Financial Market: May 2015
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
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