CIBC`s Monthly FX Outlook
Transcription
CIBC`s Monthly FX Outlook
Monthly FX Outlook March 11, 2015 Currency Strategy Highlights • All good things must come to an end, even a remarkable bull run in the USD. The market Economics Nick Exarhos ECONOMICS TORONTO (416) 956-6527 [email protected] Avery Shenfeld ECONOMICS TORONTO (416) 594-7356 [email protected] Jeremy Stretch MACRO STRATEGY LONDON +44 (0) 207-234-7232 [email protected] Patrick Bennett MACRO STRATEGY HONG KONG +852 3907 6351 [email protected] John H Welch MACRO STRATEGY TORONTO (416) 956-6983 [email protected] http://research. cibcwm.com/res/Eco/ EcoResearch.html has yet to fully account for rapidly approaching Fed hikes, the first of which should come by June. That will give a last leg to USD strength, before better news overseas allows other majors to hold ground versus the greenback. • Tighter policy from Yellen will see a bit more near-term downside in the C$. Better global growth and a recovery in resource prices will allow the loonie to recoup some of its losses near the end of this year, but a need for rebalancing toward exports and business investment will prevent a sharp rally in the Canadian dollar further out. We see the loonie bottoming at 78 cents-US in 15Q2 (USCAD 1.29). Events to Watch in Coming Month • The FOMC meets on the 17th and 18th, and the committee should be ready to drop “patience” from its message on rates. That’s likely to serve as a wake-up call to the bond market, and in the process start the last leg of greenback strength. • A potential deal with Iran on its nuclear program is a development worth watching for oil-related currencies. Negotiations with Greece are the Eurozone’s wildcard. Currency Outlook End of period: 11-Mar-15 2015 II 2015 III 2015 IV US$ Rates: USDCAD EURUSD USDJPY GBPUSD USDCHF AUDUSD USDBRL USDMXN USDKRW USDCNY USDSGD USDTWD USDMYR USDINR Other Crosses: CADJPY AUDCAD GBPCAD EURCAD EURJPY EURGBP EURCHF EURSEK EURNOK 2016 I 2016 II 2016 III 2016 IV 1.27 1.06 121 1.50 1.01 0.76 3.12 15.60 1126 6.26 1.39 31.7 3.70 62.8 1.29 1.06 122 1.45 1.00 0.76 2.88 15.15 1110 6.26 1.38 31.4 3.65 61.5 1.29 1.05 125 1.48 1.00 0.74 2.86 15.45 1105 6.25 1.39 31.2 3.55 61.3 1.26 1.09 122 1.50 0.98 0.76 2.97 15.60 1100 6.22 1.38 31.1 3.50 61.3 1.24 1.12 117 1.52 0.96 0.79 3.02 15.14 1090 6.19 1.37 30.9 3.47 61.0 1.23 1.15 116 1.55 0.94 0.81 3.05 14.69 1080 6.16 1.36 30.7 3.42 61.0 1.22 1.18 115 1.57 0.92 0.83 3.05 14.26 1070 6.12 1.35 30.6 3.40 60.8 1.24 1.21 114 1.59 0.90 0.85 3.04 13.83 1060 6.08 1.34 30.4 3.38 60.5 96 0.97 1.91 1.34 129 0.70 1.07 9.13 8.66 95 0.98 1.87 1.37 129 0.73 1.06 9.15 8.55 97 0.95 1.91 1.35 131 0.71 1.05 9.05 8.45 97 0.96 1.89 1.37 133 0.73 1.07 8.95 8.40 94 0.98 1.89 1.39 131 0.74 1.08 8.90 8.35 94 1.00 1.91 1.41 133 0.74 1.08 8.85 8.30 94 1.01 1.92 1.44 136 0.75 1.09 8.80 8.25 92 1.05 1.97 1.50 138 0.76 1.09 8.75 8.20 CIBC World Markets Inc. • PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 • Bloomberg @ CIBC • (416) 594-7000 CIBC World Markets Corp. • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 All Good Things Must Come to an End But we would take a 1% year-end fed funds futures rate as a signal to cash in on long dollar positions against most majors. With the Fed fully priced for 2015, the market could begin to focus on other fundamentals that could lean the other way. Long dollar positions have been steadily rewarded in recent months, as an improving American economy and labour market (Chart 1, left) have stood in sharp contrast to developments overseas, where growth and geopolitical worries have left investors seeking safety— and a relative abundance of yield—in US securities. But though that trend is to continue in the near term, all good trades must come to an end, and this one could be over by late spring. The evidence is beginning to build that the dollar is overshooting what the US can sustain on the trade side, particularly if oil rebounds and raises nominal imports. Export orders have started to languish (Chart 1, right), denting the performance of the real economy. Exporters are also registering a visible dent to profits, the key longer term driver for capital spending, as foreign sales get translated into fewer greenbacks. The near-term underpinnings for the USD are clear. While aggressive monetary policy in Europe and parts of Asia is now well priced into yields and FX markets, the market has yet to fully capture the coming turn from the Fed. Yellen’s recent testimony cemented our own view that “patience” will be dropped from the FOMC’s next message, paving the way for a June rate hike. Further into the year, the payoffs from monetary stimulus could be more visible in the performance of overseas economies. Not that they will outperform the US or raise rates for several years to come, but enough that there won’t be fresh downside surprises to keep the dollar on the rise. Although US Q1 GDP now looks to be a bit below 2%, more seasonal weather, solid labour income gains from new jobs, and the accumulated savings from several months of cheaper gasoline prices should provide a powerful lift this spring. Recently announced wage hikes by major retailers will spill over to other sectors, providing enough justification to move on rates despite tame core and negative headline inflation. Futures are pricing in barely more than a 0.5% year-end funds rate, but a hike in June would quickly tack on a further 50 bps to expectations. That should see one final leg to USD strength this spring. One Less Reason for C$ Weakness Before the Bank of Canada’s rate announcement last week, markets were pricing in 99% odds that the overnight rate would be below 75 bps at year-end (Chart 2, left), implying that a further cut was only a matter of timing. That was, in part, based on the Bank’s prior history which showed no tendency for a single isolated cut or hike in the past, the scar that weak oil was likely to leave on business investment Chart 2 - Another Cut No Longer Certain (L), Crude Surplus Slashed (R) Chart 1 - Payroll Gains Fastest Since Late-90s (R), But Strong Greenback Stalling Real Exports (L) 91 95 99 03 07 11 15 Implied Probabilities for Dec-15 BoC O/N Rate (%) 100 80 Dec-14 Jun-14 Sep-14 Mar-14 Dec-13 Jun-13 -6 Sep-13 -4 -8 60 58 56 54 52 50 48 46 Mar-13 Cumm. 12-mon chg in Payrolls 116 114 112 4 mn 110 108 2 106 104 0 102 100 -2 98 6.0 60 5.0 40 4.0 20 3.0 0 Trade-Weighted USD (Jan-97=100, L) ISM Mfg: New Export Orders Index (R) Crude & Products Trade Bal C$ bn 7.0 Day before Mar BoC Mtg Now less than 75bps 75bps or higher 2.0 1.0 0.0 Jun-14 Jan-15 Source: Bloomberg, Statistics Canada, CIBC Source: BEA, Census Bureau, CIBC 2 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 and government spending, and the dovish talk that accompanied the first cut. The details of the ECB’s plan allow it to purchase securities that yield more than its -0.20% overnight deposit rate. That has pushed the front end of the German yield curve into negative territory, all the way out to securities maturing in six years. The use of negative overnight yields in Europe has proven to be a strong driver of euro weakness, as the market continues to eye the potential for another move lower in the central bank’s mandated rate. Furthermore, though rates still have room to move higher in the US, their relative attractiveness, and the greenback’s broadbased strength, has encouraged an exodus from the common currency. An overshoot of our 1.05 forecast for 15Q3 is of course a risk if the Greek situation gets messier. But the verbiage accompanying the Bank’s stand-pat decision leaned the other way, with the BoC suggesting that the first cut had done a lot to ease monetary conditions. In saying that it sees the blow from crude being “even more front-loaded” than previously assumed, the Bank signaled its willingness to stomach significant disappointments versus the existing nearterm forecast. Though we dropped a second cut from our forecast, greater-than-assumed USD strength will still likely get us to 1.29 on dollar-Canada in June. The C$ will see some short-term weakness if, as we expect, the Fed hikes US rates in June, earlier than now priced in. Furthermore, despite crude prices recently stabilizing, there’s little chance of an immediate v-shaped recovery with global growth still fragile, and with US supply not yet responding to falling rig counts. That will leave more pain in the near-term for Canada’s goods trade balance, where more than half of the oilrelated surplus has been shaved (Chart 2, right). Once this year’s Fed tightening is fully priced in, it should be time to cash in on short euro positions. With yield differentials fully baked in, markets could begin to focus on other fundamentals that will be more supportive for the euro. We were well ahead of the ECB in looking for an improvement to roughly 1½% real GDP growth for the Eurozone this year (Chart 3, left), lifted by exports driven off a weaker euro and the consumer boost from cheap gasoline, of which there are already some early positive signs (Chart 3, right). US trade and current account balances already show that the euro is moving into undervalued territory. Blindly buying Treasuries for the yield pick-up could start to look like a less obvious trade for those recognizing the potential for currencies to, at some point, drift back to fair value. Firmer expectations for global growth in 2016, a gradual recovery in oil, and a long pause in Fed tightening at a mild 1% funds rate, should enable the C$ to recover some of its lost ground late this year and into 2016. But that rebound will be held in check by a longer-term need for rebalancing growth from housing and debt-financed consumption towards exports and business capital spending, with a competitive exchange rate remaining key to that story. Chart 3 - ECB Forecasts Catch Up to Our Own (L), With Greenshoots in Retail Sales (R) Euro: A Final Overshooting 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 March 9th ushered in the QE era in the Eurozone, with EUR60 bn per month in purchases slated until September of next year. ECB’s plan to reflate its balance sheet should keep the euro on the cheap side of where current account and trade fundamentals might dictate, even if the central bank’s action is becoming increasingly priced into the currency. As Draghi pumps a steady flow of new euros, and the market prices in 2015 action from the Fed, there’s scope for slightly more downside in EURUSD through the first half of this year. Eurozone Real Retail Sales 2014 2015 2016 Dec-14 (Eurosystem Staff) Mar-15 (ECB Staff) CIBC 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 YoY % Source: ECB, Eurostat, CIBC 3 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 BoE On Hold as Elections Loom Don’t Rule Out the BoJ Just Yet Though rates have been on hold for six years at 0.5%, the Bank of England may soon be contemplating a policy turn of its own. The UK economy continues to grow above its potential, with recent data suggesting that Q1 activity is poised to register a 0.6% unannualized gain. Because the economy has been able to maintain an above-trend pace, spare capacity could be narrowing faster than the Bank of England is currently anticipating. And though other European economies have yet to reclaim their pre-recession peaks, the annualized 2.7% advance in Q4 has left UK GDP nearly 2.5% higher than its pre-crisis high-water mark. Though UST-JGB spreads moved towards the highs of the year, investors are becoming increasingly hesitant to drive a commensurate spike higher in USDJPY. Indeed, even the authorities apparently view the JPY as trading in the correct range, with Economics minister Amari hinting that neither excessive strength nor weakness in the JPY is desirable. Taking those clues, investors have pared negative JPY speculative skew back to levels not seen in several years (Chart 5, left). That move underlines the decreasing expectations of another round of BoJ easing in the near term. But in terms of potential action, BoJ Chief Kuroda continues to argue that monetary policy could be adjusted without hesitation, should conditions warrant it. And though a fall in oil is a definite positive for Japan’s economy, a miss on the 2% CPI target for 2015 (Chart 5, right) might still cause the BoJ to act once more. Furthermore, with domestic investors continuing to seek higher-yielding foreign bonds, the yen may have to get weaker still before curbing the Japanese appetite for foreign currencies. We share Governor Carney’s view that weaker oil prices are an unambiguous positive for the UK. With labour markets tight and average earnings accelerating, a lower profile for CPI supports what should be solid gains in real consumption (Chart 4, left). Furthermore, UK consumers are getting an added lift from retailers who are competing for their business through lower prices. However, there’s an added complication to policy normalization for the BoE that the Fed doesn’t have to contend with. UK elections are slated for May 7th, but markets are currently pricing in little disruption from such an event. We’re of the view that the elections will mean that monetary policy might be on hold for longer, given the still-uncertain nature of the results (Chart 4, right). That leaves a little bit more near-term GBPUSD downside, though there should still be upside in going long sterling versus the euro. Still-Lower Rates for Australia Ahead While the RBA may have left rates on hold last month, pressure will mount to cut policy rates further, from an already record low of 2.25%. The Bank has been hesitant to ease borrowing conditions since Australia possesses the fourth highest level of household debt as a share of GDP amongst the majors at 113%. But a Chart 5 - Speculators Paring Yen Shorts (L), But Falling Inflation Expectations Might Stir BoJ Into Action (R) Chart 4 - UK Earnings Now Outpacing Inflation (L), Though Election Uncertainty Might Stall BoE (R) YouGov/The Sun Populus Yen Net Non-Commercial Short Positions 15 0 10 CPI Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 -1 5 0 Earnings Source: ONS, YouGov, Populus, CIBC Consensus Expectations for 2015 YoY CPI (%) 2.0 1.8 1.6 1.4 1.2 1.0 Jan-15 20 Nov-14 25 1 000s contracts 140 120 100 80 60 40 20 0 Jul-14 30 2 Sep-14 % Mar-14 35 May-14 YoY % Jan-14 3 0.8 Source: CFTC, Bloomberg, CIBC 4 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 softening in global growth has hit Australia’s resourcelevered economy, with the realities on the ground likely to force Stevens’ hand once more. Dovish Talk Not Likely Enough to Weigh on SEK Despite the Riksbank surprising the market last month by taking interest rates negative and announcing a QE program worth SEK10 bn per month, we’ve witnessed a rebound in the SEK, much to the chagrin of the central bank. But then again, the Swedish monetary stance remains less aggressive than that of the Eurozone. Moreover, we have seen the SEK react to recent data, with GDP, industrial output and forward-looking PMI all suggesting a more encouraging economic environment. In trying to avoid the need for lower rates, the RBA has explicitly tried to induce a slide in the aussie dollar. Unlike the BoC’s Governor Poloz who maintains his innocence regarding his bias for a cheaper national currency, the RBA’s Governor has consistently—and successfully—talked down the aussie over the last few months. With that in mind, it’s no surprise then that the RBA statement references the currency as above its fundamental value given commodity price declines, and states that “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”. While the current account deficit narrowed in Q4, the price of iron ore continues to plumb new lows as China’s demand slows (Chart 6), suggesting further pain ahead. Q4 GDP came in double what had been expected with the quarter’s 1.1% good enough to take the year-onyear level to 2.7%—the highest since 11Q3. That has made the central bank’s job of convincing the market that backward-looking measures aren’t a guide to future monetary policy guidance more difficult. Furthermore, the advance in the currency is also feeding off a continued slide in inflation expectations, which Governor Ingves has referred to as getting near the ‘discomfort zone’. That kind of talk from the governor suggests that more action could be coming when the Bank next meets on April 29th, with the Bank remaining concerned that the currency’s strength is arresting any positive upticks in inflation. Furthermore, a compression in 10-year rates versus the US should continue, with the differential headed to zero by mid-year. That favours additional cheapening in the currency as the market continues to eye the RBA’s next moves. Chart 6 - China’s Demand Growth for Iron Stalls, Denting Prices for Australia’s Key Commodity Export 85 mn tonnes $/tonne 160 Norges Bank to Act Unsurprisingly, the performance of the NOK remains highly correlated with that of oil. The one-week, onemonth, and one-year inverse correlations all currently remain between 0.80 and 0.85. That’s something we’ve kept in mind when charting the performance of the currency over the next 12 months. Given the potential for firmer oil prices in the back half of this year, we look for EURNOK to trend lower. Jan-15 40 Oct-14 55 Jul-14 60 Apr-14 60 Jan-14 80 Oct-13 65 Jul-13 100 Apr-13 70 Jan-13 120 Oct-12 75 Jul-12 140 Apr-12 80 Jan-12 However, since the central bank is likely to struggle to get its dovish message ahead of the ECB’s QE program, and since domestic Swedish data remains largely supportive, we look for ongoing EURSEK downside. China Iron Import Volumes (L) 62% Iron Ore Price (R) Source: Customs General Administration (PRC), Bloomberg, CIBC That being said, in the context of the domestic fundamentals, the legacy of oil’s slide will see a dramatic decline in investment, while near-term fundamentals are also showing softness (manufacturing output slumped by 3.7% in January). 5 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 Those factors favour additional monetary stimulus from the Norges bank, which promised to closely monitor oil’s effects on the economy when they cut rates in December. With consumer confidence in Q1 having declined to 7.4, the lowest reading since the great recession, the bank is as likely as ever to weigh added measures. Chart 7 - USDBRL Spot, the SELIC Policy Rate, and Inflation 16% 12% IPCA inflation (% YoY, L) Forecast SELIC rate (L) Inflation target USDBRL (R) 3.0 2.5 2.0 8% The most likely scenario involves another 25-bp cut at the March 19th meeting, to bring rates to 1.00%, with the risk of at least an additional quarter-percent cut in Q2 should underlying real economy prove to remain under near-term pressure. However, even if the central bank continues to lower rates, expect that to merely slow rather than arrest the medium-run downtrend in EURUSD, with external oil price dynamics to come more into play as the year progresses. 3.5 1.5 TARGET 1.0 4% 0.5 0% Aug-10 Oct-11 Nov-12 Dec-13 Feb-15 Mar-16 0.0 Source: Banco Central do Brasil, IBGE , CIBC The IBGE reported that February IPCA inflation came in at 7.7% year-on-year, just above our forecast. Inflation is to remain above 7.0% in the first half before starting to slowly fall in H2 2015 (Chart 7). This reaffirms our revised view that the COPOM will undertake three more 25-bp hikes to bring the SELIC to 13.50% in July. Will Levy’s Plan Last? Though USDBRL shot northward to above 3.00 on strong US numbers, the Petrobrás scandal, and problems in congress threatening the fiscal adjustment, we remain buyers. The Banco Central reported a much better-thanexpected January primary surplus of BRL21.1 bn, following the extremely poor numbers in December. The nominal balance came in with a surplus of BRL3.0 bn corresponding to a 12-month deficit of 6.4% of GDP—better than the prior 6.7%. These solid results show genuine improvement, and are the products of the work undertaken by Ministers Levy and Barbosa. Serious questions about whether this improvement will last over the next few months, however, remain of key importance to our forecasts. New Finance Minister Joaquim Levy and team have faced some political opposition but continue on their crusade to resuscitate Brazil’s credibility. The initial program improves the primary result BRL57 bn. The new team cannot yet cut budgetary spending as congress has not passed the 2015 budget. The program sees cutting expenditures by BRL30 bn through reducing the length of widows’ pensions according to age, increasing the subsidized TJLP (Long Term Interest Rate) on loans from the state-owned banks, reducing bonuses to government employees, reducing unemployment benefits, and reducing energy subsidies. Banxico to Tighten in Second Half The government also seeks to raise BRL26.6 bn in additional revenue by increasing taxes on consumer durables, increasing the IOF tax, and increasing fuel taxes. The new finance team also put in place a reduction in exemptions on payroll taxes but was delayed for three months. For now, all of these initiatives are already binding through temporary decrees that need ultimate approval by congress, where resistance is still fierce. At some point, the fall in the peso will have some, if muted, inflationary impact. Since we maintain that Banxico is too loose, we have significantly revised our forecasts for USDMXN higher, at least through the first US Fed hike. We expect Banxico to become more hawkish and start tightening in the second half of this year, whether 6 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 the US Fed starts tightening or not. Higher growth and tighter money should reveal that the current level of USDMXN is too high. Once we see more signs of growth and a more hawkish Banxico, we will remove our bullish bias and begin to propose selling the pair. Until then, we will maintain our bearish peso bias. undertake fiscal adjustment in 2016 and would appear in the 2016 budget due in congress in September. The government is curtailing some spending in the shortterm but will probably wait until after July mid-term elections for aggressive measures. INEGI reported that bi-weekly CPI inflation came in at 3.04% year-on-year in February, almost at the target. The precipitous drop in inflation to the target came in December due to the price effects of telecom reform which dropped rates significantly. Despite the declining trend in headline inflation and the still-weak but recovering economic activity, a high USDMXN as well as US Fed tightening should prompt Banxico to start increasing its fondeo rate. Hence, we have Banxico moving at the beginning of 2015Q3 and increasing the fondeo by a total of 50 bps to end 2015 at 3.5% (Chart 8). CNY Divergence Between Trade-weighted and USD Levels Investor concern regarding capital outflows from China and a broadly firmer USD overall has seen USDCNY and USDCNY both gain around 1% year to date. Assuming some further USD strength, we can see both spots modestly higher, but we expect those moves to be compensated by further trade-weighted gains for the Chinese currency as the balance of supply and demand remains positive. A notable divergence has emerged between both of those moves (vs. USD and trade-weighted), a development that we would expect to close over coming months (Chart 9). On the capital outflow, concerns in the market appear, at this stage, to be overblown. The external balance remains positive and evidence of China accommodating some of the outflow by running down reserves and then compensating for the impact on the domestic market by cutting the RRR, suggests a topside blowout in USDCNY is still unlikely. China’s NPC has announced a target for GDP of around 7%, in line with expectations. The drive to re-orient the economy toward a higher share of domestic demand and to pursue quality over quantity of growth remains intact. The February PMI (HSBC) came in at 54.4, above the neutral 50 threshold for the seventeenth successive month. Although it has been at the lowest level since November 2014, February’s number continues to signal solid improvement in overall business conditions. However, input price inflation accelerated to its fastest pace in over two and a half years, which was mainly linked to higher costs for imported raw materials. Though imported prices have been influenced higher through a cheaper currency, lower oil prices mean lower government revenues. Finance Minister Luis Videgaray announced that the government would Chart 8 - Mexico: USDMXN, Fondeo Rate, Headline and Core Inflation (y-o-y %) 7.0 16 Forecast 6.0 5.0 4.0 3.0 2.0 1.0 CPI inflation (y/y %, L) Core inflation (y/y %, L) Fondeo rate (L) USDMXN (R) 0.0 Aug-10 Nov-12 Jan-15 Chart 9 - Watch For Divergence Between USDCNY and Trade-weighted to Close 142 15 140 14 138 13 136 12 134 11 132 10 130 9 128 6.05 6.10 6.15 6.20 6.25 126 8 124 Jan-13 7 Mar-17 6.00 6 Jul-13 CNY NEER (L) Jan-14 Jul-14 Jan-15 6.30 USDCNY (R, Inverted) Source: Bloomberg, CIBC Source: Banxico, Bloomberg, CIBC 7 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 KRW Stable, BoK With Room to Ease INR Supported by Pro-active Policies Stability best describes the recent track of USDKRW, with spot having traded in a range of 1080-1120 since November of last year. That stability is similarly reflected in the track of KRW against the JPY, with JPYKRW within 9.05-9.45 since December. Positive impulses have been forthcoming for the INR recently, with the budget announcement having been well received, to the extent that the RBI delivered an inter-meeting cut of 25 bps in the key benchmarks, the second such cut this year. The message with the latest cut referenced the budget and also noted that disinflationary pressures were developing at a faster pace than had been expected. South Korea announced a record trade surplus in February of $7.7 bn, though the makeup was less bullish, with imports falling near 20% (some of it was value related via lower oil prices). Other recent indicators have been mixed; IP was soft and CPI printed at another lower-than-expected level. USDINR spot and NDF markets have been stable this year and we expect that to continue. Some positive expectation for INR may however be tempered by RBI comments on the currency, with references highlighting that INR has remained strong relative to peer countries and that an excessively strong currency is undesirable. While it is true over the last year when the INR has outperformed other Asian currencies and has been near flat to the USD, it is still weaker by 28% against the USD during the last three years and near the weakest of Asian currencies during that time. We expect USDINR to remain stable inside a range of 60.00-63.00. We continue to recommend buying INR against the USD and EUR. Brighter spots were in recoveries in March business surveys, the manufacturing index rebounding to 82 from 73, the best since May of last year. BoK kept rates on hold recently, but with disinflationary pressures prevailing and the currency stable, we expect they will be under pressure to ease when they meet next on March 12th. With regard to inbound investment, portfolio flows to bonds is a year-to-date positive total of $5.7 bn, whereas equity inflows have been a more modest $830 mn in the same time frame (Chart 10). MYR Challenges Now Present Value Opportunity Chart 10 - Portfolio Inflow to South Korean Bonds is Tracking Positively After months of underperformance, primarily on soft oil prices, and also on domestic political concerns, MYR remains soft, even if we still consider it to be undervalued at present levels. Malaysia recently revised its current year fiscal deficit to 3.2% of GDP from 3.0% and GDP target to 4.5–5.5% from 5–6% on the back of weaker oil prices. On the positive side of the wider deficit, the figure would be 3.9% without spending cuts. January trade data again showed a strong surplus, coming in at MYR9 bn, though two-way trade saw a contraction. Lower prices for commodities account for softer exports, while a drop in imports of capital goods remains something we’ll be monitoring. We still see value in short EURMYR and look for the underperformance of MYR against Asian peers to be corrected. South Korea Bond Inflow (net purchases) USD mn 40000 35000 30000 25000 20000 2012 2013 2014 2015 15000 10000 5000 0 -5000 1 6 11 16 21 26 31 36 41 Week 46 51 Source: Bloomberg, CIBC 8 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 SGD More Easing Expected in April Sometime around April 10th–12th is the likely date for the MAS bi-annual policy review. We expect that following the surprise easing of policy on January 28th, a more wide-ranging review and potential re-calibrating of policy will be in store. In January, the MAS reduced the slope of the SGD NEER band; we assume the slope is now +1%. On that measure SGD remains near the low side of the band limit, we estimate for USDSGD that is currently around 1.3730-50. Interest Rate and Economic Outlook End of period: 2015 II 2015 III 0.75 Canada Overnight target rate 0.75 2-Year Gov't Bond 0.60 0.80 10-Year Gov't Bond 1.70 2.00 Federal Funds Rate 0.25 0.75 US 2-Year Gov't Note 1.20 1.50 10-Year Gov't Note 2.65 3.00 0.05 Eurozone Refin.operations rate 0.05 2-Year Gov't Bunds -0.05 -0.05 10-Year Gov't Bunds 1.10 1.10 Bank rate 0.50 0.50 UK 2-Year Gilts 0.60 0.75 10-Year Gilts 1.75 2.10 Overnight rate 0.10 0.10 Japan 2-Year Gov't Bond 0.05 0.05 10-Year Gov't Bond 0.40 0.40 2015 IV 2016 I 2016 II 0.75 0.75 1.00 1.00 1.20 1.40 2.00 2.10 2.40 1.00 1.00 1.00 1.60 1.50 1.50 2.85 2.75 3.00 0.05 0.05 0.05 -0.05 0.05 0.05 1.20 1.30 1.40 0.75 1.00 1.25 1.05 1.25 1.50 2.20 2.35 2.45 0.10 0.10 0.10 0.10 0.10 0.10 0.45 0.50 0.50 Canada Real GDP growth (%) Unemployment rate (%) CPI (%) Real GDP growth (%) US Unemployment rate (%) CPI (%) Eurozone Real GDP growth (%) Unemployment rate (%) CPI (%) Real GDP growth (%) UK Unemployment rate (%) CPI (%) Japan Real GDP growth (%) Unemployment rate (%) CPI (%) 9 2013 2.0 7.1 0.9 2.2 7.4 1.5 -0.4 11.9 1.3 1.7 7.6 2.6 1.6 4.0 0.4 2014 2.5 6.9 1.9 2.4 6.2 1.6 0.9 11.6 0.4 2.6 6.3 1.5 -0.1 3.6 2.7 2015 1.9 6.8 0.8 3.0 5.5 0.5 1.5 11.2 0.0 2.2 5.8 0.5 0.8 3.5 0.9 2016 2.5 6.4 2.2 2.4 5.3 2.8 1.9 10.8 1.6 2.4 5.5 2.0 1.3 3.5 1.7 CIBC World Markets Inc. Monthly FX Outlook - March 11, 2015 This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority, and (c) in Australia, CIBC Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, “CIBC”) and (d) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors (“MII”) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority. U.S. MIIs receiving this report from CIBC World Markets Inc. 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