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

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By <a href="https://macrohive.com/">Macro Hive</a>

SGX Asia Currencies Insights

<ul>
<li>We go tactically short <a href="https://www.sgx.com/derivatives/products/fx?cc=UC">SGX USD/CNH futures</a> (XUCN2, Jul22) as a widening current account surplus and more balanced portfolio flows are conducive to near-term CNH appreciation.</li>
	<li>Stay short<a href="https://www.sgx.com/derivatives/products/fx?cc=IU"> SGX INR/USD futures</a> (XIDN2, Jul22) as the RBI pivots to liberalising FX flows to support the currency.</li>
	<li>We stay short <a href="https://www.sgx.com/derivatives/products/fx?cc=KU">SGX KRW/USD futures</a> (XUWN2, Jul22). The trade balance keeps widening, while intervention efforts are merely smoothing won weakening.</li>
	<li>Flip to long <a href="https://www.sgx.com/derivatives/products/fx?cc=TWD">SGX TWD/USD futures</a> (XTDN2, Jul22) on intervention to support the Taiex.  </li>
	<li>Dollar strength has pushed USD/SGD higher, and we remain neutral on <a href="https://www.sgx.com/derivatives/products/fx?cc=SND">SGX USD/SGD futures</a>.  </li>
</ul>
 

Asia FX – Recession Risks Add to FX Vulnerabilities 

Increased talk of a US and a global recession keeps us bearish overall on Asian currencies. We express this via our short INR and short KRW trades. We have held these trades for the past month, and both have moved in the right direction.

We also spot tactical opportunities to be long TWD and CNH. In Taiwan, this is because the government will implement a support program for the equity market, which in turn shows a correlation with TWD. In China, because the recent trade data have strengthened significantly.

 

Spotlight View #1: Tactical Opportunity to Go Long CNH   

We open a new trade where we go tactically short SGX USD/CNH futures (short XUCN2, Jul22). The Chinese economy continues to improve gradually, and the underlying flow dynamic in trade and investment increasingly favours the currency. Among global EMFX, the USD trades very strongly. But on a short-term basis of a few weeks, we see CNY outperformance versus the dollar.
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China’s Trade Balance Sets a Record

We see improvements in both the C/A and portfolio flows. On the trade side, take as an example this week’s trade balance. At $97bn, it was much stronger than expected ($76bn), courtesy of exports rising by almost 20% YoY, while imports were broadly flat. Domestic consumer demand remains lacklustre even if the most severe lockdowns of the zero-Covid policy have ended. Meanwhile, factories are up and running, filling export orders with hardly any impediments. The lower oil price of the last few weeks also helped keep imports contained.

Portfolio Flows Are Balancing Out

Meanwhile, portfolio flows in June were more balanced than in earlier months. Previous months had seen outflows out of both bonds and equities. Last month, we saw quite large net inflows into equities (+$5bn) and a limited amount of bond outflows (-$5bn estimated). While there are some geopolitical reasons for bond investors to keep reducing in China, our sense is that they have already moved from overweight CGBs to neutral. This should perhaps not end future outflows but limit them in size, as we saw in June. Equity flows will ebb and flow with the economy, which is currently seeing a gradual rise.

Economy Gradually Improving Despite Zero-Covid

Besides the improving flow picture for CNH, the broader economy is slowly improving. The main driver of activity following the severe lockdowns that we saw in Shanghai and other cities was the so-called ‘government put’ at work. Roughly speaking, 2-3% of GDP of fiscal and other support was, or is about to be, given to the economy since April. This breaks down as 1-1.5% of micro measures, such as subsidies and tax breaks, and 1-1.5% of a broad infrastructure spending plan. PMI data have already returned above 50, whereas actual activity indicators such as retail sales and IP are improving more slowly.

In summary, we like the current level of 6.72 as an opportunity to go short USD/CNH SGX futures (short XUCN2, Jul22), with a target of a tactical drop towards 6.65.

 

Spotlight View #2: Still Short INR With New Lows Ahead  

We remain short SGX INR/USD futures (XIDN2, Jul22). Recent weeks saw several new RBI initiatives to attract foreign inflows alongside a further slide in oil. Despite this, USD/INR has continued to hit new highs. Open interest on SGX INR/USD futures continues to drop from the April high of almost $4bn as the RBI’s changing intervention strategy has left uncertainty over commitment to contain rupee weakness.
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RBI measures to liberalise FX flows does not change our short INR view. Announced measures include attracting greater FX financing through increasing the external borrowing limit for companies while also attracting greater rupee inflows. Rule changes for inflows included 1) widening the eligibility of IGBs under the fully accessible route (adding 7- and 14-year securities to the existing 5-, 10-, and 30-year ones); 2) temporarily allowing foreign investment into corporate money market instruments; and 3) lifting the short-term limit on government and corporate bond investment to allow foreign investment where residual maturity is less than a year.

Alongside the subsequent announcement to allow international trade to settle in INR, these measures are rupee positive. But they will take time to have an effect and even then will not necessarily trigger any meaningful turnaround in portfolio flows. Equity not debt flows have been the far bigger driver of portfolio outflows. And even on debt, India has seen an unprecedented five consecutive months of outflows. 

In the context of broad dollar strength and structural IIP weakness – India’s net debtor position is at odds with the world’s other large holders of reserves who are significant net creditors – the RBI now seems more comfortable with a weaker currency. Two consecutive months of disinflation and comments from Governor Das indicating a possible downward revision to CPI forecasts also leave the rates outlook not particularly INR supportive. RBI hikes will continue, but this will likely be slow and steady despite the RBI being one of the last to start its tightening cycle.

We initiated a short SGX INR/USD futures position in out last report (XIDN2, Jul22). This position is working, and we see further gains ahead.

 

Spotlight View #3: Holding Onto Short KRW    

We retain our short SGX KRW/USD futures position (XUWN2, Jul22), which is working well. The trend in Korea’s trade balance has been surprisingly negative this year. Dollar selling intervention and other measures to support the won will only go so far, while Korea still runs a wide negative real rate despite a 50bp hike this week.

Weak Trade Balance

The last fortnight provided more evidence in favour of our short KRW view. For the fourth time this year, Korea’s monthly trade balance printed negative with the June deficit at $2.47bn. Korea has not recorded monthly trade deficits of this size since the oil price spike of 2007-2008 leaving a fairly a unique C/A picture for Korean won.

Intervention Smoothens, Does Not Halt Depreciation

With USD/KRW rising above 1,300, BOK and the government are using various methods to stem the pair from rising even higher. Not only is there the official intervention from BOK where they sell their spot dollars. It was also reported last week that the National Pension Service (NPS) was entering into a currency-hedging program that could eventually amount to the selling of more than $10bn USD/KRW if fully executed. In addition, sources at the Ministry of Economy and Finance have mentioned that plans to add Korean government bonds into a leading global bond index (i.e., the so-called ‘WGBI’) are at an advanced stage. Being part of this index would lead to approximately $40bn of inflows into the local market over 12 to 18 months, starting in 2H22. That said, the sum of all this intervention is unlikely to stop let alone reverse the weakening direction of the won, but rather slow the pace.
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BOK Rate Hikes Helpful, But Not a Game Changer

This week’s 50bps rate hike brings the policy rate to  2.25% and leaves a slightly higher carry for KRW. While more rate hikes are ahead inflation at 6%  leaves Korean won with a negative rate gap of 375bp, and hence KRW support from higher interest rates should be fairly limited in our view (Chart 6).

 

Rest of Asia FX 
 

TWD – Flip to Long SGX TWD/USD Futures  

We flip to a long SGX TWD/USD (XTDN2, Jul22) futures position. Taiwan’s recent support for the stock market should improve short-term currency dynamics and see TWD recover from what is currently its weakest level in two years.   

$35bn in equity outflows YTD (around 8% of GDP) and a stock market down more than 20% since January finally prompted Taiwan’s National Financial Stabilization Fund to intervene. This was the first time since the height of the pandemic that the stabilization fund has been used and the eighth since the fund was established in 2000. Past intervention in the stock market has succeeded in putting a floor under equity declines. And while the support for equities is very different to any intervention to smooth TWD moves, a recovery in Taiex should nevertheless support TWD (Chart 7).

TWD outperformance versus KRW or INR is also justified by the better C/A position. Like South Korea, Taiwan is facing weaker exports and a shrinking C/A surplus. But the starting point is different given Taiwan’s 15% of GDP surplus last year versus 4.9% for South Korea. And with reduced equity outflows with this week’s announced intervention, the overall BoP position is supportive.

We flip our earlier short SGX TWD/USD position to go long (XTDN2 Jul22). The global backdrop is challenging. But for now, TWD is better placed than others in Asia to withstand the stress.
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SGD – Neutral SGX USD/SGD Futures, Bullish S$NEER on Inflation Concerns

We remain neutral SGX USD/SGD futures. The pair has traded higher on broad dollar strength – current levels are the highest in two years. But we remain bullish S$NEER with inflation rather than growth concerns dominating.  

Risk aversion, heightened concerns over a US recession and a sharp drop in oil prompted a brief pullback in S$NEER. Versus the 1.7-1.8% above the basket’s midpoint through the second half of June, S$NEER dropped back to just 1.2% in early July. But with the latest bout of USD strength concentrated against the EUR on a basket basis, SGD has fared better. MAS’s own NEER (published with a lag) is now 3.25% stronger YTD, while our proxy through mid-July is trading back around 1.6% above the midpoint and up 2.9% YTD.

The US economy is undoubtedly slowing with the pandemic-related stimulus being rolled back and a strong dollar not helping. Rate hikes, equity declines, and decade highs on inflation (June CPI at 9.1% YoY is the highest since November 1981) are also impacting households. But with these factors expected to ease later in the year, growth should pick up again.

And with China’s vast fiscal stimulus and enough momentum in global growth, we expect Singapore’s trade- and service-driven economy to remain on track. Retail sales momentum is accelerating, the labour market remains tight, and visitor numbers are rising, with departures from Changi up 84.1% YTD. Further, unscheduled policy tightening from MAS remains our base case with another step up in S$NEER appreciation.

With USD/SGD at 1.40 the highest in more than two years on broad dollar strength, we remain neutral on any outright futures position. But we remain bullish S$NEER with SGD continuing to strengthen versus EUR and JPY.
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<html><body>(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.)</body></html>



By Macro Hive

SGX Asia Currencies Insights


We go tactically short SGX USD/CNH futures (XUCN2, Jul22) as a widening current account surplus and more balanced portfolio flows are conducive to near-term CNH appreciation.
	Stay short SGX INR/USD futures (XIDN2, Jul22) as the RBI pivots to liberalising FX flows to support the currency.
	We stay short SGX KRW/USD futures (XUWN2, Jul22). The trade balance keeps widening, while intervention efforts are merely smoothing won weakening.
	Flip to long SGX TWD/USD futures (XTDN2, Jul22) on intervention to support the Taiex.  
	Dollar strength has pushed USD/SGD higher, and we remain neutral on SGX USD/SGD futures.  

 

Asia FX – Recession Risks Add to FX Vulnerabilities 

Increased talk of a US and a global recession keeps us bearish overall on Asian currencies. We express this via our short INR and short KRW trades. We have held these trades for the past month, and both have moved in the right direction.

We also spot tactical opportunities to be long TWD and CNH. In Taiwan, this is because the government will implement a support program for the equity market, which in turn shows a correlation with TWD. In China, because the recent trade data have strengthened significantly.

 

Spotlight View #1: Tactical Opportunity to Go Long CNH   

We open a new trade where we go tactically short SGX USD/CNH futures (short XUCN2, Jul22). The Chinese economy continues to improve gradually, and the underlying flow dynamic in trade and investment increasingly favours the currency. Among global EMFX, the USD trades very strongly. But on a short-term basis of a few weeks, we see CNY outperformance versus the dollar.



      
    
    20220713_1E


China’s Trade Balance Sets a Record

We see improvements in both the C/A and portfolio flows. On the trade side, take as an example this week’s trade balance. At $97bn, it was much stronger than expected ($76bn), courtesy of exports rising by almost 20% YoY, while imports were broadly flat. Domestic consumer demand remains lacklustre even if the most severe lockdowns of the zero-Covid policy have ended. Meanwhile, factories are up and running, filling export orders with hardly any impediments. The lower oil price of the last few weeks also helped keep imports contained.

Portfolio Flows Are Balancing Out

Meanwhile, portfolio flows in June were more balanced than in earlier months. Previous months had seen outflows out of both bonds and equities. Last month, we saw quite large net inflows into equities (+$5bn) and a limited amount of bond outflows (-$5bn estimated). While there are some geopolitical reasons for bond investors to keep reducing in China, our sense is that they have already moved from overweight CGBs to neutral. This should perhaps not end future outflows but limit them in size, as we saw in June. Equity flows will ebb and flow with the economy, which is currently seeing a gradual rise.

Economy Gradually Improving Despite Zero-Covid

Besides the improving flow picture for CNH, the broader economy is slowly improving. The main driver of activity following the severe lockdowns that we saw in Shanghai and other cities was the so-called ‘government put’ at work. Roughly speaking, 2-3% of GDP of fiscal and other support was, or is about to be, given to the economy since April. This breaks down as 1-1.5% of micro measures, such as subsidies and tax breaks, and 1-1.5% of a broad infrastructure spending plan. PMI data have already returned above 50, whereas actual activity indicators such as retail sales and IP are improving more slowly.

In summary, we like the current level of 6.72 as an opportunity to go short USD/CNH SGX futures (short XUCN2, Jul22), with a target of a tactical drop towards 6.65.

 

Spotlight View #2: Still Short INR With New Lows Ahead  

We remain short SGX INR/USD futures (XIDN2, Jul22). Recent weeks saw several new RBI initiatives to attract foreign inflows alongside a further slide in oil. Despite this, USD/INR has continued to hit new highs. Open interest on SGX INR/USD futures continues to drop from the April high of almost $4bn as the RBI’s changing intervention strategy has left uncertainty over commitment to contain rupee weakness.



      
    
    20220713_2E


RBI measures to liberalise FX flows does not change our short INR view. Announced measures include attracting greater FX financing through increasing the external borrowing limit for companies while also attracting greater rupee inflows. Rule changes for inflows included 1) widening the eligibility of IGBs under the fully accessible route (adding 7- and 14-year securities to the existing 5-, 10-, and 30-year ones); 2) temporarily allowing foreign investment into corporate money market instruments; and 3) lifting the short-term limit on government and corporate bond investment to allow foreign investment where residual maturity is less than a year.

Alongside the subsequent announcement to allow international trade to settle in INR, these measures are rupee positive. But they will take time to have an effect and even then will not necessarily trigger any meaningful turnaround in portfolio flows. Equity not debt flows have been the far bigger driver of portfolio outflows. And even on debt, India has seen an unprecedented five consecutive months of outflows. 

In the context of broad dollar strength and structural IIP weakness – India’s net debtor position is at odds with the world’s other large holders of reserves who are significant net creditors – the RBI now seems more comfortable with a weaker currency. Two consecutive months of disinflation and comments from Governor Das indicating a possible downward revision to CPI forecasts also leave the rates outlook not particularly INR supportive. RBI hikes will continue, but this will likely be slow and steady despite the RBI being one of the last to start its tightening cycle.

We initiated a short SGX INR/USD futures position in out last report (XIDN2, Jul22). This position is working, and we see further gains ahead.

 

Spotlight View #3: Holding Onto Short KRW    

We retain our short SGX KRW/USD futures position (XUWN2, Jul22), which is working well. The trend in Korea’s trade balance has been surprisingly negative this year. Dollar selling intervention and other measures to support the won will only go so far, while Korea still runs a wide negative real rate despite a 50bp hike this week.

Weak Trade Balance

The last fortnight provided more evidence in favour of our short KRW view. For the fourth time this year, Korea’s monthly trade balance printed negative with the June deficit at $2.47bn. Korea has not recorded monthly trade deficits of this size since the oil price spike of 2007-2008 leaving a fairly a unique C/A picture for Korean won.

Intervention Smoothens, Does Not Halt Depreciation

With USD/KRW rising above 1,300, BOK and the government are using various methods to stem the pair from rising even higher. Not only is there the official intervention from BOK where they sell their spot dollars. It was also reported last week that the National Pension Service (NPS) was entering into a currency-hedging program that could eventually amount to the selling of more than $10bn USD/KRW if fully executed. In addition, sources at the Ministry of Economy and Finance have mentioned that plans to add Korean government bonds into a leading global bond index (i.e., the so-called ‘WGBI’) are at an advanced stage. Being part of this index would lead to approximately $40bn of inflows into the local market over 12 to 18 months, starting in 2H22. That said, the sum of all this intervention is unlikely to stop let alone reverse the weakening direction of the won, but rather slow the pace.



      
    
    20220713_3E


BOK Rate Hikes Helpful, But Not a Game Changer

This week’s 50bps rate hike brings the policy rate to  2.25% and leaves a slightly higher carry for KRW. While more rate hikes are ahead inflation at 6%  leaves Korean won with a negative rate gap of 375bp, and hence KRW support from higher interest rates should be fairly limited in our view (Chart 6).

 

Rest of Asia FX 
 

TWD – Flip to Long SGX TWD/USD Futures  

We flip to a long SGX TWD/USD (XTDN2, Jul22) futures position. Taiwan’s recent support for the stock market should improve short-term currency dynamics and see TWD recover from what is currently its weakest level in two years.   

$35bn in equity outflows YTD (around 8% of GDP) and a stock market down more than 20% since January finally prompted Taiwan’s National Financial Stabilization Fund to intervene. This was the first time since the height of the pandemic that the stabilization fund has been used and the eighth since the fund was established in 2000. Past intervention in the stock market has succeeded in putting a floor under equity declines. And while the support for equities is very different to any intervention to smooth TWD moves, a recovery in Taiex should nevertheless support TWD (Chart 7).

TWD outperformance versus KRW or INR is also justified by the better C/A position. Like South Korea, Taiwan is facing weaker exports and a shrinking C/A surplus. But the starting point is different given Taiwan’s 15% of GDP surplus last year versus 4.9% for South Korea. And with reduced equity outflows with this week’s announced intervention, the overall BoP position is supportive.

We flip our earlier short SGX TWD/USD position to go long (XTDN2 Jul22). The global backdrop is challenging. But for now, TWD is better placed than others in Asia to withstand the stress.



      
    
    20220713_4E


SGD – Neutral SGX USD/SGD Futures, Bullish S$NEER on Inflation Concerns

We remain neutral SGX USD/SGD futures. The pair has traded higher on broad dollar strength – current levels are the highest in two years. But we remain bullish S$NEER with inflation rather than growth concerns dominating.  

Risk aversion, heightened concerns over a US recession and a sharp drop in oil prompted a brief pullback in S$NEER. Versus the 1.7-1.8% above the basket’s midpoint through the second half of June, S$NEER dropped back to just 1.2% in early July. But with the latest bout of USD strength concentrated against the EUR on a basket basis, SGD has fared better. MAS’s own NEER (published with a lag) is now 3.25% stronger YTD, while our proxy through mid-July is trading back around 1.6% above the midpoint and up 2.9% YTD.

The US economy is undoubtedly slowing with the pandemic-related stimulus being rolled back and a strong dollar not helping. Rate hikes, equity declines, and decade highs on inflation (June CPI at 9.1% YoY is the highest since November 1981) are also impacting households. But with these factors expected to ease later in the year, growth should pick up again.

And with China’s vast fiscal stimulus and enough momentum in global growth, we expect Singapore’s trade- and service-driven economy to remain on track. Retail sales momentum is accelerating, the labour market remains tight, and visitor numbers are rising, with departures from Changi up 84.1% YTD. Further, unscheduled policy tightening from MAS remains our base case with another step up in S$NEER appreciation.

With USD/SGD at 1.40 the highest in more than two years on broad dollar strength, we remain neutral on any outright futures position. But we remain bullish S$NEER with SGD continuing to strengthen versus EUR and JPY.



      
    
    20220713_5E

(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.)


Keppel Corp

SGX Asia Currencies Insights