJP) has decided to tolerate some
CPI 4.9 5.0 3.3 3.7 4.6
Curr a/c -1.1 -0.6 -0.7 -1.8 -2.2 fiscal slippage to address the key factors (youth
Budget -3.5 -3.7 -3.5 -3.5 -3.2 joblessness, the agrarian debt crisis) responsible for
% YoY for GDP & CPI, % of GDP for current account & budget balances its dismal performance at the Gujarati elections.
DBS forecasts in red, historical data in black. FY ends in March

• The fiscal deficit will remain at 3.5% of GDP in FY18,

USD/INR 9 Mar: 65.168
instead of falling to 3.3% from 3.5% in FY17. India is
70 70
now expected to hit the 3% target in FY20 instead of
68 68 FY19. On a positive note, international rating
66 66
agencies have been comfortable with the
government’s decision to delay the fiscal
64 64 consolidation plan by a year.
62 62
• Instead, we expect the depreciation pressure on the
60 60
Jan-15 Jan-16 Jan-17 Jan-18
rupee to come from a widening in the current
account deficit, first to 1.8% of GDP in FY19, and
Bond yields higher, Sensex lower finally to 2.2% in FY20. According to Economic Survey
8.50 10Y INGov bond 38,000 2018, every US$10/barrel increase in oil prices is
(%, left) Bombay Sensex 36,000 estimated to add US$9-10bn to the current account
8.00 (right) 34,000 deficit, trim growth by 0.2-0.3%, and raise WPI
32,000
7.50
30,000 inflation by 1.7%. The survey assumed that oil prices
28,000 would rise 12% in FY19.
7.00
26,000
6.50 24,000 • Against this background, the Reserve Bank of India
22,000
6.00 20,000 (RBI) expects inflation to stay elevated in the upper
Jan-15 Jan-16 Jan-17 Jan-18 half of the official 4±2% target band in FY19. The RBI
has projected inflation to be firm at 5.1-5.6% in April-
HIgher growth, higher inflation in FY19 September (H1 FY19) before easing back to 4.5-4.6%
10 RBI reverse in October-March (H2 FY19).
repo, % pa Real GDP, % YoY
8 7-7.5% growth target
• In the face of wider twin deficits and elevated
6 inflation, the rupee will be less immune to
4 Core inflation headwinds from rising US interest rates this year.
% YoY
4±2% inflation target Unlike in the past couple of years, the Fed now
2
expects US inflation to rise this year. With US tax cuts
CPI, % YoY
0 and fiscal spending to underpin growth, the Fed is
14 15 16 17 18
looking at three or four rate hikes this year.

Page 5
FX: The US dollar is Fed Up 12 March 2018

Indonesian rupiah More rupiah volatility, but only a bit more

DBS forecasts • The Indonesian rupiah is set to be a little more

Year Q1 Q2 Q3 Q4 volatile after 1-2 years of stability. We expect
USD/IDR 2018 13,596 13,747 13900 13,960
USD/IDR to move into a higher 13,500-14,000
2019 14,019 14,079 14,140 14,200
Policy rate 2018 4.25 4.25 4.25 4.50 trading range for the rest of the year. The 2018 state
% 2019 4.75 5.00 5.00 5.00 budget has assumed a rupiah rate of 13,500 vs the
10Y bond 2018 6.50 6.60 6.70 6.80 US dollar.
% 2019 6.90 7.00 7.10 7.20
2015 2016 2017 2018 2019 • The primary source of rupiah volatility is external.
Real GDP 4.9 5.0 5.1 5.3 5.4
The rupiah’s stability in the 2016-17 was easily
CPI 6.4 3.5 3.8 3.7 4.6
Curr a/c -2.1 -1.8 -1.7 -1.9 -2.1 attributed to strong investor confidence in the
Budget -2.6 -2.4 -2.6 -2.6 -2.7 country’s equities and bonds. The global reflation
% YoY for GDP & CPI, % of GDP for current account & budget balances trade is currently being challenged by a better and
DBS forecasts in red, historical data in black
rising US growth/inflation outlook that threatens to
lift the US 10-year bond yield above 3%. Unless the
USD/IDR 9 Mar: 13,797
US rate outlook turns decidedly hawkish, the
15000 15,000
rupiah’s depreciation is expected to be orderly.
14500 14,500

14000 14,000 • External pressures on the rupiah will be partly

13500 13,500 offset by domestic fundamentals in Indonesia.
13000 13,000 Finance Minister Sri Mulyani Indrawati, in February,
12500 12,500
was awarded the Best Minister in the World Award,
a testimony to a well-managed economy. The 2017
12000 12,000
Jan-15 Jan-16 Jan-17 Jan-18 unaudited budget deficit was 2.42% of GDP, less than
the previous estimate of 2.57%.
Steady-to-firmer growth amidst stable inflation
8 • Bank Indonesia (BI) has successfully lowered and
7
Real GDP kept inflation stable within its target in the past two
% YoY
years. A third year of trade surpluses was reported
6 5.1-5.5% growth target
in 2017. Despite its twin current account and fiscal
5
deficits, there are no signs of macroeconomic
4 BI 7D repo
% pa
imbalances or overheating.
3 2.5-4.5% inflation target CPI inflation, % YoY
2
• Looking ahead, economic growth is expected to pick
15 16 17 18 up for a third straight year in 2018. Domestic
demand – investment, household consumption, and
Indonesia's markets are still attractive to foreign investors fiscal spending – is set to be stronger ahead of the
10Y govt bond yield, % local elections in June this year, and the
10 Jakarta 7000 presidential/general elections set for April 2019.
Comp 6500
9 Index
8
6000 • Based on its assumption for three Fed hikes this year,
10Y
bond
5500 BI will refrain from rate cuts and, instead, relax
7
5000 reserve requirements rules in July and October. This
6 4500 strategy will provide banks more flexibility in
5 4000 managing liquidity and boosting lending to support
14 15 16 17 18
investments. Some rupiah depreciation will probably
be tolerated, as long as it is in line with regional
trends, to help exports without threatening inflation.

Page 6
FX: The US dollar is Fed Up 12 March 2018

Malaysian ringgit The ringgit has corrected its 2016-17 weakness

DBS forecasts • The Malaysian ringgit has spent the past year
Year Q1 Q2 Q3 Q4 appreciating back to its strongest level seen in April
USD/MYR 2018 3.95 4.08 4.20 4.18
2016. Looking ahead, the positive factors that
2019 4.16 4.14 4.12 4.10
Policy rate 2018 3.25 3.25 3.50 3.50 propelled the ringgit to become Asia’s second best-
% 2019 3.50 3.50 3.50 3.50 performing currency in 2017 will start to wane.
10Y bond 2018 3.90 3.95 4.00 4.05
% 2019 4.10 4.10 4.10 4.10
• First, don’t expect the economy to repeat its robust
2015 2016 2017 2018 2019 5.9% growth seen in 2017. We have projected
Real GDP 5.0 4.2 5.9 5.0 5.0
growth to moderate to 5% in 2018, at the lower end
CPI 2.1 2.1 3.9 3.5 3.0
Curr a/c 2.9 2.1 3.0 2.8 3.2 of the government’s 5-5.5% target, but still remain
Budget -3.2 -3.1 -3.0 -2.8 -2.7 above the 4.2% low seen in 2016. More importantly,
% YoY for GDP & CPI, % of GDP for current account & budget balances growth is expected to be broader, with firmer
DBS forecasts in red, historical data in black
domestic demand offsetting some of the slack in the
external sector.
USD/MYR 9 Mar: 3.9115
4.60 4.60
• Second, the government has acknowledged the
4.40 4.40 rating agencies’ assessment that it would not be able
4.20 4.20 to meet its balanced budget goal by 2020, a target
4.00 4.00 likely to be extended to 2022-23. Faced with a tough
3.80 3.80 election that must be held by August, Prime Minister
3.60 3.60
Najib Razak increased spending in the budget
unveiled last October. To keep its sovereign debt
3.40 3.40
Jan-15 Jan-16 Jan-17 Jan-18 ratings within the A band, Malaysia will, however,
keep to a fiscal consolidation path by targeting a
Malaysia's growth/inflation to moderate lower in 2018 lower budget deficit of 2.8% of GDP vs 3% last year.
7 Real GDP, % YoY
BNM o/n policy rate, % pa
6 • Third, there will be at least two more Fed hikes in
5 March and June this year before the next rate
5-5.5% growth target
4 increase in Malaysia. On 25 January, Bank Negara
3 Malaysia started to normalise monetary policy with
2 2.5-3.5% inflation target a 25bps hike in its overnight policy rate (OPR) to
1 3.25%, its first increase in 3.5 years. Since then, CPI
CPI inflation, % YoY
0 inflation has fallen to 2.7% YoY in January, below the
15 16 17 18 policy rate. Unless inflation extends its decline below
this year’s official 2.5-3.5% target (which was
Stocks off peak, 10Y bond yield ease lowered from 3-4% last year), we see one more OPR
4.65 1,900 hike to 3.50% in 3Q18.
4.45 1,850
10Y bond
1,800
4.25 (%, left) • General election, or GE14, must be held on or
1,750
4.05 before 24 August. Prime Minister Najib and his
1,700
3.85 Barisan Nasional party need to secure 112 out of the
1,650
3.65 KL Comp Index 1,600 222 seats contested for a parliamentary majority.
3.45 (right)
1,550 The party won 133 seats in the last election held in
3.25 1,500 May 2013. The race is likely to be a close one, given
Jan-15 Jan-16 Jan-17 Jan-18
that five out of the 13 states are swing states, two of
which are governed by the opposition.

Page 7
FX: The US dollar is Fed Up 12 March 2018

Philippine peso The peso heading for a new record low in 1-2 years

DBS forecasts • Although it comes as no surprise that the Philippine

Year Q1 Q2 Q3 Q4 peso is depreciating for a sixth consecutive year,
USD/PHP 2018 52.6 53.3 54.0 54.4
there is a need to be vigilant against signs of
2019 54.8 55.2 55.6 56.0
Policy rate 2018 3.25 3.50 3.75 4.00 overheating in its economy. The door has opened for
% 2019 4.25 4.50 4.50 4.50 the peso to fall, over the next couple of years, to 56,
10Y bond 2018 6.50 6.60 6.70 6.80 its weakeest level against the US dollar seen (in
% 2019 6.90 7.00 7.00 7.00
2004-05).
2015 2016 2017 2018 2019
Real GDP 5.9 6.9 6.7 6.7 6.7
• High growth in the Philippines is now accompanied
CPI 1.4 1.8 3.2 3.6 3.8
Curr a/c 2.5 0.2 -0.7 -1.1 -1.3 by twin (current account and budget) deficits.
Budget -0.9 -3.4 -2.4 -2.5 -2.5 Overseas foreign worker (OFW) remittances, a
% YoY for GDP & CPI, % of GDP for Budget & current account traditional support for the peso, have been
DBS forecasts in red, historical data in black
overtaken by record-wide trade deficits. This has
increased the peso’s weakness to higher US rates
USD/PHP 9 Mar: 52.063
and a stronger US dollar. The peso has already
54 54
depreciated 4.4% in the first two months of this year,
52 52 which is large compared to the full-year depreciation
50 50 of 5.4% and 4.7% in 2016 and 2017, respectively.

48 48 • Inflation is set to stay above the central bank’s

46 46 target this year. At its monetary policy meeting on 8
February, Bangko Sentral ng Pilipinas (BSP) raised its
44 44
Jan-15 Jan-16 Jan-17 Jan-18 inflation forecast to 4.3% from 3.4% in 2018, above
its 2-4% target range. Believing that the higher
Trade deficit overtakes OFW remittances inflation this year will be transitory because of tax
US$bn, 12M rolling sum reforms, as well as higher food and energy prices,
40 BSP expects inflation to return lower to 3.5% in 2019.
30 Overseas foreign worker
(OFW) remittances • Contrary to expectations, BSP did not hike rates on 8
20
Trade February. Instead, BSP announced, a week later, a
10 deficit reduction in the banks’ reserve requirement ratio
0 (RRR) by one percentage point to 19%. This will take
effect from 2 March and is estimated to inject less
-10
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 than PHP 100bn in additional liquidity.

• Given the twin deficits and higher inflation outlook,

Rate hikes are coming on higher inflation
we expect the BSP to eventually hike rates every
6 quarter into 2Q19. This will help temper the
5 BSP o/n reverse depreciation pressure on the peso from the three
repo rate, % pa Fed hikes we expect this year.
4
3 • The International Monetary Fund (IMF) warned last
2
Core inflation
November that credit gaps in the country could
1 CPI, % YoY % YoY approach ‘warning’ levels in 2017-18. Close attention
0 should be paid to the increased leverage of some
10 11 12 13 14 15 16 17 18 conglomerates and property developers, as well the
expansion in shadow banking activities.

Page 8
FX: The US dollar is Fed Up 12 March 2018

Singapore dollar The SGD has weakened against its basket

DBS forecasts • A downward correction in the Sing dollar’s year-

Year Q1 Q2 Q3 Q4 long appreciation is due. After the unexpected spike
USD/SGD 2018 1.32 1.35 1.38 1.37
in global market volatility in early February, the Sing
2019 1.37 1.36 1.36 1.35
3mth SOR 2018 1.40 1.65 1.90 2.15 dollar nominal effective exchange rate (SGD NEER)
% 2019 2.15 2.40 2.40 2.65 has fallen below the strongest quartile of its neutral
10Y bond 2018 2.55 2.60 2.65 2.70 policy band. Historically, this has been associated
% 2019 2.75 2.80 2.80 2.80
with a recovery in the US dollar against the
2015 2016 2017 2018 2019
currencies of Singapore’s major trading partners.
Real GDP 2.0 2.0 3.6 3.0 2.7
CPI -0.5 -0.5 0.6 1.0 1.8
Curr a/c 18.1 19.0 18.8 18.9 20.0 • The lower SGD NEER was also consistent with the
Budget 0.6 -1.2 1.2 1.5 1.8 moderation in GDP growth to 3.6% YoY in 4Q17 from
% YoY for GDP & CPI, % of GDP for current account & budget balances its four-year high of 5.5% in 3Q17, as well as a CPI
DBS forecasts in red, historical data in black
inflation rate below its official forecast.
USD/SGD 9 Mar: 1.3166 • With 2018 growth seen at 3%, and inflation to pick
1.46 1.46
up in 2H18, Singapore is expected to return to a mild
1.44 1.44
1.42 1.42
appreciation stance this year. Hence, the downside
1.40 1.40 in the SGD NEER should be limited to around the
1.38 1.38 mid-point of its policy band.
1.36 1.36
1.34 1.34 • Conditions are coming together for the SGD NEER
1.32 1.32 policy to exit its neutral stance this year. The
1.30 1.30
Jan-15 Jan-16 Jan-17 Jan-18
economic recovery has broadened from the external
sector to domestic demand. In turn, labour market
DBS SGD NEER has fallen below its highest quartile conditions have improved. For example, the
Indexed: 7-11 Apr 2014=100 seasonally-adjusted resident unemployment rate
104 returned below 3% again in 4Q17.
103
102 • Unless inflation surprises on the upside, the odds
101 remain for the appreciation policy to return in
100 October instead of April. CPI-All Items inflation has
99 been below its official 0.5-1.5% forecast range in five
98 out of last six months ending January. Core inflation
Jan-15 Jan-16 Jan-17 Jan-18 was 1.4% YoY in January, below the mid-point of the
official 1-2% target for a second straight month.
Singapore's post-crisis growth moderates
20
Appreciation Real GDP • When the neutral stance ends, don’t expect a return
(% YoY, left)
15 stance to the traditional 2% annual appreciation pace for
10 the SGD NEER policy band like in 2004 or 2010.
Average economic growth has been, and is expected
5
to remain, below pre-crisis levels. For now, the slope
0
of the SGD NEER policy band is only expected to
-5 CPI inflation
(% YoY, right) return to a mild appreciation pace of 0.5% a year.
-10
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Page 9
FX: The US dollar is Fed Up 12 March 2018

South Korean won The currency is not as won-derful as in 2017

DBS forecasts • In 2017, the Korean won appreciated 13% vs the US

Year Q1 Q2 Q3 Q4 dollar to become the second best-performing G20
USD/KRW 2018 1,082 1,121 1,160 1,148
currency. In 4Q17 alone, the won rallied 7.3% on a
2019 1,136 1,124 1,112 1,100
Policy rate 2018 1.50 1.75 1.75 2.00 convergence of positive factors. Real GDP growth
% 2019 2.00 2.25 2.25 2.25 surprised at a 3.5-year high of 3.8% YoY in 3Q17. CPI
10Y bond 2018 2.65 2.70 2.75 2.80 inflation rose to a five-year high of 2.6% YoY in
% 2019 2.82 2.84 2.86 2.88
August. The Bank of Korea (BOK) lifted its policy rate
2015 2016 2017 2018 2019
for the first time in six years, above its US
Real GDP 2.8 2.8 3.0 2.9 2.9
CPI 0.7 1.0 1.5 1.8 1.8 counterpart on 30 November.
Curr a/c 7.7 7.0 5.8 5.8 5.6
Budget -2.4 -1.4 -1.8 -1.7 -1.9 • The Korean won is unlikely to repeat last year’s
% YoY for GDP & CPI, % of GDP for current account & budget balances stellar performance. As of 23 February, the won was
Budget is net fiscal balance
at 1,079, a tad weaker than the 1,067 level it ended
DBS forecasts in red, historical data in black
2017 at. We expect the won to return more gains
USD/KRW over the next six months as the Fed hikes lift and
9 Mar: 1070
1250 1,250 keep the US policy rate above its Korean counterpart
this year.
1200 1,200
• There is no urgency for the BOK to keep pace with
1150 1,150 Fed hikes this year. Real GDP growth slowed to 3%
YoY in 4Q17 and has scope to moderate further with
1100 1,100
exports and investment. For example, the Korea
1050 1,050
Institute for Industrial Economics & Trade has
Jan-15 Jan-16 Jan-17 Jan-18 projected growth in semiconductor exports to
moderate to 18.6% in 2018 from 60.2% last year.
KOSPI tumbles, KR bond yields holding up for now
3.00 2,700 • Private consumption will be constrained by record
2,600 high household debt. Economic activity, however,
10Y KR bond 2,500
2.50 will be supported by the Moon government’s
(%, left)
2,400
2,300 income-led growth policies and ambitious fiscal
2.00
2,200 spending plan.
2,100
1.50 KOSPI
2,000
(right)
1,900
• Both CPI and core inflation slipped to around 1% YoY
1.00 1,800 in January, below the official 2% target, but also the
Jan-15 Jan-16 Jan-17 Jan-18 1.50% policy rate. Inflation is likely to stay subdued
in 1H18 before moving higher again in 2H18.
Growth/inflation outlook is not as strong as before
4 • The BOK will also need to monitor external risks.
Real GDP, % YoY
Two main risks will come from the US this year i.e. a
3
2% step-up in trade protectionism ahead of the mid-
2
inflation target term elections, and a faster pace of US rate
increases. Geopolitical risks will continue to revolve
Core
1 BOK policy inflation around North Korea. Unlike last year, US-NK
CPI, % YoY
rate, % % YoY relations have been less about sabre-rattling this
0 year, and hopefully more about moving towards
14 15 16 17 18
diplomatic negotiations to resolve the nuclear crisis.

Page 10
FX: The US dollar is Fed Up 12 March 2018

Thai baht No encore to last year’s solid performance

DBS forecasts • Investor confidence remains high in Thailand as

Year Q1 Q2 Q3 Q4 evidenced by the resilience of its financial markets
USD/THB 2018 31.8 32.8 33.9 33.6
during the brief global market volatility in early
2019 33.3 33.1 32.8 32.5
Policy rate 2018 1.50 1.50 1.50 1.50 February. Unlike most of its peers, Thailand’s growth
% 2019 1.75 2.00 2.25 2.50 is accompanied by robust current account surpluses
10Y bond 2018 2.40 2.40 2.45 2.50 and fiscal consolidation. Hence, it should not come
% 2019 2.60 2.70 2.80 2.80
as a surprise that the Thai baht has been the
2015 2016 2017 2018 2019
strongest Asian currency this year. As of 26
Real GDP 2.9 3.3 3.9 4.0 4.0
CPI -0.9 0.2 0.7 1.5 1.5 February, the baht has appreciated 4% vs the US
Curr a/c 8.1 11.9 10.1 8.7 7.5 dollar. This is on top of the 10% gain that made the
Budget -2.9 -2.6 -1.2 -1.5 -2.0 baht the third-best performer in 2017.
% YoY for GDP & CPI, % of GDP for current account & budget balances
DBS forecasts in red, historical data in black
• Historically, the baht has never repeated or
surpassed its strong performance for a second
USD/THB 9 Mar: 31.328
straight year. This year is unlikely to be any different.
37 37
In contrast to 2017, the US dollar is oversold with
36 36
potential to recover on more Fed hikes driven by a
35 35 stronger US growth/inflation outlook this year.
34 34

33 50% Fibonacci 33 • The next Fed hike in March will push the US policy
retracement
32 range 32
rate above its Thai counterpart. For 2018, we see
three Fed hikes and none by the Bank of Thailand
31 31
Jan-15 Jan-16 Jan-17 Jan-18 (BOT). The Finance Ministry has upgraded its 2018
growth outlook to 4.2% from 3.8% on the
Thai stocks and bonds hold on to gains assumption that the policy rate remains steady at
3.25 1,900 1.50% throughout the year.
SET Index
3.00 (right) 1,800
2.75 1,700 • Thailand has been experiencing “growth optimism
2.50 1,600 without inflation”. After moving out of deflation in
2.25 1,500 2016, CPI inflation has not been able to rise above
2.00 10Y TH bond 1,400 the BOT policy rate, even as real GDP growth pushed
(%, left) above the BOT’s 1-4% inflation target in 3Q17.
1.75 1,300
1.50 1,200 Looking ahead, we expect Thailand’s growth to
Jan-15 Jan-16 Jan-17 Jan-18 remain strong around 4%, with inflation averaging
around 1.5% in 2018-19. Hence, we expect the BOT
Thailand is experiencing "growth without inflation" to refrain from rate hikes this year and to start
5
1-4% inflation target normalising rates only in 2019.
4
3 Real GDP, % YoY
• Unlike in the past couple of years, Thailand’s current
2 BOT 1D repo rate, % pa account surplus will narrow to less than 10% of GDP
1 amidst a wider fiscal deficit this year. This, coupled
0 with policy measures to encourage overseas direct
-1 investment and a stronger US dollar in the region,
-2 CPI, % YoY Core inflation, % YoY
should help the baht reverse some of its strong gains
14 15 16 17 18
over the past year.

Page 11
FX: The US dollar is Fed Up 12 March 2018

Vietnamese dong The dong is still stable, but not as steady as last year

DBS forecasts • The Vietnamese dong is, over the next couple of
Year Q1 Q2 Q3 Q4 years, unlikely to be as stable as it has been in past
USD/VND 2018 22,745 22,832 22,920 22,970
eight months. We expect the dong to break out of its
2019 23,020 23,069 23,120 23,170
Policy rate 2018 6.25 6.25 6.25 6.25 tight 22,700-22,750 range and depreciate towards
% 2019 6.50 6.50 6.75 6.75 and above 23,000 in 2018-19.
2015 2016 2017 2018 2019
Real GDP 6.7 6.2 6.8 6.4 6.6 • We expect the US dollar to recover this year on Fed
CPI 0.6 4.7 2.6 3.6 3.8 hikes supported by a stronger US growth/inflation
Curr a/c -0.1 4.1 1.3 3.2 4.0
outlook. Over the past few years, the dong has
Budget -5.0 5.0 -3.5 -3.7 -3.5
% YoY for GDP & CPI, % of GDP for current account & budget balances depreciated with its Asia ex Japan (AXJ) peers when
DBS forecasts in red, historical data in black the US dollar was strong, but remained stable
(especially in 2017) when the greenback weakened
USD/VND 9 Mar: 22762 against AXJ currencies.
23000 USD/VND 1.05
(left)
• The Vietnamese economy is unlikely to repeat last
22500 1.00
year’s stellar performance. The bar to beating this
year’s official 6.5-6.7% growth target is high. Robust
22000 0.95
export growth is set to moderate with global growth
21500 USD/AXJ 0.90 amidst more US-led protectionist measures. With
(right) public debt approaching the 65% constitutional limit,
21000 0.85 Vietnam needs to attract foreign investments. To
Jan-15 Jan-16 Jan-17 Jan-18
this end, Vietnam intends to step up its planned
divestment of hundreds of state-owned companies
GDP growth higher, inflation lower, trade deficit narrow
of around VND 5,000 tn or US$220bn (more details
US$mn, 12M rolling sum % YoY
will be available in 2Q18). This has become more
4,000 Real GDP 7
(right) 6 challenging this year because global equities have,
2,000
5 since February, been struggling to rise against a more
0 4 hawkish US rate outlook and a stronger US dollar.
-2,000 3 More so if the Ho Chi Minh stock index relinquishes
CPI
(right) 2 its position as Asia’s best performer this year.
-4,000
1
Trade balance (left)
-6,000 0
15 16 17 18
• To achieve this year’s growth target, the State Bank
of Vietnam (SBV) is targeting 17% credit growth in
Best stock market, and possibly bond market, in Asia 2018 after bank lending increased 18.2% in 2017.
8.00 1,200
Moody’s has been encouraged by the meaningful
Ho Chi Minh progress in resolving problem assets in the banking
7.50 1,100
stock index
7.00 (right) 1,000 sector. Fitch recently upgraded the ratings of three
6.50 900 Vietnamese lenders. We also noted that high growth
6.00 800 has not been accompanied by sharply higher
5.50 700 inflation and widening trade deficits.
5.00 600
10Y bond • Still, Vietnam should guard against complacency,
4.50 (%, left) 500
4.00 400 especially when investor confidence is strong.
Jan-15 Jan-16 Jan-17 Jan-18 Moody’s has cautioned against more monetary
accommodation to support headline growth at the
expense of macroeconomic stability. The World Bank
was wary that rapid credit expansion could
encourage excessive risk-taking and worsen asset
quality over the longer term.

Page 12
FX: The US dollar is Fed Up 12 March 2018

Australian dollar Negative rate differential to weigh on the Oz

DBS forecasts • The Australian dollar has been in a new and higher
Year Q1 Q2 Q3 Q4 0.74-0.81 trading range against the US dollar since
AUD/USD 2018 0.78 0.76 0.74 0.75
June 2017, in line with Australia’s better growth
2019 0.76 0.76 0.77 0.78
Policy rate 2018 1.50 1.50 1.55 1.65 performance and outlook. Having hit the ceiling in
% 2019 1.80 1.90 2.05 2.20 January, the Oz has been, and is expected to keep
10Y bond 2018 2.85 2.93 3.01 3.06 retreating towards the floor of this range.
% 2019 3.16 3.32 3.39 3.45
2015 2016 2017 2018 2019 • The Oz has started to lose its rate-differential
Real GDP 2.5 2.6 2.3 2.8 2.8
advantage to the greenback. The AU 10Y bond yield
CPI 1.5 1.3 1.9 2.2 2.3
Curr a/c -4.7 -2.9 -1.9 -2.1 -2.0 has, for the first time since mid-2000, fallen below its
Budget -1.9 -1.5 -0.9 -1.5 -1.3 US counterpart since 21 February. The next US rate
% YoY for GDP & CPI, % of GDP for current account & budget balances hike in March will lift the Fed Funds Rate above the
DBS forecasts in red, Bloomberg consensus in blue
Reserve Bank of Australia (RBA) cash rate; both
Historical data in black
policty rates are currently at 1.50%. We expect three
AUD/USD Fed hikes in 2018, followed by another two increases
9 Mar: 0.7844
0.85 0.85 in 2019. Even if growth exceeds 3% over the next
year, the RBA has no intention to follow other
0.80 0.80 central banks in raising rates this year. The Oz
depreciated the last time AU rates fell below that of
0.75 0.75 the the USD’s in the late 1990s.

0.70 0.70
• The RBA has set a high bar to raise rates. A couple
0.65 0.65
of things need to happen before the RBA is
Jan-15 Jan-16 Jan-17 Jan-18 convinced that inflation is on track to move above
the mid-point of its 2-3% target. First, the RBA needs
Australia's growth without inflation more progress in the labour market towards full
5 employment. Second, businesses need to increase
4 wages.
Real GDP, % YoY

3 • The RBA has estimated that the non-accelerating

2 inflation rate of unemployment (NAIRU) has declined
to 5% in 2017 from 6% in 2003, and has left the door
1 RBA cash
CPI, % YoY rate, % pa open for more downward revisions. Until then, it
0 expects the jobless rate to stabilise at around 5.25%
09 10 11 12 13 14 15 16 17 18 into 2020. The RBA is also comfortable with its
projection for underlying inflation to reach 1.75% by
RBA hike needs full employment & wage growth
end-2018 and 2% by end-2019.
5 6.5
Jobless rate
4 (%, right) • Unlike in 2017, the Oz will not be supported by a
6.0
trade surplus this year. The good and services
3
5.5 balance posted a A$1.36bn deficit in December, its
2 widest since October 2016. A slowdown in China and
1 Wage growth RBA cash rate
5.0 Japan, with whom Australia has the largest
(% YoY, left) (% pa, left) surpluses, will not be welcome. More than half of the
0 4.5
country’s exports head to Asia. In this regard, the Oz
09 10 11 12 13 14 15 16 17 18
is likely to depreciate with its Asian counterparts.

Page 13
FX: The US dollar is Fed Up 12 March 2018

British pound Pounded by Fed hikes and Brexit uncertainties

DBS forecasts • The British pound could not sustain its recovery
Year Q1 Q2 Q3 Q4 above its psychological 1.40 level against the US
GBP/USD 2018 1.39 1.37 1.35 1.37
dollar. Sterling is likely to spend the rest of year in a
2019 1.38 1.40 1.41 1.43
Policy rate 2018 0.50 0.65 0.70 0.80 lower 1.35-1.40 range with downside risks.
% 2019 0.90 1.00 1.10 1.20
10Y bond 2018 1.50 1.60 1.70 1.80 • Sterling will depreciate with a weaker euro. The
% 2019 1.92 2.09 2.15 2.20
sterling’s appreciation since the start of 2017 has
2015 2016 2017 2018 2019 been in line with the rise of the euro, the largest
Real GDP 2.3 1.9 1.8 1.5 1.5
component in the DXY. We believe that the euro has
CPI 0.0 0.7 2.7 2.5 2.1
Curr a/c -5.2 -5.8 -4.8 -4.4 -3.7 started to retreat from the ceiling of its new and
Budget -4.1 -2.9 -1.8 -2.1 -1.8 higher “pre-normalisation” range between 1.15 and
% YoY for GDP & CPI, % of GDP for current account & budget balances 1.25. With the Eurozone, and not the US, now
DBS forecasts in red, Bloomberg consensus in blue
experiencing “growth without inflation”, the Fed is
Historical data in black
now increasingly seen to be well ahead of its EU
GBP/USD counterpart in normalising monetary policy.
9 Mar: 1.3850
1.60 1.60
1.55 1.55 • The Bank of England (BOE) is expected to deliver a
1.50 1.50 “dovish hike” this year, possibly in May. CPI inflation
1.45 1.45 is no longer surging towards 3% as it did into the BOE
1.40 1.40 hike last November. While the UK’s key inflation
1.35 1.35
gauges have stabilised around their peaks, they have
1.30 1.30
to retreat lower. With the pound having appreciated
1.25 1.25
1.20 1.20
back to around its Brexit referendum levels and
Jan-15 Jan-16 Jan-17 Jan-18 Brexit uncertainties keeping the UK’s growth outlook
below 2%, the BOE expects inflation to eventually fall
UK inflation gauges have yet to come off their highs back towards its official 2% target over the next two
% YoY, % pa years. According to its latest inflation report, the BOE
5 is looking at “one hike per year” over the next three
4 RPI-X years. Clearly, UK rate hike expectations pale
3 CPI against the prospect for 3-4 Fed hikes this year.
2
Real GDP
1
BOE base rate
• According to the Commodity Futures Trading
0 Commission (CFTC) Commitment of Traders report,
-1 speculators have turned net long on sterling since
14 15 16 17 18 4Q. Appetite for the dollar weakened as global
reflation trades picked up momentum with the
Speculators are exposed if Brexit shifts towards an
synchronised world recovery. Sterling also drew
unfavourable outcome
40 support from the BOE’s hike last November. When
thousands of CFTC contracts
20 this year started, some EU leaders gave false hope
0 for negotiations with the UK to move towards a “soft
-20
Brexit”. Over the past month, the UK and Brussels
-40
-60 remain divided on a myriad of issues that could lead
Non-commercial
-80 to a “hard Brexit” or “no deal”. The immediate risk
net long GBP positions
-100 to the pound is a failure to agree on the terms of
-120
Jan-15 Jan-16 Jan-17 Jan-18 UK’s Brexit transition period by the end-March
deadline.

Page 14
FX: The US dollar is Fed Up 12 March 2018

Euro A pre-normalisation range forms around 1.15-1.25

DBS forecasts • The euro is likely to have found a “pre-

Year Q1 Q2 Q3 Q4 normalisation” trading range between 1.15 and
EUR/USD 2018 1.23 1.19 1.16 1.17
1.25 vs the US dollar. This is above the 1.05-1.15
2019 1.19 1.20 1.22 1.23
Policy rate 2018 0 0 0 0 band seen after the ECB launched its QE programme
% 2019 0 0 0 0 in March 2015. The new and higher range is
10Y bond 2018 0.70 0.80 0.90 1.00 consistent with the Eurozone’s better growth
% 2019 1.13 1.25 1.38 1.50
performance and improved economic outlook.
2015 2016 2017 2018 2019
Real GDP 2.1 1.8 2.5 2.2 2.2
• There are reasons to believe that the euro will
CPI 0.0 0.2 1.5 1.3 1.4
Curr a/c 3.2 3.3 3.1 3.2 3.0 retreat from the top of this new 1.15-1.25 range
Budget -2.1 -1.5 -1.2 -1.2 -1.0 over the next six months. According to the
% YoY for GDP & CPI, % of GDP for current account & budget balances Commitment of Traders report by theCFTC,
DBS forecasts in red, historical data in black
speculators have been hesitant to add to their
record long euro positions this year.
EUR/USD 9 Mar: 1.2307
1.30 Pre-normalisation 1.30
range: 1.15-1.25 • Unlike 2017, it is the Eurozone, and not America, that
1.25 1.25 is experiencing “growth without inflation” this year.
1.20 1.20 CPI inflation retreated further from its official 2%
QE range: 1.05-1.15
1.15 1.15 target to 1.2% YoY in February, it lowest level since
1.10 1.10 December 2016. While real GDP growth remained
1.05 1.05
high at 2.7% YoY in 4Q, it did slow for the first time
in five quarters. As growth moderates further in the
1.00 1.00
Jan-15 Jan-16 Jan-17 Jan-18 quarters ahead, it should help dampen speculation
for the ECB to bring forward monetary policy
Eurozone faces growth optimism without inflation normalisation.
% YoY
3 • The base case remains for the ECB to end its asset-
ECB's 2% Real GDP
inflation target purchase programme (APP) in September. Unless
2 the euro extends its appreciation to 1.30, the ECB is
CPI
1 unlikely to extend its APP to December. The ECB’s
Core inflation stance remains unchanged for a hike to come only
0
well after APP ends. The Fed delivered its first rate
-1 hike 14 months after it ended QE. Understandably,
14 15 16 17 18 ECB staff has projected the 3M Euribor to turn
positive only in 2020.
Record-high speculative net long positions in EUR
thousands of CFTC contracts • Don’t expect the same upside surprises for growth
200 Non-commercial
net long EUR positions and politics like last year. Eurozone growth is set to
100 moderate in the quarters ahead. German Chancellor
0 Angela Merkel has finally formed a grand coalition
but she and her allies have been weakened by the
-100
process. An increase in euroscepticism was evident
-200
at the Italian elections on 4 March, but this was more
-300 about voters rejecting establishment parties than
05 06 07 08 09 10 11 12 13 14 15 16 17 18
about exiting the EU.

Page 15
FX: The US dollar is Fed Up 12 March 2018

Monetary divergence vs risk aversion

Japanese yen
• It has become challenging to make a confident call
DBS forecasts on the Japanese yen. Our base case scenario sees
Year Q1 Q2 Q3 Q4 the return of a dovish stance at the Bank of Japan
USD/JPY 2018 108 112 116 115 (BOJ) and a more hawkish US interest rate outlook
2019 114 112 111 110
Policy rate 2018 -0.10 -0.10 -0.10 -0.10
lifting USD/JPY back into its 110-115 range.
% 2019 -0.10 -0.10 -0.10 -0.10 Conversely, we are aware that the yen could reprise
10Y bond 2018 0.08 0.09 0.10 0.10 its safe-haven role if the US 10Y bond yield rises
% 2019 0.10 0.10 0.10 0.10 above 3% and hurts global equities including the
2015 2016 2017 2018 2019 Nikkei.
Real GDP 1.4 0.9 1.6 1.1 0.9
CPI 0.8 -0.1 0.5 0.6 1.0
Curr a/c 3.1 3.8 4.0 3.7 3.5
• Japan has reaffirmed its commitment to continue
Budget -6.7 -5.7 -5.0 -5.5 -5.0 its quantitative and qualitative easing (QQE) with
% YoY for GDP & CPI, % of GDP for current account & budget balances yield curve control (YCC) policies. The Abe
DBS forecasts in red, historical data in black
government has, in mid-February, reappointed
Haruhiko Kuroda for a second five-year term as BOJ
USD/JPY 9 Mar: 106.82 governor. Equally important were the appointments
130 130
of reflationist Mazaumi Wakatabe and “BOJ-insider”
125 125
Masayoshi Amamiya as Kuroda’s deputies.
120 120
115 115
• Having pushed back speculation that it engaged in
110 110
“stealth tapering”, the BOJ now holds the stance
105 105
that “Japan is not yet in a situation where the BOJ
100 100
can offer a plan on how and when to exit its ultra-
95 95
easy policy”. The return of a dovish stance at the BOJ
Jan-15 Jan-16 Jan-17 Jan-18
and a more hawkish Fed hike outlook have potential
Nikkei tumbles on doubts over BOJ policies to renew monetary policy divergences and arrest this
0.75 26,000 year’s appreciation in the yen. Unfortunately, as
10Y JGB Nikkei 225 mentioned above, the odds for a flight to safety into
0.50 24,000
(%, left) (right) the yen on risk aversion cannot be ruled out too.
22,000
0.25
20,000 • The odds of a policy response to address
0.00
18,000 undesirable yen strength is no longer a zero
-0.25 16,000 probability. Chief Cabinet Secretary Yoshihide Suga
-0.50 14,000
and Vice-Finance Minister for international affairs
Jan-15 Jan-16 Jan-17 Jan-18 Masatsugu Asaakawa have come out to warn that
recent yen moves have been one-sided. The risk of
Japan's GDP growth slips below inflation again intervention cannot be ruled out if USD/JPY falls to
6 100-102. Koichi Hamada, economic adviser to Prime
5 Minister Shinzo Abe, has suggested that the BOJ
4 CPI inflation Real GDP
% YoY % QoQ saar 2% considers buying foreign bonds if it runs out of
3 inflation target
domestic assets to purchase. Until then, the cabinet
2
1 CPI ex Food has, meanwhile, approved a tax reform plan for the
0
% YoY coming fiscal year starting in April to provide tax
-1 incentives for Japanese companies to redirect
-2 retained earnings toward lifting wages and
15 16 17 18
increasing capital investment.

Page 16
FX: The US dollar is Fed Up 12 March 2018

US dollar Supported by the Fed’s positive outlook

DBS forecasts • Do not underestimate the potential of three Fed

Year Q1 Q2 Q3 Q4 hikes to support the US dollar this year. Unlike 2017,
DXY Index 2018 89.8 92.7 95.0 94.2
Fed hikes are no longer viewed as “dovish hikes” this
2019 92.9 92.0 90.7 90.0
Policy rate 2018 1.75 2.00 2.00 2.25 year. At its Federal Open Market Committee meeting
% 2019 2.25 2.50 2.50 2.75 on 31 January, the Fed clearly stated that it was no
10Y bond 2018 2.85 2.90 2.95 3.00 longer looking for inflation to stay below, but to rise
% 2019 3.05 3.10 3.10 3.10
towards its 2% target this year. This has been
2015 2016 2017 2018 2019
supported by the central tendency for the US 10Y
Real GDP 2.9 1.5 2.3 2.6 2.5
CPI 0.1 1.3 2.1 1.8 1.8 Treasury yield to gravitate towards 3%.
Curr a/c -2.4 -2.4 -2.4 -2.5 -2.6
Budget -2.6 -3.1 -3.4 -3.7 -4.5 • The US economy is now expected to expand
% YoY for GDP & CPI (eop), % of GDP for current account & budget balance at/above 2.5% in 2018-19 on the Tax Cuts and Jobs
DBS forecasts in red, historical data in black
Act passed last year, the two-year bipartisan budget
deal signed in February, and new Fed Chairman
DXY Index 9 Mar: 90.093
Jerome Powell looking to encourage US banks to
105 105
lend more to families and businesses. Apart from
100 100 moving above its post-crisis average 2.1% growth, US
growth will, more importantly, take over the lead
95 95 from its G7 peers such as the Eurozone. The euro,
which is the largest component of the DXY, has been
90 90
bolstered over the past year by its stronger growth
performance and outlook.
85 85
Jan-15 Jan-16 Jan-17 Jan-18
• Hence, we now believe the first two Fed hikes will
Fed expects inflation to rise in 2018 be front-loaded by a quarter to March and June. The
% YoY hike in March will take the ceiling of the Fed funds
2%
4
inflation target
rate to above its peers in Australia, South Korea, and
3
Real GDP Thailand. The increase in June will take the ceiling to
2% which was the the level from which it first fell to
2
tackle the subprime-led financial crisis.
1 PCE core deflator
0 • With the benchmark DXY low around 90 today, and
CPI inflation not high above 100 a year ago, Trump has stopped
-1
14 15 16 17 18 complaining about a strong US dollar.
Unfortunately, he has become more protectionist
UST10Y above 3% will be a game-changer for the USD this year. For example, his latest proposal to impose
10-year government bond yield, %
import tariffs of 25% on steel and 10% on aluminium,
4
while aimed at gaining leverage at the NAFTA
3
US negotiations, has potential to provoke America’s
2 major trading partners to retaliate. There is certainly
UK
1
less complacency over trade war risks this year,
EU
JP especially ahead of the US mid-term elections in
0
November.
-1
14 15 16 17 18

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FX: The US dollar is Fed Up 12 March 2018

Growth, Inflation, Policy Rates & FX forecasts

GDP growth, % YoY CPI inflation, % YoY, ave

2016 2017e 2018f 2019f 2016 2017e 2018f 2019f
China 6.7 6.9 6.4 6.2 2.0 1.6 2.1 2.2
Hong Kong 2.0 3.7 3.3 2.5 2.4 1.7 2.0 2.5
India* 8.0 7.1 6.6 7.2 4.9 4.5 3.7 4.6
Indonesia 5.0 5.1 5.3 5.4 3.5 3.8 4.0 4.5
Malaysia 4.2 5.9 5.0 5.0 2.1 3.8 3.5 3.0
Philippines** 6.9 6.7 6.7 6.7 1.3 2.9 4.2 3.5
Singapore 2.0 3.6 3.0 2.7 -0.5 0.6 1.0 1.8
South Korea 2.8 3.1 2.9 2.9 1.0 1.9 1.8 1.8
Taiwan 1.4 2.9 2.8 2.4 1.4 0.6 1.0 1.0
Thailand 3.2 3.9 4.0 4.0 0.2 0.7 1.5 1.5
Vietnam 6.2 6.8 6.4 6.6 2.7 3.5 3.6 3.8
Eurozone 1.8 2.5 2.2 2.2 0.2 1.5 1.3 1.4
Japan 0.9 1.7 1.1 0.9 -0.1 0.5 0.6 1.0
United States*** 1.5 2.3 2.6 2.5 1.3 1.6 1.8 1.8
* refers to year ending March ** new CPI series *** eop for CPI inflation

Policy interest rates, eop

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
India 6.00 6.00 6.00 6.00 6.25 6.25 6.50 6.50
Indonesia 4.25 4.25 4.25 4.50 4.75 5.00 5.00 5.00
Malaysia 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50
Philippines 3.25 3.50 3.75 4.00 4.25 4.50 4.50 4.50
Singapore** 1.40 1.65 1.90 2.15 2.15 2.40 2.40 2.65
South Korea 1.50 1.75 1.75 2.00 2.00 2.25 2.25 2.25
Taiwan 1.38 1.38 1.38 1.50 1.50 1.63 1.63 1.75
Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.50
Vietnam*** 6.25 6.25 6.25 6.25 6.50 6.50 6.75 6.75
Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
United States 1.75 2.00 2.00 2.25 2.25 2.50 2.50 2.75
* 1-yr lending rate; ** 3M SOR ; *** prime rate

Exchange rates, eop

Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19
China 6.39 6.49 6.60 6.56 6.52 6.48 6.44 6.40
Hong Kong 7.82 7.83 7.83 7.82 7.82 7.81 7.81 7.80
India 64.7 65.9 67.0 67.2 67.4 67.6 67.8 68.0
Indonesia 13,596 13,747 13900 13,960 14,019 14,079 14,140 14200
Malaysia 3.95 4.08 4.20 4.18 4.16 4.14 4.12 4.10
Philippines 52.6 53.3 54.0 54.4 54.8 55.2 55.6 56.0
Singapore 1.32 1.35 1.38 1.37 1.37 1.36 1.36 1.35
South Korea 1,082 1,121 1160 1,148 1,136 1,124 1,112 1100
Thailand 31.8 32.8 33.9 33.6 33.3 33.1 32.8 32.5
Vietnam 22,745 22,832 22920 22,970 23,020 23,069 23,120 23170
Australia 0.78 0.76 0.74 0.75 0.76 0.76 0.77 0.78
Eurozone 1.23 1.19 1.16 1.17 1.19 1.20 1.22 1.23
Japan 108 112 116 115 114 112 111 110
United Kingdom 1.39 1.37 1.35 1.37 1.38 1.40 1.41 1.43
Australia, Eurozone and United Kingdom are direct quotes

Page 18
FX: The US dollar is Fed Up
12 March 2018

Group Research
Economics & Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Gundy Cahyadi Radhika Rao

Economist - Indonesia, Thailand, & Philippines Economist - Eurozone & India
+65 6682-8760 gundycahyadi@dbs.com +65 6878-5282 radhikarao@dbs.com

Nathan Chow Irvin Seah

Strategist - China & Hong Kong Economist - Singapore, Malaysia, & Vietnam
+852 3668-5693 nathanchow@dbs.com +65 6878-6727 irvinseah@dbs.com

Joanne Goh Duncan Tan

Regional equity strategist FX and Rates Strategist
+65 6878-5233 joannegohsc@dbs.com +65 6878-2140 duncantan@dbs.com

Eugene Leow
Samuel Tse
Rates Strategist - G3 & Asia
Economist - China & Hong Kong
+65 6878-2842 eugeneleow@dbs.com
+852 3668-5694 samueltse@dbs.com

Chris Leung
Philip Wee
Economist - China & Hong Kong
FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com
+65 6878-4033 philipwee@dbs.com

Ma Tieying
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 matieying@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

Disclaimer:
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company
does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions
expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation
& the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for
the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals
connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from
any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the
Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy
or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors,
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person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC &
Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company
Registration No. 196800306E.

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