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.

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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


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

(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

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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...

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