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13 Mar 2014
Asia EM Express: Central bank decisions and Chinese data in focus
The rapid decline in metal prices and the disappointing Industrial Production and Retail Sales numbers continue to spur concerns over China's growth slowdown on Thursday.
Nevertheless, Royal Bank of Scotland analysts point out that “while financial stress has lifted somewhat in China it has hardly spilled over outside its borders.”
“The market remains unconvinced that it will spiral out of the control of the authorities. It has imposed a bigger dampening impact on commodity currencies that are involved in metals. Chilean peso (CLP), Brazilian real (ZAR) and AUD are among the weaker currencies. CAD has also been down modestly recently. However, the moves are not too severe.”
Meanwhile, the Thai Central Bank announced its decision to reduce the benchmark interest rate to 2% from 2.25% at it monetary policy meeting on Wednesday, as expected. The MPC members were divided, with a 4 to 3 vote in favour of the cut.
Tim Condon from ING believes that the risks to the Thai government’s 3.0% GDP growth forecast for 2014 are “asymmetrically downside” and suggests that we will rater see a 2.4% expansion.
“The economy needs additional monetary accommodation in our view. Our takeaway from yesterday is that the BoT eventually provides it. We revise our year end forecast for the policy rate to 1.75% and we reiterate our 3.40% yearend forecast for the 10-year government bond.”
Bank of Korea also held its monetary policy meeting on Wednesday, keeping rates steady at 2.5% for the tenth running month, in line with forecasts. This was Governor Kim Choongsoo's last policy meeting and now focus will turn to his successor n Lee Ju-Yeol, who will testify on 19 March before the National Assembly.
Young Sun Kwon and Wee Khoon Chong from Nomura expect him to speak about deflation risks and to emphasize that “current low CPI inflation is mainly due to positive supply shocks (e.g., lower food and energy prices) and demand-side inflation pressures are building gradually.” They add that this way “he would signal that there is no need for the BOK to cut rates.”
On Thursday also the Bank of Indonesia announces its monetary policy decision and the general expectation is that the key interest rate will be kept on hold at 7.5% for the fourth consecutive month , as inflation has slowed down and the rupiah strengthened considerably this year.
Economic data
China remained in focus on Thursday, as its Industrial Production and Retail Sales data surprised to the downside, increasing concerns over the country's growth slowdown.
On an annual basis Industrial Production rose by 8.6% in January, down from the 9.7% increase and below forecasts of 9.5%. Retail Sales growth slowed down to 11.8% from 13.6%, considerably below consensus of 13.5%.
According to the Nomura analysts Zhiwei Zhang and Wee Khoon Chong: “The sharp slowdown reflected in the data reinforces our view that the government will have to ease monetary policy significantly, which we believe will take the form of a 50bp cut in the bank reserve requirement ratio (RRR) in Q2, with another to follow in Q3.”
“We also believe that fiscal policy needs to become more expansionary to avoid GDP
growth dropping below 7%. We now believe that downside risks exist to our 2014 GDP
growth forecast of 7.4% (and 7.5% in Q1).”
On an annual basis Indian inflation slowed down to a 25-month low of 8.1% in February, from 8.79% in January and below consensus of 8.35%, the Ministry of Statistics revealed on Wednesday.
Judging from today's data, Nomura research analysts Sonal Varma and Aman Mohunta believe that “a disinflationary process is underway, but it is very gradual” and that it is due “the divergence between price pressures in the income elastic versus inelastic items within the core CPI basket.”
Indian year-on-year Industrial production data for February showed 0.1% growth, compared wit the 0.6% drop the previous month and against expectations of another 0.6% drop. On a monthly basis manufacturing output slid 0.7%, up from the previous reading of -1.6%.
“Based on today's data, Q1 2014 GDP growth is tracking around 4.5% y-o-y, lower than our current forecast of 4.9% and also weaker than the 4.7% rise in Q4 2013,” Nomura experts predict. “We expect GDP growth to consolidate in the 4.5-5.0% range for most of 2014 as both fiscal and monetary policies are likely to remain tight amid some support from stronger global growth in H2 2014.”
Malaysia's January Industrial Production grew 3.7%, down from 4.8% seen in December and below expectations of a 4.1% increase. Tim Condon from ING to believes that Malaysia's Central Bank, (Bank Negara Malaysia currently sees “the balance of economic risks as tilted toward inflation”, although over the course of this year this could change “as an export-led recovery fails to materialize and the agriculture supply shocks and administered price hikes fail to cause inflation to accelerate.”
“We expect the consensus forecast that BNM hikes the OPR by 25bp to 3.25% by year end will be scaled back to a no-hike forecast,” the analyst adds.
Technicals
On the recent worrying volatility of the Chinese yuan the RBS market experts comment that “while attracting a lot of attention” it has been in the most part “driven by the spot moves suggesting much of it reflects official policy action rather than significant financial stress.”
“We would continue to watch the CNY market more closely. It already appears to be triggering some weakness in metals, AUD and USD/JPY. But AUD and JPY (risk proxies) are still relatively stable since financial risks in China have not spilled over to either onshore of offshore CNY funding markets.”
The USD/CNY fell by 0.13 yesterday hitting a low of 6.1374. The daily FXStreet Trend Index for USD/CNY was slightly bullish, with the OB/OS Index overbought. RSI was neutral at 73.3827 at the last close. Daily 2-StDev Volatility Bandwidth is shrinking at 303 pips, with ATR (14) shrinking at 122 pips. The 1D 200 SMA was at 6.1034, while the 1D 20 EMA was at 6.1157.
USD/THB, USD/KRW and USD/INR also extended losses on Wednesday.
Nevertheless, Royal Bank of Scotland analysts point out that “while financial stress has lifted somewhat in China it has hardly spilled over outside its borders.”
“The market remains unconvinced that it will spiral out of the control of the authorities. It has imposed a bigger dampening impact on commodity currencies that are involved in metals. Chilean peso (CLP), Brazilian real (ZAR) and AUD are among the weaker currencies. CAD has also been down modestly recently. However, the moves are not too severe.”
Meanwhile, the Thai Central Bank announced its decision to reduce the benchmark interest rate to 2% from 2.25% at it monetary policy meeting on Wednesday, as expected. The MPC members were divided, with a 4 to 3 vote in favour of the cut.
Tim Condon from ING believes that the risks to the Thai government’s 3.0% GDP growth forecast for 2014 are “asymmetrically downside” and suggests that we will rater see a 2.4% expansion.
“The economy needs additional monetary accommodation in our view. Our takeaway from yesterday is that the BoT eventually provides it. We revise our year end forecast for the policy rate to 1.75% and we reiterate our 3.40% yearend forecast for the 10-year government bond.”
Bank of Korea also held its monetary policy meeting on Wednesday, keeping rates steady at 2.5% for the tenth running month, in line with forecasts. This was Governor Kim Choongsoo's last policy meeting and now focus will turn to his successor n Lee Ju-Yeol, who will testify on 19 March before the National Assembly.
Young Sun Kwon and Wee Khoon Chong from Nomura expect him to speak about deflation risks and to emphasize that “current low CPI inflation is mainly due to positive supply shocks (e.g., lower food and energy prices) and demand-side inflation pressures are building gradually.” They add that this way “he would signal that there is no need for the BOK to cut rates.”
On Thursday also the Bank of Indonesia announces its monetary policy decision and the general expectation is that the key interest rate will be kept on hold at 7.5% for the fourth consecutive month , as inflation has slowed down and the rupiah strengthened considerably this year.
Economic data
China remained in focus on Thursday, as its Industrial Production and Retail Sales data surprised to the downside, increasing concerns over the country's growth slowdown.
On an annual basis Industrial Production rose by 8.6% in January, down from the 9.7% increase and below forecasts of 9.5%. Retail Sales growth slowed down to 11.8% from 13.6%, considerably below consensus of 13.5%.
According to the Nomura analysts Zhiwei Zhang and Wee Khoon Chong: “The sharp slowdown reflected in the data reinforces our view that the government will have to ease monetary policy significantly, which we believe will take the form of a 50bp cut in the bank reserve requirement ratio (RRR) in Q2, with another to follow in Q3.”
“We also believe that fiscal policy needs to become more expansionary to avoid GDP
growth dropping below 7%. We now believe that downside risks exist to our 2014 GDP
growth forecast of 7.4% (and 7.5% in Q1).”
On an annual basis Indian inflation slowed down to a 25-month low of 8.1% in February, from 8.79% in January and below consensus of 8.35%, the Ministry of Statistics revealed on Wednesday.
Judging from today's data, Nomura research analysts Sonal Varma and Aman Mohunta believe that “a disinflationary process is underway, but it is very gradual” and that it is due “the divergence between price pressures in the income elastic versus inelastic items within the core CPI basket.”
Indian year-on-year Industrial production data for February showed 0.1% growth, compared wit the 0.6% drop the previous month and against expectations of another 0.6% drop. On a monthly basis manufacturing output slid 0.7%, up from the previous reading of -1.6%.
“Based on today's data, Q1 2014 GDP growth is tracking around 4.5% y-o-y, lower than our current forecast of 4.9% and also weaker than the 4.7% rise in Q4 2013,” Nomura experts predict. “We expect GDP growth to consolidate in the 4.5-5.0% range for most of 2014 as both fiscal and monetary policies are likely to remain tight amid some support from stronger global growth in H2 2014.”
Malaysia's January Industrial Production grew 3.7%, down from 4.8% seen in December and below expectations of a 4.1% increase. Tim Condon from ING to believes that Malaysia's Central Bank, (Bank Negara Malaysia currently sees “the balance of economic risks as tilted toward inflation”, although over the course of this year this could change “as an export-led recovery fails to materialize and the agriculture supply shocks and administered price hikes fail to cause inflation to accelerate.”
“We expect the consensus forecast that BNM hikes the OPR by 25bp to 3.25% by year end will be scaled back to a no-hike forecast,” the analyst adds.
Technicals
On the recent worrying volatility of the Chinese yuan the RBS market experts comment that “while attracting a lot of attention” it has been in the most part “driven by the spot moves suggesting much of it reflects official policy action rather than significant financial stress.”
“We would continue to watch the CNY market more closely. It already appears to be triggering some weakness in metals, AUD and USD/JPY. But AUD and JPY (risk proxies) are still relatively stable since financial risks in China have not spilled over to either onshore of offshore CNY funding markets.”
The USD/CNY fell by 0.13 yesterday hitting a low of 6.1374. The daily FXStreet Trend Index for USD/CNY was slightly bullish, with the OB/OS Index overbought. RSI was neutral at 73.3827 at the last close. Daily 2-StDev Volatility Bandwidth is shrinking at 303 pips, with ATR (14) shrinking at 122 pips. The 1D 200 SMA was at 6.1034, while the 1D 20 EMA was at 6.1157.
USD/THB, USD/KRW and USD/INR also extended losses on Wednesday.