Financial Market: May 2015
Wiracha Lorattawut
[email protected]
• It is May and not April fool day, USD/THB made its moment to remember as it skyrocketed to
33.00, the level we believe it should have reached since year-end 2014. A surprise policy rate
cut on April 29 and the BoT’s relaxed FX regulation delivered the twin effect of rising
USD/THB. Most accommodative outflows measures facilitate an up-move of USD/THB and
are perceived as market-friendly tools. Importantly, they are totally different from the capital
control in 2006.
• Capital control in 2006 is nothing more than a nightmare for investors. At that time, the baht
was overly appreciated and the central bank brought URR 30% measure to curb strong baht.
However, policy makers admitted later they made a mistake after financial market was in
turbulence. The SET index saw the most severe plunge in the history and bond market
suffered from selloff. Even the BoT took an immediate action to ease the rules for foreign
investors. Thailand stock market remained lagging behind regional markets after the lift of
capital control measure.
• In May, we expect USD/THB to stay firmly above 33.00 and it may reach 34.00 in medium
term on the backdrop of deteriorating Thailand economic fundamentals from prolonged tepid
growth. However, upside of USD/THB could be capped after the market factored in BOT
relaxed rules and policy rate cut. Moreover, USD may trade lower on the expectation that the
Fed will raise interest rate later rather than sooner after weak real data such as nonfarm
payrolls and retail sales.
• EUR/USD may manage to rise to potential highest topside of 1.15 as the economy grew as
expected in 1Q15 and we bias on the optimism of relieving Greece concern. As long-term
trend of the euro stays on the downside, we recommend a sell EUR on rally.
• “Sell in May and go away” market anomaly still applied in May 2015. Global bond selloff in
Bund, European bond, and Treasury prompted investor to pull their money out of global fixed
income security. But we believe that relieving Greece default concern and any improvement
in U.S. data would calm the market. We still recommend a buy of LB19 govies basing on
attracted yield and steep spread 2Y4Y curve.
Our call
USD/THB
Policy rate
Fixed Income Strategy
33.34-34.00
1.25%
Recommend: LB-19
THB IRS
5-year: 2.30%
10-year: 2.90%
Key Events in March
Date
13-May
Country
EC
Events/Data
1Q15 GDP
13-May
US
Retail Sales in April
15-May
US
U. of Michigan Sentiment in May and Industrial Production in April
15-May
SK
BOK Repo Rate
18-May
TH
1Q15 GDP
19-May
EC
Finalized CPI in April and Zew Surveys
20-May
JN
1Q15 GDP
21-May
CH
HSBC Manufacturing PMI in May
21-May
EC
Markit Manufacturing and Services PMIs in May
22-May
US
CPI in April, Markit manufacturing PMI in May
22-May
JN
BOJ Policy Meeting
25-28 May
TH
Custom trade in April
26-May
US
Durable Goods Order in April
29-May
JN
CPI in April
2-Jun
EC
Estimated CPI in Apr and Unemployment rate in May
1
Financial Market: May 2015
Save the best for last
Beginning on April fool day up until before the last few days of this month, financial markets
were in defensive mode due the wait of FOMC decision on April 28-29. Most U.S. economic
data lessened confidence in the economy after the report on April 3 showed U.S. change in
nonfarm payrolls plunged below 200K positions in March. Weak employment data set the tone
of this month. Later, disappointing U.S. retail sale, industrial production, durable goods order,
and existing home sales further underscored growth concern. Consequently, the dollar saw a
sharp decline in April after the DXY index peaked at 100.33 on March. The Fed’s meeting did
not provide any fresh new details about the liftoff, but the statement mentioned slowdown in
1Q15 GDP should be temporary from winter-setback. Some relieving sign has arrived on May 8
as after U.S. change in nonfarm payrolls improved to 223K position in April.
Most U.S. data surprised at the downsides, pausing USD bull-trend
K position
%
Source: Bloomberg and SCB FM
In-house creations are much more exciting.
The most exciting moment has not occur at the west but happened at home. The first shock
wave is stroke by a surprise policy rate cut on April 29. Thailand’s MPC lowered benchmark
interest rate by 25bps to 1.5% in a bid to bolster economic growth as the economy shows sign
of falter from weak domestic demand and exports and strength from public investment and
tourism industry seems insufficient to kick growth. The second shock wave happened to the
market when the BoT official said at press conference after delivering rate cut that “the BoT
will announce rules about accommodating outflows on April 30”. Unexpected interest rate cut
and worrying about the return of capital control measure dampened the baht and USD/THB
shot above 32.80 and trended higher after it had consolidated in range of 32.50-32.70 since
January.
To recap what happened to the market when the BoT imposed unremunerated reserve
requirement of 30% on December 19, 2006 to prevent the baht from overly appreciation owing
to foreign speculation flows. This rule will apply to nonresident (NR) with each transaction
amount greater than USD20000. Thirty percent of this amount was suspended at the BoT for a
year and 2/3 of this reserve could be taken out within a year but with 10% withholding tax
penalty. The announcement caused devastating impact on Thailand. The SET index tumbled
108pt or -15% within one day, the biggest one day decline in history. Out-of-control damage
spread into bond market and overall investment environment for Thailand. Furthermore, the
baht was divided into two-tiered market which is onshore and offshore market. Offshore baht
liquidity was shortage from the firewall of capital control measure, leaving THB offshore
strengthened and diverged from weak THB onshore. The policymakers admitted URR 30% was
a mistake and granted exception of the measure for the stock market after one-day
announcement and the regulation was later eased for the bond market and corporate financing
before an official lift on March 3, 2008. Therefore, the market was in highly risk-averse mode
when the BoT it would launch accommodating outflows measure on April 30, 2015.
2
Financial Market: May 2015
SET index and USD/THB movement after capital control in 2006
*** The SET index plunged
108pt or 15% within a day
after releasing capital control
on Dec 19, 2006. USD/THB
rose after the announcement
pt
USD/THB
***
Source: Bloomberg, and SCB FM
Bond selloff on fear of capital control
%
Source: Bloomberg and SCB FM
Two-tiered market of USD/THB onshore and offshore
THB offshore diverged from THB onshore as
the baht appreciated amid tight liquidity after
the BoT restricted speculative fund inflows to
prevent strong baht.
Source: Bloomberg and SCB FM
The BoT announced relaxing FX regulations at 11.00AM on April 30. Some announced rules are
same rules but just better. In other words, transaction limits are increased for both resident
and nonresident.
•
Resident: increasing outstanding limit for foreign currency deposit (FCD) with domestic
financial institution to USD5.0mn from USD0.5mn or ten folds.
3
Financial Market: May 2015
•
Resident: increasing limit for purchasing immovable properties abroad including
leasehold properties to USD50mn from USD10mn or 5 folds.
•
Nonresident: increasing outstanding limit for borrowing Thai baht from domestic
financial institutions for transactions undertaken without underlying trade and
investment in Thailand to not exceed THB600bn per group of NRs per financial
institution from previous limit of THB300mn. This will be effective in May 2015.
Other fresh new rules support resident for investment abroad for both international
securities and structured product while facilitate nonresident to gain onshore source of fund.
•
Resident: investment in securities abroad through onshore banks, depositing foreign
currencies abroad and investment in securities abroad without the need to go through
local intermediaries, and investment in foreign exchange-linked products issued in
Thailand such as structured products linked to exchange rate (USD/THB)
•
Nonresident: allowing foreign corporations to borrow Thai baht (direct loan) from
domestic financial institutions for investment in Thailand, except investment in
properties and securities in Thailand and allowing the corporations located in
neighboring countries to borrow Thai baht (direct loan) from domestic financial
institutions for investment in these countries to facilitate trade and investment between
these countries and Thailand.
In sum, these capital flows relaxation measures are market friendly from offshore and onshore
standpoint. The central bank increases transaction limit and facilitates offshore investment for
resident as onshore lending for nonresident. These measures are completely different from
capital control measure in 2006 which introduced to curb the baht appreciation. Furthermore,
the new measure may turn into the baht depreciation (please see the below table) without
hurting Thailand’s investment sentiment in terms of stock and bond market and FDI. Most of
relaxing rules drove USD/THB to finish month-ending at 32.94 ahead of May Day. During 5-day
break from May 1 to May 5, USD/THB reached 33.00 and stood firmly above this level.
We believe that capital control does not worth a worry going forward. Not only the BoT
confirmed such measure will not be the case but also the devastating impact in the 2006
experience will not consider the tool even as an alternative. Flat stock market performance
relative to peers evidenced prolonged severe effect as investor lacked confidence in Thailand
market. Furthermore, the hard measure will further add downside risk to growth as it may
worsen inflows from foreign direct investment in addition to portfolio flows.
The SET index had been underperformed after URR 30% for extended
period as investors lacked the confidence in Thai market.
pt
Source: Bloomberg, and SCB FM
4
Financial Market: May 2015
Implication of the BoT measures on the baht
New BoT Rules
Resident
1) Outstanding limit of FCD with domestic financial institutions (FI) increases
to USD5mn from USD0.5mn.
2) Purchase of immovable properties abroad : to raise the limit for purchase
of immovable properties including leasehold properties abroad to
USD50mn/year from USD10/year.
How to transact
Impact on USD/THB
Sell THB and buy USD into domestic FI.
Rising
Effective Date
2015
Sell THB to buy USD to investment in
property.
Rising
2015
3.1) Invest in securities abroad through onshore banks.
1. To increase alernative investment.
2.Facilitating investment abroad
Rising
2015
3.2) Qualified investors to directly deposit foreign currencies abroad and
invest in securities abroad within a certain limit without the need to go
through local intermediaries .
1. To increase alternative investment.
2.Facilitating investment abroad
Rising
2015 for Broker in
TFEX and 2016 for
qualified domestic FIs.
3.3) Invest in foreign exchange-linked products issued in Thailand such as
structured products linked to exchange rates (FX/THB).
Domestic FI can sell new financial products
to sophisticated investor.
Unclear
2015
Providing for convenient settlement to
domestic and foreign investors
Unclear
2016
Increasing flexibility or cash (FX)
management.
Providing for convenient service of
transferring transaction.
Unclear
2015
Unclear
2015-2016
Facilitating THB lending to NR. Without this
easing rule, NR will need to obtain USD loan
and sell it for THB funding.
Rising
May-15
Facilitating THB lending to NR. Without this
easing rule, NR will need to obtain USD loan
and sell it for THB funding.
Facilitating THB lending to NR for buoying
international trade between the two
countries.
Rising
N/A
Unclear
N/A
4) Foreign exchange licensing for securities companies : to allow securities
companies to buy and sell foreign currencies with their customers within the
scope of their brokerage business.
5) Corporate treasury centers : to relax regulations on corporate treasury
centers
6) Authorized money changers and authorized money transfer agents :
such as telecommunication companies to provide cross-border remittance
services and money changers to have a higher limit on the amount of
transactions with customers.
Nonresident (NR)
1) Increase the outstanding limit for NRs in borrowing Thai baht from
domestic FIs for transactions undertaken without underlying trade and
investment inThailand to not exceeding THB600mn per group of NRs per FI
(previous limit is THB300mn).
2) To allow foreign corporations to borrow Thai baht (direct loan) from
domestic FIs for investment in Thailand, except investment in properties
and securities in Thailand.
3) To allow foreign corporations located in neighboring countries to borrow
Thai baht (direct loan) from domestic FIs for investment in these countries
to facilitate trade and investment between these countries and Thailand.
Source: The BoT and SCB FM
USD/THB: Forming a bullish move this month; target 33.34-34.00
USD/THB moved in exciting direction after USD/THB had stayed flat and oscillating in range of
32.40-32.80 since January 2015. USD/THB skyrocketed to 33.00 at the end of April and it was
able to sustain into the following days in May thanks to a surprise policy rate cut and relaxed
FX regulations from the BoT. During Thailand holiday, USD/THB made an effortless step to
33.20 on Labor Day, 33.30 on May 4, and a touch of 33.40 on May 5. When the market
resumed operation on May 6, USD/THB corrected to 33.2level before building a bullish trend
and advanced to a high at 33.86 on May 12, the highest level since September 15, 2009 or 5.7
years as a large amount of flows from importer and market player turned on the market.
Looking forward, we believe that USD/THB will stay buoyant but it will on the track of slowed
rise rather than fast rise. Rising USD/THB should decelerate after all surprising news, policy
rate cut to 1.5% and the BoT measures, are factored in. Furthermore, potential better-thanexpected Thailand 1Q15 GDP to be released on May 18 may prevent USD/THB from rising.
However, fundamentals do not change the picture of weak baht and we target USD/THB at
34.00 in medium-term. Year-to-date real data of exports, imports, manufacturing production,
and inflation data raised the doubt when the economy really bottoms out. Thus, an expectation
of another 25bps policy rate cut and other expansionary fiscal and monetary policies will be
certain as the MPC implied in the statement that stimulating growth is a top priority. The below
chart showed foreign investors reduced positions in Thai stocks and bond reflected by fall Thai
baht outlook and “sell in May and go away” anomaly. In addition, 1-year swap rate pierced
below 1.50%, signaling the market expectation of lowering key interest rate.
5
Financial Market: May 2015
Sell in May and go away: foreign investors disposed Thai bonds on theme
of global bond selloff and falling THB outlook.
Foreign Net buy/-sell
Foreign Net buy/-sell
in Thai's stocks
in Thai's bond
THB mn
Jan'13
15,037
Feb'13
-17,387
107,798
80,386
93,034
Mar'13
6,245
Apr'13
-19,839
84,467
May'13
-5,147
-28,289
Jun'13
-55,492
-17,623
Jul'13
Aug'13
498
41,291
-39,939
-44,741
Sep'13
9,606
95,595
Oct'13
1,168
44,490
Nov'13
-48,075
-40,217
Dec'13
-40,584
3,242
Jan'14
-13,665
-6,029
Feb'14
-21,377
-1,683
Mar'14
14,254
7,440
Apr'14
15,872
42,536
May'14
-35,760
-37,206
Jun'14
-357
64,826
13,766
170,225
Aug'14
2,398
-23,582
Sep'14
23,409
-15,611
Oct'14
-16,139
3,672
Jul'14
Nov'14
11,047
Dec'14
-27,739
6,434
Jan'15
-4,300
-1,785
-159
Feb'15
-6,898
13,907
Mar'15
2,742
-4,815
Apr'15
130
May'15
95
7,346
-22,039 *May1-May13
Source: Bloomberg and SCB FM
Key factor to watch: 1Q15 Thailand GDP on May 18 and custom trade data within May 2528.
Recommendation for exporter: hedging 50% at current pot rate and 50% at 34.00.
Recommendation for importer: Buy on dip at 33.65, 33.55, and 33.34 (supports from pivot
at 33.73 on May 12).
USD/THB
Daily QTHB=TH
17/11/2014 - 22/05/2015 (GMT)
Price
33.6
Cndl, QTHB=TH, Bid
14/05/2015, 33.53, 33.60, 33.33, 33.51, -.07, (-.21%)
AMA, QTHB=TH, Bid(Last), 20
14/05/2015, 33.36
AMA, QTHB=TH, Bid(Last), 50
14/05/2015, 33.18
33.51
33.5
33.4
33.36
33.3
33.2
33.18
33.1
33
32.9
32.8
32.7
32.6
32.5
32.4
.12
.56
MACD, QTHB=TH, Bid(Last), 12, 100, 9, Exponential
14/05/2015, .56, .33
Value
.33
.2
0
.12
17 24
01
พ.ย. 14
08 15
22
29
ธ ันวาคม 2014
12
19
26
มกราคม 2015
Source: Thomson Reuters
6
02
09
16
23
กุมภาพ ันธ ์ 2015
02
09
16
23
ม ีนาคม 2015
30
07 16
27
เมษายน 2015
06 11
18
พ.ค. 15
Financial Market: May 2015
EUR/USD: Upside bias 1.09-1.15 (EUR/THB 36.34-39.1)
EUR/USD shifted in range of 1.0519-1.1266 in April, very similar to March’s range of 1.04561.124. Concern over cash-strapped Greece remained at the center of eurozone. The euro rises
and falls with headlines from Greece. Moreover, upsides of the currency stemmed from weak
U.S. data. Array of disappointing U.S. data started from nonfarm payrolls in March weighed on
USD against major currencies. In April, we bias on the upside of the euro on the expectation of
development in Greece’s situation to unlock the last resort of fund from the IMF at EUR7.2bn.
Although we are not confident about the timeline of an ending of more than 3-month
negotiation between Greece and its creditors, we are optimism that there should be a much
progress of the talk at minimum. Furthermore, eurozone GDP expanded at 0.4%QoQ in 1Q15
as expected. Therefore, there is a possibility that the euro will advance toward 1.15, a high on
January 21.
Key factor to watch: estimated eurozone CPI in May on June 2.
Recommendation for exporter: Sell on rally. Uptrend is unlikely to sustain on the back of
ultra-loosing monetary policy and structural growth challenges. Recommend a sell at 38.00
ceiling and beyond (EUR/USD at 1.128, 1.135, 1.15 pivot point at 1.1213 on May 12).
Recommendation for importer: Buy at 37.50/24 and 36.70 (EUR/USD at 1.1139, 1.1064,
and 1.09 pivot point at 1.1213 on May 12).
EUR/USD
Daily QEUR=
17/11/2014 - 22/05/2015 (GMT)
Price
USD
1.22
1.2
1.18
1.16
1.1404
1.14
1.1213
1.12
Cndl, QEUR=, Bid
14/05/2015, 1.1357, 1.1445, 1.1339, 1.1404, +.0048, (+.42%)
AMA, QEUR=, Bid(Last), 20
14/05/2015, 1.1213
AMA, QEUR=, Bid(Last), 50
14/05/2015, 1.0884
1.1
1.0884
1.08
1.06
.1234
-.0085
-.0197
Value
MACD, QEUR=, Bid(Last), 12, 100, 9, Exponential
14/05/2015, -.0085, -.0197
USD
-.06
-.08
.1234
17 24 01
พ.ย. 14
08 15 22 29
ธน
ั วาคม 2014
05
12 19 26
มกราคม 2015
02
09 16 23 02
กุมภาพน
ั ธ ์ 2015
09 16 23 30
ม ีนาคม 2015
06
13 20 27
เมษายน 2015
04 11 18
พฤษภาคม 2015
Source: Thomson Reuters
USD/JPY: 118.5-121 (JPY/THB 27.55-28.69)
USD/JPY shifted in 118.47-120.84 in April, in line with our expectation. The yen continued to
stay in the boring range of 118.0-120 as there was no new directional cue to drive the market
and most up- or down- moves were mostly directed by the U.S. Mild risk-off in April from weak
U.S. data and global bond selloff at month ending kept USD/JPY below 120. In addition, BOJ
governor Kuroda stated timeframe to achieve inflation target may be delayed to FY2016. This
is interpreted that additional monetary stimulus will not be seen in reaching distance. In May,
the data and key event from the U.S. side are even lighter than in April. Therefore, we expect
USD/JPY to stay in same familiar range of 118.5-121.
Recommendation for exporter: sell at 28.69 (USD/JPY 121).
Recommendation for importer: buy at 27.55 (USD/JPY 118.5).
7
Financial Market: May 2015
3-month volatility declined amid sluggish USD/JPY movement
pt
USD/JPY
Source: Thomson Reuters
USD/JPY
Daily QJPY=
17/11/2014 - 22/05/2015 (GMT)
Price
/USD
121
120.5
120
119.75
119.62
119.5
119.04
119
118.5
118
117.5
Cndl, QJPY=, Bid
14/05/2015, 119.15, 119.34, 118.86, 119.04, -.10, (-.08%)
AMA, QJPY=, Bid(Last), 20
14/05/2015, 119.75
AMA, QJPY=, Bid(Last), 50
14/05/2015, 119.62
117
116.5
116
115.5
.12
MACD, QJPY=, Bid(Last), 12, 100, 9, Exponential
14/05/2015, .98, 1.12
Value
/USD
4
2
1.12
.98
.12
17 24 01
พ.ย. 14
08 15 22 29
ธน
ั วาคม 2014
05
12 19 26
มกราคม 2015
02
09 16 23 02
กุมภาพน
ั ธ ์ 2015
09 16 23 30
ม ีนาคม 2015
06
13 20 27
เมษายน 2015
04 11 18
พฤษภาคม 2015
Source: Thomson Reuters
Fixed Income Market
Bond curve steepened in April after Thailand’s MPC unexpectedly trimmed interest rate by
25bps to 1.50% for a second consecutive time on April 29. Downside risk to growth is the
major concern since the economy has struggled to bottom out. Therefore, 5 out of 7 policy
makers judged strong medicine is needed to shore up growth. According to the statement,
Thailand economy is projected to recover at a slower paced than previously assessed, blaming
on weak private consumption and merchandise exports. Improving tourism is not sufficient for
offsetting loss from exports sector. Furthermore, China’s slowdown and structural shift of
regional trading partners to depend more on local production from relying on import products.
Thailand’s custom exports evidenced the conviction as exports contracted 4.45%YoY in March
whereas exports to China plunged 8.3%YoY. The central bank Mathee Supapongse said
exports may contract in 2015, prompting to lower GDP forecast in 2015.
8
Financial Market: May 2015
Looking into next schedule of the MPC meeting on June 10 and later, we do not rule out the
possibility of rate cut in future rounds. Thailand’s economy struggles to accelerate pace of
growth amid challenges from external and internal environment. Despite the lowest nominal
policy rate of 1.5%, current real policy rate remained at elevating level of 2.54%, behind only
Malaysia. This indicates the room for future interest rate trimming.
Thai’s government yield curve saw bull-steepening after policy rate cut on
Apr 29.
%
Source: Bloomberg and SCB FM
Increasing deflation risk owing to weak price development
%
Source: Bloomberg and SCB FM
Comparable policy rates
%
Source: Bloomberg and SCB FM
9
Financial Market: May 2015
Yield curve and strategy
Our take: Maintain LB19-govies.
Global bond selloff led by Germany bund, European bond, and Treasury owing to fear on cashstrapped Greece and the expectation of late Fed’s liftoff put an upward pressure on yields.
Risk-off sentiment cause a rise in yield in May and this may follow “sell in May and go away”
pattern. We believe that the situation will improve on development of Greece’s situation and
the market factored in the higher possibility that the Fed will push back timetable of hiking Fed
Funds rate. Thus, we believe Treasury will soon attract market demand and player will realize
recent yield rally is a BUY opportunity. Furthermore, its relative value compared to Bund
remains attractive. Basing on our expectation on this global bond theme, Thai bond market
should return to its normal situation and the tight supply story coupled with speculation on
another policy rate cut would buoy demand for the bond.
Our top pick remains LB-19 series due to steep 2Y4Y curve. We rule out longer than 6-year
bonds as they are risker than the shorter tenor bonds. There is also an auction schedule of
bond supply for longer-than 6 year to maturity in this year. Holding the bond aging lower than
or equal to 2-year bond is not attractive as the current yield has little upside above current
policy of 1.50%. Furthermore, if the MPC cuts interest rate for another round, increasing
duration to 4-year bond would grab more return on investment. Current yields of 2-year LB17
bonds varied in 1.542%-1.679% or 4bps-18bps pick-up spread from policy rate while the
spread of LB19 bonds and policy rate shows handsome yield picking up at 53bps-66bps.
LB19 stays attractive.
Source: Bloomberg
View on THB IRS swap curve
IRS curve steepened since the MPC reduced policy rate to 1.50% from 1.75% on April 29.
Global yield rally boosted gain in mid- to long-term swap rates while 1-year swap rates
gradually moved below the policy rate of 1.5% as market increased bet on future rate cut.
With little evidence about solid real demand or demand from corporates to pay fixed interest
rate and the expectation that global bond selloff is not persistent, 5- and 10-year swap rates
have less room for the upside with a target at 2.30% and 2.90%.
10
Financial Market: May 2015
The swap curve steepened in March following the surprise cut on March 11.
%
Source: Bloomberg
5-year and 10-year IRS rates consolidated in tight range
%
Source: Thomson Reuters and SCB FM
11
Financial Market: May 2015
The information contained in this document has been obtained from sources
believed to reliable. However, neither we nor any of our respective affiliates,
employees or representatives makes any representation or warranty, express or
implied, as to the accuracy or completeness of any of the information contained in
this document, and we and each of such persons expressly disclaims any and all
liability relating to or resulting from the use of this document or such information
by the recipient and any persons in whatever manner.
Any opinions presented herein represent the subject views of ours and our current
estimates and judgments which are based on various assumptions that may be
subject to changes without notice, and may or may not prove to be correct.
This document is for the recipient’s information only. It does not represent or
constitutes an advice, offer, recommendation, or solicitation by us and should not
be relied as such. We or any of our associates may also have an interest in the
companies mentioned herein.
12