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.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

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.

Asia’s leading multi-asset exchange

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

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

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

BHP Group Ltd

SGX Asia Currencies and Commodities Insights