SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

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Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Equity Bottom-Up



By Macro Hive

 

SGX Asia Currencies Insights


Broad USD weakness and improved confidence over China’s recovery support CNH.
	Escalating COVID cases and renewed lockdowns weigh on the rupee.
	US Treasury commentary that TWD is structurally undervalued triggers renewed currency appreciation.
	KRW recovery to continue on equity inflows and positive C/A dynamics.
	An improving domestic backdrop should keep S$NEER above the band’s midpoint.

 

SGX Commodities Insights (Iron Ore)


Iron ore prices surge to fresh highs.
	Both demand and supply issues play a role.
	The Baltic Dry Index (BDI) confirms broad strength.
	Dollar weakness amplifies the picture somewhat.

 

China Growth Tracker


Iron ore prices rallied 13% over the past two weeks, and the annual growth rate picked up.
	Other China-sensitive commodity markets also gained over the past week. Copper rallied by 3%, oil 6%, and the BDI 18%.
	The one market to buck the trend was China bond yields, which fell over that period. Nevertheless, taken together, China-sensitive markets suggest robust Chinese growth.
	Last report we favoured buying iron ore (SCOK1) and selling copper (LPK21). This worked well, with iron ore outperforming copper by 10%. With a divergence still existing between the two, we continue to favour the trade.

 

 

 

 

 

SGX Asia Currencies Insights

Spotlight View #1: USD/Asia Lower With Improved Risk Appetite    

USD weakness through April brought respite for Asia FX. US Treasury yields have dropped from the March highs, tech stocks have rallied back, and prospects for global growth have improved with the ongoing vaccine rollout. USD/Asia has moved lower with KRW and TWD the region’s best performing currencies. Month-to-date KRW and TWD have gained around 1.2-1.5% versus the USD, and CHN just over 1%. The Indian rupee is the only Asian currency to weaken through April, reflecting the significantly worsening COVID situation (Chart 1).    

CNH Rally Continues as Recovery Concerns Abate  

Robust data released in recent weeks has boosted confidence in China’s ongoing recovery. March import growth of 38.1% YoY, the highest in four years, indicates strong domestic momentum, albeit also reflecting higher commodity prices. Meanwhile, retail sales at a higher-than-expected 34.2% YoY has eased fears over the prospect of an uneven (and largely export- and investment-led) recovery. CPI has remained low at 0.4% YoY, but the jump in PPI to an above-consensus 4.4% reflects rising cost pressure and the prospect that some of this may get passed on to consumers.

Q1 GDP data present a more mixed picture. On a QoQ basis, the economy expanded at a slower-than-expected 0.6%, the second-weakest reading since data began. YoY growth was a record 18.3%, reflecting the very weak base from a year ago. Some of the weakness nevertheless reflects the efforts to curb COVID outbreaks earlier in the year and the ‘stay put’ policy around the Chinese New Year holiday. Overall, service sector growth has remained subdued, with manufacturing driving the recovery.

But with the authorities’ conservative growth target for this year of around 6%, and a pledge to keep credit growth in line with nominal GDP, a more subdued growth dynamic is to be expected. And as the Chinese economy has already recouped COVID-related losses, growth rates are expected to drop back towards some trend level. Base effects in the service sector will remain favourable for longer, but overall, consensus is for slower lending growth, more subdued exports, IP and FAI (and broadly goods production).

Geopolitics Remains a Key Risk for the Yuan

USD/CNH dropped below 6.50 this week, a level last seen in mid-March. CFETS at 96.4 is down slightly from the recent highs, however, with the yuan weakening versus the EUR and JPY. We continue to see fundamentals as supportive of further CNH appreciation with an ongoing, albeit narrower C/A surplus, favourable yield support and debt market inflows all driving the yuan stronger.

Geopolitics remains a concern, but we see the risks as contained. Speaking at the annual Boao Forum this week, President Xi Jinping reiterated the country’s commitment to global economic integration while criticising the US without naming the country directly. US-China trade policy under President Joe Biden will undoubtedly be less fractious than under former President Donald Trump but not necessarily more lenient. China’s incursions into Taiwanese airspace are another potential flashpoint. Last week, 25 Chinese military aircraft entered Taiwan, the most in a year. US Secretary of State Antony Blinken commented recently on China’s ‘increasing aggressive actions’ towards Taiwan, and unease over China’s motives for the flights is growing.           

Barring any significant flare up in geopolitical tensions, we reiterate our call for further yuan strength ahead. The repricing of US growth expectations and accompanying USD strength appears over, allowing yuan appreciation to resume.  



      
    
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Spotlight View #2: INR to Remain Under Pressure   

India’s latest COVID crisis continues to escalate. Daily cases are now almost three times the peak in September last year, and Delhi is now under a six-day lockdown (Chart 3). The country has the fastest-rising case numbers globally (around 270,000 per day), and the death rate has accelerated. Economic costs are mounting, pressuring the rupee. INR remains Asia’s worst performer MTD (down 2.2% versus the USD), and unless the COVID situation materially improves, further weakness may be ahead. After a rapid move higher in April, USD/INR has consolidated around 75 and SGX INR/USD futures around 132.5. We see scope for further near-term weakness.

COVID Surge Threatens the Recovery

Rather than last year’s stringent nationwide lockdown, India’s approach is more localised this time. Recession risks are therefore lower, but this year’s projected double-digit GDP growth is increasingly unlikely. Urban unemployment jumped to 10.7% as of 18 April, from around 7.5% a month earlier, and memories of last year’s full shutdown have triggered a partial exodus of migrant labour from some cities. Factory shutdowns are an increasing worry as demand drops. And expectations for an ongoing recovery in IP and service sector activity could face delay. Strong agriculture output may prevent a wider drop in overall activity, but downside risks to growth are undoubtedly rising.   

As well as questions over the government’s handling of the outbreak – religious festivals and political rallies have proceeded in recent weeks – vaccine shortages have also compounded India’s COVID crisis. To boost supply from the two domestically made vaccines, the government has fast-tracked approval for vaccines already approved in the US, UK, EU and Japan. Russia’s Sputnik V vaccine was also approved in mid-April, although it is unclear when any of the additional vaccines will arrive. Nevertheless, vaccine rollout has accelerated in recent weeks, and from 1 May, all adults in India will be eligible to receive a vaccine. With 127mn doses administered, however, India is behind schedule to reach its target of 300mn by August.  

Fiscal Constraints Complicate the COVID Response 

With one of the highest debt/GDP ratios in EM, India’s ability to offer additional fiscal support is constrained. And with 10-year yields stuck firmly above 6% (currently around 6.1%) despite the start of the official QE programme, financing costs remain high. A March inflation reading of 5.5% YoY, the highest since November, is unlikely to shift the RBI’s pro-growth stance, however. The reading was broadly in line with the RBI’s updated inflation profile and remains within the target range. A shift higher in both three-month-ahead (10.1%) and one-year-ahead (10.1%) household inflation expectations will limit the extent of RBI dovishness, though.  

With the policy rate set to remain at the current 4% for the coming quarters, real yields are heading lower. Appetite for portfolio inflows could wane, and on top of lower yield support, equity outflows have also significantly pressured INR. April looks set to be the first month since September where foreign equity flows are negative, and until the COVID spike subsides and certainty over India’s recovery improves, it is difficult to see sentiment towards corporate India picking up.



      
    
    202104_2E


Given still-accelerating COVID cases and increased threats to the economic recovery, we continue to see near-term weakness for the rupee. We expect USD/INR to head towards 76 and SGX INR futures below 132.      

Spotlight View #3: TWD – Appreciation Trend Back in Play

Last year’s TWD appreciation trend has resumed. The tech-related equity outflows earlier this year have subsided, and the country’s exceptionally strong fundamentals are again pushing the USD/TWD lower. The currency is back at 28.1, a level last seen in December and before that in 1997, and SGX TWD/USD futures are above 0.355. With the tech weakness, and earlier UST yield spike, now receding, we reinstate our earlier bullish view on TWD.    

US Treasury Deems Taiwan’s Currency ‘Structurally Undervalued’

Last week’s comment from the US Treasury that TWD is ‘structurally undervalued’ has been a key driver of recent currency strength. The Treasury’s first FX Manipulation report under Biden concluded that Taiwan, Vietnam and Switzerland met all three criteria to be designated currency manipulators. But it labelled none as such. Nevertheless, with the three criteria met, the Treasury will now ‘commence enhanced bilateral engagement’ with Taiwan over its currency practices.

The CBC responded to the US Treasury Report by repeating its stance that FX intervention is intended to smooth market volatility. But comments in the report over the need to address ‘policy distortions’, improve ‘data transparency’ and limit FX intervention to ‘exceptional circumstances of disorderly market conditions’ could put the central bank in a difficult position. Moreover, the analysis of the FX practices of Taiwan’s Life Insurance sector and discussion over the use of FX swaps and various regulatory restrictions limiting currency appreciation leaves a very high level of scrutiny.   

Alongside the assumption that the CBC will now relinquish some control over its currency to appease the US, stronger global momentum and ongoing demand for semiconductors will support the export-driven economy. Export orders are normalising after several months of exceptionally strong growth (YoY growth remains elevated at 33.3%, but the three-month change is now zero following four consecutive months of double-digit gains). CBC Governor Yang Chin-long said this week that the bank may revise this year’s GDP growth forecast up from the already-bumper 4.53%, with domestic demand becoming an increasingly important source of growth.



      
    
    202104_3E


Portfolio Flows Have Returned

On the capital account side, the TAIEX is up almost 5% MTD. It was buoyed by strong results from TSMC earlier this month, the company’s confirmation of the $100bn investment plan, and more generally an improved performance in the NASDAQ. Foreign equity inflows have resumed, currently running at $2bn MTD after a significant $12bn in outflows through Q1.      

Taiwan’s basic balance surplus is expected to remain above 20% of GDP in the coming quarters, leaving significant support for the currency. And with the US Treasury closely watching FX reserves accumulation and the behaviour of the life insurers, we see a move below 28 on USD/TWD as increasingly likely. 

 

Rest of Asia FX

KRW – Improved Won Performance to Continue 

Renewed equity inflows and a strengthening recovery have kept KRW as Asia’s top-performing currency in April, alongside TWD. USD/KRW is back below 1120, and SGX KRW/USD futures almost back at February’s 0.9 levels.

The BoK presented an increasingly upbeat assessment of the Korean economy at last week’s policy meeting. Governor Lee Ju-yeol said GDP growth would likely outperform the bank’s 3% forecast, with exports and investment expected to drive the acceleration in growth. April’s 20-day exports jumped 45% YoY, boosted partly by calendar and base effects. But even compared with 2019, growth in daily shipments was in double digits. Some downside risks remain, with new daily COVID cases remaining fairly high at 600-700 and vaccine rollout slower than elsewhere in Asia. Unemployment has dropped back, with the 3.9% in March broadly in line with pre-pandemic levels, and the BoK consumer sentiment index has reached its highest level since the start of the pandemic. March CPI at 1.5% YoY is the highest since early last year, but we do not expect inflation to prompt a tightening in monetary policy anytime soon.

April equity inflows are on track to record the first positive inflow since November, and the Kospi is up 4% MTD. Alongside continued improvement in the country’s C/A, we are constructive on the won and see a move back below 1100 on USD/KRW.

 

SGD – A Hawkish Tilt to the April Policy Review  

USD weakness through April has pushed the Singapore dollar to a seven-week high of around 1.33. An improving domestic backdrop and slightly hawkish MAS statement at the April policy review are also supporting the currency. S$NEER has continued to strengthen and is now around 1% above the midpoint of the policy band.

The MAS April policy review had a slightly hawkish tilt. The headline CPI projection was raised, and the statement noted that GDP growth would likely ‘exceed the upper end of the official 4-6% forecast range’. MAS also shifted to state-based policy guidance versus the earlier time-dependent stance. Any return to S$NEER appreciation depends on a move higher in core inflation. However, the broad improvement in non-oil domestic exports and the better-than-expected advance Q1 GDP reading at 2.0% QoQ (and 0.2% YoY) should also strengthen the case to gradually reduce policy accommodation.

A shift back to S$NEER appreciation is possible at the next policy review in October. Assuming the recovery continues to gather momentum, we expect the currency to remain on the band’s strong side. USD/SGD will follow broad dollar trends and should grind lower.  

 

SGX Commodities Insights (Iron Ore)

Fresh Highs Across the Board

There was broad commodity strength in recent weeks. Benchmarks copper and oil rose in price, recapturing previous highs. Iron ore prices also surged, reaching new highs approaching $200/tonne for benchmark 62% fines.

While this clearly evidences strong global industrial demand, it also somewhat reflects renewed US dollar weakness. Following a period of strength earlier this year, in broad, trade-weighted terms, the dollar has lost nearly 2% of its value since the start of the month.

Supply-side developments largely explain ore’s relative outperformance. Not only Vale but also Rio have now guided 2021 production estimates lower. Vale’s prior guidance has also shown up in actual results as Q1 production fell even more than expected, by 19.5% over the previous quarter. (BHP also reported a drop, but only by 2% and while reaffirming full-year guidance.)

Now that Vale’s output drop is confirmed, Rio’s production issues may take centre stage going forward. Difficult portside conditions in Pilbara due to cyclone Seroja earlier this month compounded matters. Bigger challenges lie ahead as Rio is relying on 90mn tonnes pa of new capacity coming online before the end of the year.



      
    
    202104_4E


Reflecting broad, strong commodity demand is the BDI, which declined only briefly following the Suez spike. It has since risen yet again along with ore, other industrials and energy, including coal.

Some consolidation continues to appear likely in commodities generally. However, as the post-Covid backlogs boom begins to fade, underlying strong global demand and fresh fiscal stimulus from the US are supporting prices. That the dollar has also declined amplifies the picture. Should the dollar fall back into its pronounced downtrend from last year, there is no reason to expect significant declines in industrial commodity prices even if demand softens somewhat over coming months.

China Growth Tracker

Macro Hive research for SGX has found that iron ore, along with several other commodity and bond markets, tracks Chinese growth closely. Therefore, these markets can indicate future reported Chinese growth. And divergences across them can be exploited. Here are their latest developments: 

   


Iron ore prices rallied 13% over the past two weeks, and the annual growth rate picked up (Chart 1).
	Other China-sensitive commodity markets also gained over the past week. Copper rallied by 3%, oil 6%, and the Baltic Dry Index 18% (Charts 1, 2, and 4).
	The one market to buck the trend was China bond yields, which fell over that period. Nevertheless, taken together, China-sensitive markets suggest robust Chinese growth.
	Last report we favoured buying iron ore (SCOK1) and selling copper (LPK21). This worked well, with iron ore outperforming copper by 10%. With a divergence still existing between the two, we continue to favour the trade (Chart 1).




      
    
    202104_5E

      
    
    202104_6E

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)


SGX Asia Currencies and Commodities Insights



By Macro Hive

SGX Asia Currencies Insights


Bumper export growth and a rally in risk leave further CNH gains.
	Rupee looks set to end the year as Asia’s worst-performing currency.
	USD/TWD heads towards 28 as C/A recycling evaporates.
	Won rally continues despite worsening third COVID wave.  
	Broad dollar weakness pulls USD/SGD lower.

SGX Commodities Insights (Iron Ore)


Recovering steel production has pulled iron ore prices sharply higher.
	De-stockpiling appears to have begun, capping further price gains near term.
	The Baltic Dry Index (BDI) has fallen sharply.
	In coming months, the iron ore and BDI disconnect will likely close.

China Growth Tracker


Iron ore, copper and oil prices and also Chinese bond yields are broadly trending up, pointing to robust Chinese growth (Charts 1-3). The Baltic Dry Index is giving a divergent and more bearish signal (Chart 4).
	Iron ore and copper prices are tracking each closely, though iron ore is trading moderately expensive to copper.
	There are larger divergences between iron ore and the other markets – with iron ore clearly trading above. Assuming the gaps will narrow, trades such as selling iron ore (SCOF1) and buying oil (COG1) could benefit.

 

SGX Asia Currencies Insights

Spotlight View #1: CNH Rally Continues as Exports Soar

Optimism over Asia is high heading into 2021. Potential for widespread vaccine rollout and a global economic rebound should benefit Asia more than elsewhere in EM. This is thanks to strong fundamentals, sizeable export sectors and the broadly efficient handling of COVID leaving limited economic scarring. Bullish sentiment is reflected in ongoing currency gains. The largest bounce in EMFX since early November is in stressed currencies such as BRL, TRY and RUB. But Asia FX has gained steadily through H2 and looks set to end the year with many of the best-performing currencies in EM. And where currencies outside Asia have performed better, some of this is simply euro appreciation.   

USD/CNH continues to benefit from the risk rally, dropping to another low for the year last week. At 6.51, the yuan is now 8.5% stronger since July (and 10% since the May high). Renewed concerns over US-China trade tensions had only a fleeting market impact this week, with continued outperformance on exports dominating sentiment. November exports jumped 21.1% YoY ($ basis), almost double last month’s already strong pace and the fastest in more than two years. The composition was fairly broad, with exports of medical goods, electronics, textiles and toys all accelerating.

Exports may well slow into year end, but China’s COVID shutdown in Q1 2020 leaves a favourable base for YoY comparisons through the first three months of next year. And China is gaining global market share. On a 12mma basis, China now accounts for 14.3% of world exports, up about 1pp from a year ago. But the weakness earlier in the year masks the extent of recent gains. Exports over the past several months are around 16-17% of the world total, versus 13-14% a year ago (Chart 1).

Another month of fairly subdued imports (up 4.5% YoY) left the November trade surplus at a record high of $75.4bn. With the 12-month rolling surplus approaching $600bn, it is now back close to the pre-trade-war highs of 2016. China’s surplus with the US is also widening sharply. The $37.4bn surplus in November is also a record high and will leave trade policy as a key focus under the new US administration. President-Elect Joe Biden confirmed last week he would not immediately remove the existing tariffs on China and has said he wants to ‘develop a coherent strategy’ first.   

Alongside inflows from trade, portfolio inflows are also supporting CNH. Rising US yields are no constraint to capital inflows as, at 236bps, China’s rate differential over US Treasuries remains close to the recent highs. Buoyant equity markets will also keep foreign interest elevated. Positive BoP dynamics are reflected in rising FX reserves. November reserves jumped by $50bn to $3.178tn, marking the largest monthly increase since 2013 (Chart 2). Valuation effects accounted for some of the gain, with dollar weakness raising the USD value of assets in other foreign currencies. This suggests that despite recent steps to liberalise the FX market the PBoC may be mindful over the pace of currency appreciation.      

Positive risk sentiment and China’s very strong external position leaves a positive outlook for CNY. We continue to see some risk of near-term consolidation, but a move to 6.50 on USD/CNH remains our base case in the coming months.  



      
    
    202012_1E


Spotlight View #2: INR – Asia’s Worst-Performing Currency in 2020

Like China, positive momentum on India’s trade and current account are a key driver of recent FX dynamics. But while China has allowed its currency to appreciate, the RBI is wary that capital inflows rather than trade dominate, and they continue to actively intervene. USD/INR is broadly flat so far in Q4, while CNH has strengthened by more than 4%. YTD the divergence is even more striking, with CNH up 6.8% versus a depreciation of almost 3% for the rupee. This leaves INR on track to become Asia’s worst-performing currency this year.

The turnaround in India’s C/A (and broad basic balance) has been remarkable this year. Given the initial collapse in imports, we were sceptical about how long the turnaround in trade dynamics could be maintained. With the recovery now underway, it seems at least part of this improvement will last. But is a more competitive rupee the near-term answer to improved export growth? We don’t think so. India’s share of global exports has been stuck around very low levels for years, domestic policies are increasingly inward-looking and trade restrictions are rising. A structural pivot back towards export-orientated growth is needed for a medium-term turnaround in exports.

Alongside a reduced trade deficit with oil exporters, one notable aspect of India’s trade improvement is the reduction in its deficit with China. The deficit stands at $38bn through October (12m rolling basis) versus $52bn a year earlier (Chart 3). This reflects increasing tensions between the two countries, which have resulted in imports being held up, a ‘digital strike’ against China with countless Chinese apps banned in India, and reduced investment between the two countries.

The lower oil price and trade tensions with China are independent of rupee performance. Limiting FX appreciation will therefore make no material difference to these components of the trade dynamics and, as oil is priced in dollars, actually caps the reduction in import costs. At the same time, limiting rupee appreciation prevents any reduction in import costs.     

India’s stubbornly high inflation (7.6% YoY) has prevented the RBI cutting rates further, with the policy rate stuck at 4% since May. At the last policy meeting in early December, Governor Das reiterated the commitment to reviving growth and ensuring inflation returns towards target. But the tone was slightly less dovish than before. The RBI continue to see above-target inflation driven by supply disruption and indirect tax hikes, but the earlier reference to looking through high inflation was omitted.    

In the current environment of significant EM inflows on expectations of a global rebound, India’s equity market could well continue to benefit. November inflows remained close to all-time highs at $8bn and have remained strong so far this month. Bonds will also remain attractive, with 10-year yields staying around 500bps above the US. Coupled with the improved trade dynamics, we expect the underlying dynamics for rupee appreciation to continue.

Comfort over balance sheet expansion will ultimately drive RBI intervention. At around 29% of GDP this is small versus major central banks, but it is up by more than 10pp in two years to almost $750bn (Chart 4). And one important difference with major DM central banks is the level of interest rates. RBI profitability will take a hit from the interest cost on rising liabilities, while interest earned on FX assets will be minimal. As central bank profits are partly transferred to the budget, the cost of FX intervention can become political. The combination of rising costs from FX intervention, lack of material support to growth from capping rupee gains, and above-target inflation all suggest further intervention will be reasonably contained.

We see USD/INR heading back towards 73 (and SGX INR/USD futures above 136). But even with a rangebound rupee performance, the currency will remain attractive as a carry play. 



      
    
    202012_2E


Spotlight View #3: USD/TWD Breaks Below 28.5  

Taiwan’s tech-heavy economy is outperforming. After an upward revision to the Q3 GDP data to 3.9% YoY, the government now expects an expansion of 2.5% for this year (Chart 5). That is above consensus expectations of around 2% for China, or indeed any other major economy. Strong fundamentals are attracting significant inflows and leave the central bank intervening in increasing amounts to stem the pace of appreciation. USD/TWD is already 1% lower since the start of December and last week broke below the key 28.5 level, a level last seen more than 20 years ago. 

Daily trading patterns point clearly to end-of-day intervention, and the central bank confirms ‘smoothing operations’ are ongoing. But with minimal data published on FX intervention (only annual data on net intervention in the spot market are published) and uncertainty over the role of Taiwanese life insurers in accumulating FX reserves, Taiwan’s currency policy is increasingly questioned. CBC Governor Yang Chin-long said last week the bank will become more transparent, but no timeframe has been set. The appointment of Brad Sester as a trade advisor in US President-Elect Biden’s transition team may be raising concerns at the central bank. Sester has written extensively on what he describes as shadow FX intervention by Taiwan via FX swaps. 

The increased scrutiny on FX comes at a time of bumper exports. October exports hit a record $32.2bn, and November was only marginally lower with the YoY gain significantly exceeding expectations. The Q3 C/A surplus was already a record, and Q4 looks on track for another sizeable reading. Strong global demand for electronics combined with Taiwan’s relatively high investment growth points to ongoing current account strength. Unless these inflows are offset by capital outflows, the central bank will have a tough job stemming further appreciation. But as FX asset accumulation by the country’s life insurers has stalled, it is difficult to see where these savings can go (Chart 6).



      
    
    202012_3E


As such, we remain bullish on the Taiwanese dollar and expect USD/TWD to break below 28.0 in the coming months. SGX TWD futures hit another high (currently 0.3545), and USD/TWD one-month NDFs are trading sharply lower at 28.0.

Rest of Asia FX

KWD – Won Shrugs off Worsening Third Wave  

Korea’s third wave of COVID is getting worse. Yet the won continues to rally as foreigners pile into the stock market and the trend of broad dollar weakness continues. The won remains Asia’s best-performing currency in H2 and is now trading close to its strongest level in more than two years. Appreciation of almost 11% since July leaves USD/KRW now below the key 1100 threshold. SGX KRW/USD futures reached yet another new high this week at 0.9217.

Despite the expected dip in activity from the latest increase in social distancing measures, Korea’s recovery continues to gather pace. Export growth is positive, albeit weaker than in China or Taiwan, and the earlier narrowing in the C/A surplus has now reversed with October’s $65.3bn (12-month rolling basis) back at levels from mid-2019. On the domestic front, measures of consumer spending are recovering and confidence has improved. The government recently approved a 3.7% budget deficit for next year – higher than the original plan – reflecting the need for continued support amid the pandemic.  

The BoK has remained tight-lipped over actual FX interventions. Warnings have been ongoing for a while, but, unlike in Taiwan, price action had not pointed to clear BoK USD buying. But FX intervention data for November suggest intervention is underway. Reserves increased by almost $10bn, the largest monthly increase in more than a decade. Nevertheless, we expect a cautious approach from the BoK on intervention and remain constructive on KRW. The next key level to watch is 1000.

SGD – USD Weakness Drives USD/SGD Lower 

Broad dollar weakness continues to support the Singapore dollar. At 1.3371, USD/SGD is trading at its strongest level since 2018 with Q4 appreciation above that of TWD. But with weakness versus EUR, S$NEER is 0.4% weaker since the start of Q4 and 0.6% weaker since the last MAS policy shift in March.

Singapore stands to gain quickly from a 2021 global recovery. Vaccine rollout would allow the tourism and services sectors to catch up with the recovery in trade and support a broader recovery in employment. The recent World Economic Forum decision to hold its 2021 annual meeting in Singapore next May is an important sign of confidence in the city-state’s handling of COVID. Singapore’s reopening is more cautions than in many other countries, particularly in entertainment and nightlife where pilot schemes have been used to ensure reopenings are viable. 

But with the economy set to remain weak at least for the next few quarters, significant policy support will remain in place. Monetary policy will remain unchanged through at least Q1 next year, leaving USD/SGD driven by what we expect to be a continued downtrend in the US dollar.  

 

SGX Commodities Insights (Iron Ore)

From Recovery to Boom? Or Bust?

Iron ore prices have risen strongly over the past month, continuing a trend that began over summer. However, prices now far exceed those implied by a symmetric recovery from the Covid demand slump. Now up nearly 40% YTD, iron ore prices have outperformed both industrial and non-industrial commodities in 2020 (Chart 1). Indeed, iron ore prices are increasingly an outlier, although energy prices have recently begun to catch up.

While there have been some Covid-related supply issues this year, they have been too small to impact prices significantly. The ‘Big Four’ producers – Vale, Rio Tinto, BHP and Fortescue – did experience some interruptions. But the big supply-side development this year has been a shift towards new production in places as diverse as Ukraine, Canada, Chile and Liberia, which in aggregate has adequately filled any temporary gaps from the majors.

Even as global steel production and the prices of most industrial commodities slumped through the middle of the year, there was never a large decline in iron ore prices due to stockpiling, particularly in China. Only in November did these stockpiles begin to decline, as steel production ramped up. Given high prices, a moderate destocking is likely to continue into 2021, which should limit further price gains in the near term. That said, as steel mill margins remain elevated, a large downward price correction appears unlikely. Most probable is that, as stockpiles are worked off, over the coming months prices settle back toward the H2 range of around 120 $/tonne.

One indication that de-stockpiling is now effecting the market is the large disconnect that has appeared between iron ore prices and dry bulk shipping rates (Chart 2). Although it recovered from the initial Covid slump by mid-year, the BDI has recently declined again to nearly 1100. While that is close to the BDI average of the past few years, it is way out of line with the ongoing rally in iron ore prices. But assuming that de-stockpiling is largely completed over the coming months, a modest recovery in the BDI is likely before the end of Q1.

A key question going forward is whether final steel demand will continue to increase at the rates generally seen pre-Covid. While it has recovered in China, production in the rest of the world has only just begun to increase again. Much depends on whether the various government stimulus programmes under discussion will include meaningful housing and infrastructure support. If so, this would make it more likely that iron ore prices remain elevated during 2021, with the BDI closing the gap higher, instead of iron ore declining back in line with the BDI.



      
    
    202012_4E


China Growth Tracker

Macro Hive research for SGX has found that iron ore, along with several other commodity and bond markets, tracks Chinese growth closely. Therefore, the direction of these markets can indicate future reported Chinese growth. And divergences across them can be exploited. Here are their latest developments:


Iron ore, copper and oil prices and also Chinese bond yields are broadly trending up, pointing to robust Chinese growth (Charts 1-3). The Baltic Dry Index is giving a divergent and more bearish signal (Chart 4).
	Iron ore and copper prices are tracking each closely, though iron ore is trading moderately expensive to copper.
	There are larger divergences between iron ore and the other markets – with iron ore clearly trading above. Assuming the gaps will narrow, trades such as selling iron ore (SCOF1) and buying oil (COG1) could benefit.




      
    
    202012_5E

      
    
    202012_6E

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BHP Billiton Limited is an international resources company.  The Company's principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining.  Dually-listed company with BLT LN.

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