Currency Forecast & Interest Rate Trends · highlight. The insurgence in Syria and Iraq remains a real threat which has now led to the US & its allies’ expanded military action

QUARTERLY GLOBAL OUTLOOKCurrency Forecast & Interest Rate Trends

4Q 2014Global Economics & Markets Research

Information as of 25 September 2014

02 QUARTERLY GLOBAL OUTLOOK 4Q2014UOB Global Economics & Markets Research

CONTENTS

FX & INTEREST RATE OUTLOOK09

EXECUTIVE SUMMARY03

ASEAN: AEC AND CHINA THE KEY DRIVERS IN TRADE AND INVESTMENT INTO THE NEXT DECADES10

INDONESIA26

THAILAND29

MALAYSIA27

INDIA30

JAPAN32

CHINA31

EUROZONE34

SOUTH KOREA33

NEW ZEALAND36

AUSTRALIA35

UNITED KINGDOM37

UNITED STATES OF AMERICA38

FX TECHNICALS39

US FEDERAL RESERVE IN FOCUS: WHO MATTERS IN THE FOMC?18

CHINA FOCUS: THE SHANGHAI-HK THROUGH TRAIN–PUSHING AHEAD MARKET REFORMS15

MALAYSIA FOCUS: THE IMPACT OF GST21

SINGAPORE28

03QUARTERLY GLOBAL OUTLOOK 4Q2014UOB Global Economics & Markets Research

EXECUTIVE SUMMARY

In 3Q-2014, our theme of monetary policy divergence among the major central banks played out very well. Growth for the US economy rebounded strongly in 2Q and is likely to be sustained into 2H (notwithstanding some re-cent ups & downs in housing & other data) while Japan’s 2Q contracted 7.1% even more than during the March 2011 Great Tsunami disaster while the malaise in consumer weakness could persist into 3Q and send Japan into a tem-porary technical recession. Meanwhile, growth in the euro-zone languished at the sub-1% rates and latest September PMI surveys even suggest that the already weak recovery could be faltering.

In the meantime, the threat of inflation has remained large-ly subdued and further moderated by falling commodity prices especially oil while wage growth in some economies have returned but remains below the pre-recession incre-ment pace. Japan continues to labor itself towards its 2% inflation target while the inflation environment remains very benign for the US. The eurozone continues to find it-self under the threat of falling into deflation. Fiscal policy is restraining US economic growth, although the extent of restraint is diminishing while the fiscal stimulus lever is un-fortunately not available to Japan and the eurozone.

These different circumstances facing the US as opposed to Japan and the Euro-zone consequently put their respective central bank’s monetary policy stuck in different directions. The US Fed Reserve is on course to fully end its quantita-tive easing program in its Oct 2014 FOMC and the intense attention will now be on the confirmation of the Fed rate normalization timeline. After having refrained from add-ing more monetary stimulus since April 2013, we think the Bank of Japan (BOJ) could act again in late October MPM in response to worsening indicators that threatens Japan into a technical recession and put the October 2015 sales tax hike at risk. The European Central Bank (ECB) is the only major central bank to ease monetary policy in a big way this year, but we do not think the ECB will do more for the rest of 2014 and instead we believe the ECB will adopt a wait-and-see approach in 4Q. That said, if we see a signifi-cant worsening of growth and inflation indicators in Eu-rope that may justify ECB for outright QE including buying government bonds.

As a result of the divergence of monetary policies, an over-arching theme we have for the next 6-12 months is the broad strengthening of the US dollar in the anticipation of

the commencement of the Fed Reserve’s rate normaliza-tion process. So far in 3Q, we saw it more clearly on the major currencies (especially EUR, JPY, AUD and NZD) but to a lesser extent on the Asian currencies with and the CNY, THB and VND being distinct exceptions as shown in the chart below. While the major currencies are expected to continue their weakening trend in the next few months, we may also see some of the Asian currencies “play catch-up” and pick up the pace of depreciation against the dollar.

That said, there will always be surprises that could derail our best thought-out plans. In 3Q, we had the worsening of the Ukraine-Russia conflict, the rise of the Islamic State in Iraq and Syria (ISIS) militants into rogue state, the most significant outbreak of Ebola to date, and the Scottish In-dependence referendum that turned from a non-event to a cliffhanger that had the markets worried about a break-up of UK. Fortunately, none has proven to be fatal for now.

While the Scottish issue is now behind us, there are still risk events that are not our base case scenarios but we should highlight. The insurgence in Syria and Iraq remains a real threat which has now led to the US & its allies’ expanded military action against ISIS. Will this worsen? Similarly, is the peace able to hold in Ukraine in 4Q? The Ebola outbreak re-mains unresolved and the US Centers for Disease Control and Prevention (CDC) estimates 1.4 million cases in Liberia and Sierra by end-Jan 2014 if nothing is done to effectively control it. Will it spread beyond Africa? In the US, we have

CONTINUING OUR DIVERGENCE THEME BUT BE AWARE OF EVENTS RISKS

Spot Returns Of Majors And Asian CurrenciesAgainst The US Dollar (30 Jun 2014 to 22 Sep 2014)

-7.27-6.90

-6.16-5.94

-5.65-4.36

-2.78-2.18

-1.85-1.09-1.05-1.04-0.84-0.01

0.540.561.02

-8.00 -6.00 -4.00 -2.00 0.00 2.00

NZDJPY

EURAUDCHFGBPKRWPHPSGDTWDMYR

INRIDR

HKDVNDTHBCNY

Source: Bloomberg


EXECUTIVE SUMMARY

the 4 November mid-term elections which could sow the seeds for another US political showdown in 2015 for the markets to relive the US government debt ceiling negotia-tions & the fiscal cliff drama that threatens the world with a US default. And in emerging markets, will the crystalliza-tion of the Fed rate hike timeline elicit an unexpected and exaggerated reaction in the currency markets and a tidal wave of capital outflows leading to balance of payments crisis in vulnerable economies? Or it may just turn out to be a clam and peaceful quarter as we head towards Christmas in 2014.

ASEAN IN FOCUS: AEC & China - The Key Drivers In Trade And Investment Into The Next DecadesThe rise of China, coupled with the establishment AEC from 2015, is expected to provide new catalysts for growth in ASEAN, which we expect to be larger than that of the UK by 2020 and that of Japan by 2025.

Domestic factors such as population growth and the rise in the middle income class in ASEAN will pave the way for AEC’s promise of an integrated production platform and market size, and to leverage on a region that is already out-ward oriented in its trade and investment.

The shift in domestic conditions in China is propelling fur-ther outward orientation, which will result in closer inte-gration and relations with ASEAN through the trade and investment channels.

CHINA IN FOCUS: The Shanghai-HK Through Train–Pushing Ahead Market ReformsThe Shanghai-Hong Kong Stock Connect is slated to begin in October to allow investors to purchase Shanghai-listed stocks, thus opening up a new investment channel to de-ploy offshore RMB.

This latest initiative reflects China’s determination in mar-ket reforms and towards the opening of the capital ac-count, and the speed of which is astonishing given that an equivalent program, QFII, has existed more than a decade.

The excitement at the official launch is likely to squeeze the RMB liquidity but we do not expect persistent disrup-tion given the availability of offshore RMB. Nevertheless it is advisable to stay long on RMB going into the launch.

MALAYSIA IN FOCUS: The Impact Of GSTIt took 10 years from when the Goods and Services Tax (GST) was first mooted in Malaysia to its implementation on April 1, 2015. The move was announced at Budget 2014 to replace the existing Sales and Services tax as the gov-ernment was under pressure to rein in its persistent fiscal

deficits which it has been running since the Asian Financial Crisis.

The GST is one of the key strategies to help Malaysia achieve its target of a balanced budget by 2020. In the upcoming Budget 2015, the government is expected to follow up with more fiscal consolidation measures, in par-ticular, to reform its fuel subsidy scheme.

With the GST, we expect headline inflation rate to rise to 4.0% in 2015 from our estimate of 3.0 this year. As the im-pact is not expected to be sustained, we do not think Bank Negara Malaysia (BNM) will tighten monetary policy based on the GST consideration alone. The central bank has high-lighted the accumulation of economic and financial imbal-ances in recent meetings that led to the 25 bps Overnight Policy Rate (OPR) hike in July. As growth is likely to slow in 2015, there is little basis to raise the OPR beyond its pre-Lehman level.

In addition to the announced cuts in personal and cor-porate income tax rates, offsetting packages will help to reduce the short-term impact of the GST on private con-sumption and business costs. Higher domestic interest rate is also a headwind to growth. Overall, the impact of GST implementation on economic outlook in 2015 will be further mitigated by some frontloading in expenditure in the first quarter as well as a firm labour market.

US FED RESERVE IN FOCUS:Who Matters In The FOMC?Sensing the Fed is finally on the cusp of normalizing policy interest rate, there will be a sharper intensity in market’s Fed watching, not just about the FOMC decisions and the minutes, and also Fed officials’ commentary.

A recent St. Louis Fed report highlighted that between 2008 and 2014, the Fed Reserve bank presidents account-ed for all of the dissents since 2008 which is unusual ac-cording to the authors. In prior years, both Fed Presidents and Fed Board Governors dissented.

In 2014 FOMC decisions so far, Charles Plosser and Rich-ard Fishers are the key dissenters. And we believe that they may be joined by Loretta Mester in the dissent camp for the remaining FOMC decisions in 2014. But their dissent is unlikely to have a large effect on policy, as Fed Chair Janet Yellen will still be able to press ahead with majority sup-port rather than seeking unanimity (7-3 votes in the base case scenario).

In 2015 FOMC, Richard Fisher, Narayana Kocherlakota, Lo-retta Mester, and Charles Plosser will rotate out of their


EXECUTIVE SUMMARY

voting positions, and the incoming voters are Chicago Fed President Charles Evans (Dove), Richmond Fed Presi-dent Jeffrey Lacker (Hawk), Atlanta Fed President, Den-nis Lockhart (Centrist – tentative dovish bias), and San Francisco Fed President, John Williams (Dove) which we should pay more attention to. So it seems there will be more doves replacing the departing hawks (Fisher and Plosser) for now, which in our view benefits Yellen’s dovish approach.

The rest of the important 2015 FOMC voters are the 5 Fed Board Governors and the New York Fed President, Wil-liam Dudley. It is unlikely for US President Obama to fill the 2 vacant Governor seats next year, so the number of FOMC voters is expected to remain at 10 in 2015.

Global FXEUR/USD: The EUR/USD has not seen much of a rebound since it punched through the key 1.300 psychological level. Even without the latest move by the ECB, we have had compelling reasons to believe that the EUR/USD will move lower. On the domestic front, there have been clear setbacks to Eurozone growth prospects. Domestic politics and geopolitical uncertainties will also add to the pressure. More importantly, the notion that Fed policy “normaliza-tion” is on track to see policy interest rates begin to rise by the middle of 2015, and continue to move gradually higher from there is consistent with an overall broadly firmer dol-lar tone. But the ECB’s move in September clearly widens the perceived gap between US monetary policy and Eu-rozone monetary policy. This should see the EUR/USD re-main under renewed pressure, we see a year-end target of around 1.2600.

GBP/USD: The GBP/USD has turned back higher due to the removal of political risk, and this relief could dominate for the time-being. We do not, however, see much gains from here as the shine on the GBP/USD has already begun to come off even before intensified political concerns came into play. We think that the currency will probably need greater BoE dissent first to move higher. In that regard, two dissenters do not necessarily mean that chances for a rate hike have increased, and recent history suggests it is not a given. The broader USD theme, in our view, should con-tinue to be in play and this reinforces our view of a lower GBP/USD ahead.

AUD/USD: The AUD/USD has weakened sharply since early-September, amplified by the strength of the USD on firming Fed policy tightening, versus the Australian cen-tral bank that is not tightening policy anytime soon. This should continue to be a catalyst that will see further cor-rection in the AUD/USD going forward. Chinese data will

be another important catalyst for the Australian dollar. Indeed, bearish Chinese data has added to worries about a 40% slide in iron ore prices this year and further soured the outlook for commodity-led currencies. Going forward, chief among these potential risk factors will be the extent to which a softening property market in China is coincid-ing with a weakening credit cycle. We look for a lower AUD/USD from here, with an end-year target of around 0.8700.

NZD/USD: The NZD/UZD has fallen sharply over the past quarter on a pause in rate rises by the RBNZ. In fact, weaker dairy prices and underperforming New Zealand price-growth data suggest that the New Zealand central bank may be relatively slow to resume interest rate hikes. This, alongside the prospect of a sooner-than-expected start to Fed tightening, is likely to add pressure on the NZD in the coming months. However, if the currency falls at a faster pace or to a much lower level than the RBNZ expects, then the central bank would need to tighten policy so as to keep imported inflation at bay. The RBNZ thus faces a careful balancing act going from here. On balance though, we look for a lower NZD/USD as we head towards the end of 2014.

USD/JPY: We still expect the USD/JPY to breach 110 by year-end on the back of the expected late-2014 additional monetary stimulus. We already saw the USD/JPY breach 109 before the end of 3Q and the 110 could be breached in late Sep/early Oct. The eventual delivery of more QQE in late 2014 and the possible crystallization of the Fed Reserve rate lift-off timeline during the same period may even see the USD/JPY hitting 115 although BOJ may not tolerate weakness significantly beyond 110 in the near term and could intervene.

Asian FXUSD/CNY: The sharp and unexpected depreciation seen in March/April this year, coupled with the widening of the trading bands, suggests that the one-way appreciation of the RMB will be a thing of the past. A one-way track for the RMB will also impede the efforts of the ongoing inter-nationalization of the currency, which has seen its pace pick up significantly since early 2014 and going forward, not only will the RMB become less predictable, the wider trading bands also could see more volatile RMB trading ahead, and possibility of bouts of depreciation, in response to market dynamics and fundamentals. With our target of 6.15/USD now met, we are adjusting our end-2014 forecast to 6.10/USD, which would still represent a full year depre-ciation of 0.8% for the full year, the first such occurrence since 2009. Further ahead, we see RMB having limited appreciation towards 6.00-6.05/USD at end-2015, given the lackluster economic performance as well as potential


EXECUTIVE SUMMARY

headwinds from the US Fed’s rate hikes.

USD/SGD: Although 2014 GDP may come in slightly lower than last year, it would not be at a critical level for the central bank to adopt any form of monetary loosening. Rather, the tight labour market coupled with higher core inflationary expectations will see the MAS maintaining their current policy stance of a “modest and gradual” SGD NEER appreciation. That said, the completion of QE taper-ing (expected in October FOMC) will likely see market an-ticipating Fed’s move to start the rates normalization cycle, adding upside pressure for the USD. As such, we maintain our target for the USD/SGD to reach 1.29 by end 2014.

USD/IDR: During the third quarter, USD/IDR rose towards 12,000 from its low of 11,508 in July with some profit-tak-ing on the IDR after the elections. USD strength is likely to continue into 4Q14 as investors eye the termination of the Fed QE in October and an eventual rate hike in the US next year. The finalisation of the fuel subsidy cut plan is likely to be positive for the IDR in the medium-term, but in the short-term, there could be some upward pressure on USD/IDR as a result of the surge in inflation. Having said that, we expect monetary policy to be tightened to counter the en-suing surge in the headline inflation rate if there is any ma-jor adjustment to the fuel prices. Our end-4Q14 target for USD/IDR is now at 12,200 and any deterioration in Indone-sia’s trade balances could pose upside risks to our forecast.

USD/KRW: KRW has fallen sharply from its 6-year high of 1,008.45/USD at the start of July as the government signaled support for lower interest rates. A sharper correc-tion in JPY has brought JPY/KRW to its lowest since August 2008, which will likely keep the BoK’s tone on a dovish bias in the short-term. Nonetheless, some improvement in South Korea’s economic outlook and a strong current ac-count position will mitigate pressure arising from expecta-tion of Fed rate normalisation. This could support the KRW as we move into the fourth quarter. Our end-4Q14 target for USD/KRW is now at 1,040.

USD/MYR: Strong economic growth and higher interest rates lifted the MYR in the earlier part of 3Q14 but the cur-rency has since depreciated by more than 3% from its clos-ing high this year of 3.1410/USD. As we approach the ter-mination of the Fed QE expected in October, there will be upside risks to USD/MYR, particularly as Malaysia’s growth rate is expected to moderate in the second half of the year. We expect USD/MYR to end the year at around 3.27. If BNM chooses to hike its OPR in November, that may provide a temporary respite to the MYR.

USD/THB: The significant improvement in the THB since

June this year (after the May military coup) had narrowed the loss of the THB against the USD from 6.2% at one time since the political crisis started last Oct to the 3.6% today. With the completion of the QE in the US in October this year and the expected interest rate normalization in the US in 2Q 2015, we expect downward pressure on the THB go-ing forward. We expect the THB to move weaker against the USD towards 33.50/USD by end 2014 from around the 32.21 level currently.

USD/INR: With upside risks to inflation, we believe that the RBI will continue the current policy rate well into the first half of 2015. Risks to a lower INR will now come from our view of the broad USD strength that stems from the completion of the US QE tapering and subsequent interest rate normalization. With that, the INR will probably con-tinue on a slight depreciating path, where it could move towards 62.40/USD by end of 2014, and toward 64.0 by 1Q 2015

Global Interest RatesFed Reserve: The September 2014 FOMC saw the Fed continue to trim the Fed’s monthly QE further by another US$10bn to US$15bn and announce an updated exit strat-egy plan while making minimal changes to the text of the FOMC statement. The concern about “overwhelming” mar-kets with too many changes at once in one FOMC could be the reason for the Fed to defer changing the language of the FOMC statement significantly in September, and instead leave those changes for preparing the markets for rates lift-off to a later date (either in 28-29 Oct 2014 or 16-17 Dec 2014 FOMC). We reiterate our view the QE to be fully terminated by the 28-29 Oct 2014 FOMC with US$15bn cut as last step. We still expect the rate normal-ization to take place in 2015 (possibly starting in 16-17 Jun 2015 FOMC), bringing the FFTR to 1.25% by end-2015, and 3.25% by end-2016.

ECB: The ECB unexpectedly lowered all interest rate tar-gets to fresh record lows in September and took its rate on bank deposits further into negative territory. It also an-nounced that it will start to buy asset-backed securities (ABS) in October. Whilst we won’t be getting any details till then, the purchases will now include residential mortgage-backed securities (RMBS). Draghi has long insisted the cen-tral bank would continue to take what it feels is appropri-ate action to get the Eurozone economy on track. Whether the latest policy announcements qualify as Quantitative Easing (QE) is an open question. In a nutshell, we think that what Draghi suggests QE is, is exactly what the ECB is en-gaging in. Yet “credit easing” as he put it, is the primary aim of these measures. More importantly, in announcing the measures, it has not only committed to the use of further


EXECUTIVE SUMMARY

unconventional monetary policy, but has also positioned itself for full-scale QE.

BOE: The key issue is whether both Martin Weale and Ian McCafferty will quickly gain the support of a majority in the subsequent MPC meetings. Overall, it seems that the remaining seven, including the Governor Mark Carney, agrees that the failure of wages to rise above the rate of in-flation meant there was little domestic pressure on prices over the next couple of years. This should serve to buy the MPC some more time. Besides, a premature tightening in monetary conditions could leave the economy vulnerable to unexpected shocks. We are thus keeping to our view that the BoE will hold fire on rates until early next year.

RBA: The RBA kept the cash rate steady at a record low of 2.50% in September, where it has been unchanged at its current low level for more than a year now. The central bank repeated its stance held since the beginning of the year that “the most prudent course is likely to be a period of stability in interest rates”. On a whole, more timely indi-cators have suggested further improvement in economic conditions; and with very low interest rates supporting the booming housing market, the RBA has little incentive to cut its cash rate further. The high currency, on the other hand, is constraining Australia’s great rebalancing act, and thus interest rates are likely needed to stay low for longer to support the economy. This on balance reinforces our view that the RBA will keep rates on hold over the near-term.

RBNZ: The RBNZ left the OCR unchanged at 3.50% in September, a widely expected move after the central bank announced a “pause” in its programme of rate hikes dur-ing the July monetary policy review. New Zealand inflation accelerated less than expected and dairy prices slumped, easing pressure on the central bank to continue raising borrowing costs. Previously we saw room for another 25bps rate hike by year-end, although we highlighted that it was very much contingent on the Q3 CPI print due on 23 October. However, the September meeting and the ac-companying statement saw the RBNZ saying “it is prudent to undertake a period of monitoring and assessment be-fore considering further policy adjustment”. This would ef-fectively rule out further rate hikes for the rest of this year.

BOJ: The Bank of Japan (BOJ) Governor Kuroda has con-tinued to confound those who expect more easing as the BOJ refrained from any new quantitative and qualitative easing (QQE) measures and reiterated the similar policy stance since April 2013. We still expect additional easing down the road due to concerns that the malaise in con-sumer weakness could send Japan into a technical reces-

sion and put the October 2015 sales tax hike at risk. There will be 2 BOJ policy decisions in October and we think the 31 October 2014 MPM date is the most likely one for BOJ to ease monetary policy further as it is accompanied by an assessment of BOJ’s outlook for Japan. There remains a significant possibility for the BOJ to delay easing but the longer the BOJ delays, the more it will have to inject into the system later.

Asian Interest RatesPBoC: With growth momentum showing signs of decel-eration in recent months, there have been numerous calls for the monetary authorities to ease policy. Indeed, the central bank actually been reluctant to turn on the liquidity tap generously, given that it has to consider far more fac-tors than just keeping to the economic growth target, e.g. worries about property market, shadow banking sector, residual negative effects from the RMB4tn stimulus mea-sures. The new direction remains targeted in nature, i.e. selective cuts in loan-to-deposit ratios and reserve require-ment ratios (RRR) for preferred sectors. The closest to the large scale easing was in mid-Sep, when it was reported that the PBoC had injected RMB500bn into the Big 5 local banks via the SLF (Standing Lending Facility), with terms of 3 months. The SLF move was equivalent of a 50bps cut in RRR in the past, though the major difference is that SLF comes with a term limit. We expect to change to China’s policy rates for now. We look for the headline RRR for major banks to remain at 20%, and benchmark deposit and lend-ing rates unchanged at 3% and 6%, respectively.

MAS: We believe that the MAS will maintain their current policy stance of a “modest and gradual” SGD NEER appre-ciation in the upcoming monetary policy meeting in Octo-ber as the labour market remains tight and core inflation will be higher this year compared to last year. With the completion of QE tapering (expected in October FOMC), market will begin to anticipate Fed’s move to start the rates normalization cycle. With the SGD SIBOR trending positive-ly with the LIBOR, that would see the SIBOR moving on a higher trajectory as we go into 2015. That said, we expect the 3M SGD SIBOR to trade at the current 0.40% level by the end of 2014, while moving towards 0.53% by 1Q 2015.

BI: Bank Indonesia (BI) has been on hold so far into 2014 after its last interest rate hike in November 2013. Although inflation has halved to 4.0% y/y in August from a peak of 8.2% y/y in January this year and GDP growth in the first half of the year had surprised on the downside, the coun-try’s current account deficit was the dominant factor in the monetary policy. We foresee risks of further rate increases ahead. Other than the annual adjustment to fuel prices, BI will also have to contemplate the impact on capital flows


EXECUTIVE SUMMARY

as US starts its rate hike cycle. If the new government goes ahead with a fuel price hike in late October/November 2014, there could be pressure to hike interest rate even be-fore the end of the year.

BOK: In August, the BoK cut its benchmark base rate by 25 bps to 2.25%, the first cut since May 2013. The interest rate is now at its lowest since November 2010. We perceive the August cut as a one-off move to support the govern-ment’s stimulus, in particular, on the housing market. Clearly, the strong push by Finance Minister Choi Kyung Hwan to boost growth and the real estate market means that the BoK remains under pressure to cut its benchmark interest rate further if the macroeconomic outlook fails to improve. In our view, a further rate cut is not necessary. We expect economic growth to be on track for 3.7-3.8% this year, supported by recent measures. Instead, we are wary of the potential impact of lower interest rates and easier mortgage on encouraging further household debt which has hit 85.6% of GDP by end-2013.

BNM: Bank Negara Malaysia (BNM) was on hold in Sep-tember after having raised its benchmark Overnight Policy Rate (OPR) by 25 bps to 3.25% in July. The hike in July was the first since June 2011 as the central bank pointed to the prospect of risks arising from the accumulation of broader economic and financial imbalances. Economic growth has strengthened while we expect inflation to rise to 3.0% and 4.0% in 2014 and 2015 respectively, higher than the annual average of 2.5% between 2006-2013.

Despite keeping interest rate steady in September, BNM has remained slightly hawkish as it indicated that “further

adjustment to the degree of monetary accommodation” is still being considered. As inflation is expected to ease more sharply from September due to a high base effect, we are placing our bet on the next rate hike in 1Q15 as the central bank seeks to manage inflation expectation as well as con-tain the financial imbalances ahead of the GST implemen-tation. As GST impact on CPI is only transient, the central bank is unlikely to react aggressively to the ensuing infla-tion after the GST implementation.

BOT: On 17 September, the Bank of Thailand (BoT) kept their policy rate unchanged at 2.00% with unanimous votes and for the fourth straight meeting to support the economy as the newly appointed government stepped on the fiscal accelerator to increase spending and promote growth. We think that the BoT will maintain the current 2% rate until the end of this year and going into the 1H of 2015. This is because we expect the inflationary climate to remain stable, while economic growth will rebound from the low base seen this year.

RBI: The Reserve Bank of India (RBI) had left the bench-mark repurchase rate at 8% for a third straight meeting (Aug 5) while flagging upside risks to the RBI’s target of lowering inflation to 6% by January 2016, citing the gov-ernment’s price support for crops, deficient rainfall and oil prices amid global conflicts. While the RBI do not have an official target, governor Rajan said that he hopes to bring inflation down to 8% by the start of 2015. Year-to-date, in-flation in the first eight months of 2014 averaged 8.2% y/y and although this is near to the Rajan’s target, we believe that the RBI will keep the current 8% policy rate unchanged until a lower inflationary trend is in place.


FX OUTLOOK as of 25 Sep End 4Q14F End 1Q15F End 2Q15F End 3Q15F

USD/JPY 109.25 110.5 111.5 113.5 113.5

EUR/USD 1.2724 1.26 1.24 1.22 1.21

GBP/USD 1.6296 1.61 1.61 1.60 1.59

AUD/USD 0.8812 0.87 0.86 0.85 0.83

NZD/USD 0.7954 0.79 0.78 0.78 0.76

USD/SGD 1.2677 1.29 1.31 1.32 1.32

USD/MYR 3.2500 3.27 3.30 3.32 3.32

USD/IDR 11,975 12,200 12,000 12,100 11,900

USD/THB 32.27 33.5 34.1 33.7 33.5

USD/PHP 44.80 45.5 45.0 44.0 43.0

USD/INR 61.22 62.4 64.0 65.0 66.0

USD/TWD 30.30 30.5 30.7 30.7 30.8

USD/KRW 1042.60 1,040 1,040 1,050 1,040

USD/HKD 7.7530 7.75 7.75 7.75 7.75

USD/CNY 6.1355 6.10 6.08 6.06 6.05Source: Reuters, UOB Economic-Treasury Research

INTEREST RATE TRENDS as of 25 Sep End 4Q14F End 1Q15F End 2Q15F End 3Q15F

US (Fed Funds Rate) 0-0.25 0-0.25 0-0.25 0.50 1.00

EUR (Refinancing Rate) 0.05 0.05 0.05 0.05 0.05

GBP (Repo Rate) 0.50 0.50 0.50 0.75 1.00

AUD (Official Cash Rate) 2.50 2.50 2.50 2.75 3.00

NZD (OCR) 3.50 3.50 3.50 3.75 4.00

JPY (OCR) 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10

SGD (3-Mth SIBOR) 0.41 0.40 0.53 0.58 0.98

IDR (BI Rate) 7.50 7.50 8.00 8.25 8.25

MYR (Overnight Policy Rate) 3.25 3.25 3.50 3.50 3.50

THB (1-Day Repo) 2.00 2.00 2.00 2.00 2.25

PHP (Overnight Reverse Repo) 4.00 4.00 4.00 4.25 4.25

INR (Repo Rate) 8.00 8.00 8.00 8.00 8.00

TWD (Official Discount Rate) 1.88 1.88 1.88 1.88 1.88

KRW (Base Rate) 2.25 2.25 2.25 2.50 2.75

HKD (Base Rate) 0.50 0.50 0.50 1.00 1.50

CNY (1-Yr Working Capital) 6.00 6.00 6.00 6.00 6.00Source: Reuters, UOB Economic-Treasury Research

FX & INTEREST RATE OUTLOOK


� The rise of China, coupled with the establishment AEC from 2015, is expected to provide new catalysts for growth in ASEAN, which we expect to be larger than that of the UK by 2020 and that of Japan by 2025.

� Domestic factors such as population growth and the rise in the middle income class in ASEAN will pave the way for AEC’s promise of an integrated production platform and market size, and to leverage on a region that is al-ready outward oriented in its trade and investment.

� The shift in domestic conditions in China is propelling further outward orientation, which will result in closer integration and relations with ASEAN through the trade and investment channels.

AEC: A New Phase For ASEAN’s EconomyThe commencement of the ASEAN Economic Community (AEC) from end-2015 will usher in a new era of cooperation and business opportunities among the grouping’s ten mem-bers. The AEC will play a crystalizing role for the region as it aims to achieve objectives of a 1) single market and produc-tion base; 2) highly competitive economic region; 3) region of equitable economic development; and 4) region fully inte-grated into the global economy.

This integration project will bring to the table a unified eco-nomic platform with more than 600 million population, and nominal GDP value of US$2.4 trillion in 2013, which accounts for a 3.1% share of global GDP of US$75 trillion. If ASEAN were a country, it would be the world’s 7th largest economy, just ahead of Brazil, though lagging far behind the US (the world’s largest), and the second largest, China (see chart below).

However, it should be noted that the AEC itself is not a pana-cea the moment it is launched. Rather, the AEC is the begin-ning of a long process integrating and leveraging each oth-er’s strength, and guiding all the ten member states to move towards the objectives mentioned above. But at the same time, it is also clear to the member states that any other alter-natives would be sub-optimal to the AEC solution, as produc-tivity, competitiveness, market size, among others, will be key factors for member countries in an increasingly competitive environment with the rising economic powers like China and India, and other emerging economies which are also vying for a piece of the trade and investment pie.

ASEAN’s Economic Size To Exceed Japan By 2025Added with the dynamism and scale of an integrated region, our projections show that even by growing annually at just about 2/3 of the pace that it was used to during the period of 2001-2013, the size of the 10-member ASEAN’s economy could exceed US$4 trillion by 2020 (roughly the size of Ger-many in 2013), and would be nearly four times larger by 2030, at US$9 trillion (size of China’s economy in 2013).

This means that along the way after 2020, ASEAN’s economy would be larger than that of the UK, and would overtake that of Japan by 2025, going by our calculations. This would make ASEAN as one of the world’s fastest growing consumer mar-kets as more enter the middle class status.

By 2030, we anticipate China’s economy would have ex-panded to US$28 trillion, just shy of the US economy’s size of US$29 trillion, but would have exceeded Eurozone’s eco-nomic size of about US$20 trillion (see chart below) by then.

We believe that these projections for ASEAN are achievable, going by recent developments in ASEAN, including the open-

ASEANAEC And China The Key Drivers In Trade And Investment Into The Next Decades

Nominal GDP, 2013

16.8

12.7

9.2

4.9

3.6

2.7

2.5

2.4

2.2

2.1

0.0 10.0 20.0

US

Eurozone

China

Japan

Germany

France

UK

ASEAN

Brazil

Russia

Source: World Bank; UOB Global Economics & Markets Research Est

US$ trillions

Nominal GDP Projections

US

China

Eurozone

Japan

UK

ASEAN

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2001 2005 2009 2013 2017 2021 2025 2029

Source: IMF & World Bank data; UOB Global Economics & Markets Research Est

US$ trillions


ing up of Myanmar to the international community, presi-dential election in Indonesia, the return of stability in Thai-land after the military coup that ousted former PM Yingluck, among others. In addition, the lesser developed members such as Myanmar, Cambodia, Laos, and also Vietnam, have plenty room for growth and to catch up given their low start-ing bases.

In addition, we expect that pro-business policy will continue to be pursued by various member states within ASEAN, es-pecially within the guiding framework of AEC starting from 2015 that help to aim promote free flow of goods, services, investment, and skilled labour, as well as freer flow of capital, all of which would serve to make the region as an enlarged production base and a consumer market.

Driving Factors For ASEAN’s Growth Story PopulationHaving a large population of more than 600 million is clearly an advantage, especially within a fast growing region, which would ensure rising income and standards of living, which will then spur rising consumer demands for a wide range of products and services.

Indeed, the Asian Development Bank estimated that by 2030, nearly half a billion of population in ASEAN will be classified as middle income class. This represents close to 65% of the population by then, from 29% of the ASEAN population in 2010 (see charts below).

External Trade ASEAN itself is already a trade driven block and we anticipate the momentum will continue in the decades ahead, given the rich stores of resources and an established manufactur-ing base which will be further boosted by AEC. This will the key to further drive both intra-ASEAN trade (among members

of ASEAN), as well as extra-ASEAN trade (trade with countries outside ASEAN grouping) as the promises of a single produc-tion platform and a unified market will strengthen trade ac-tivities.

As shown in the chart below, share of ASEAN total trade (ex-ports plus imports) was at 5.8% of world’s total trade in 2003, and rose to 6.7% share in 2013, while the shares of the other large trading blocs such as the Eurozone and NAFTA (North American Free Trade Area) have been falling over the years. Assuming the same CAGR growth rates experienced in 2003-2013 for these trading blocks, we expect ASEAN’s share to rise further to 7.6% by 2030, and for Eurozone and NAFTA to continue to fall.

This is reflected in our forecasts for ASEAN’s total trade which would see intra-ASEAN trade (i.e. imports and exports ac-

ASEAN

Rise of Middle Income

172251

65

227

454 = 2.6x336 =1.5x

0

200

400

600

800

1,000

1,200

ASEAN China India Latin Am

20102030

1,110 = 4.4x 1,053 =16.2x

Source: ADB Institute Middle income = daily expenditure of US$10 to US$100

millions

Rise of Middle Income

2919

5

47

65 = 2.2x

79 = 4.2x

53 = 1.1x

0

20

40

60

80

100

ASEAN China India Latin Am

20102030

69 = 13.8x

Source: ADB Institute Middle income = daily expenditure of US$10 to US$100

% of population

Total Trade

5.8% 6.7% 7.0% 7.6%

31.5%

24.0%21.8%

19.0%19.3%

14.9% 13.6%12.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1993 2003 2013 2020 2030

ASEANEurozoneNAFTA

Source: UNCTAD; UOB Global Economics & Markets Research Projections

% share of total global trade


tivities within the ten ASEAN members) to rise from current 25% share to 28% share by 2030. It should be noted that with closer trade relations with China especially the opening up of Myanmar, the share of China’s total trade with ASEAN is expected to rise to 24% by 2030, more than three times the amount seen in 2003. Meanwhile, the shares for the US and European Union will decline further, continuing the declining trend seen between 2003 and 2013.

The view from ASEAN is even more optimistic, as former ASEAN Secretary General, Dr Surin Pitsuwan, was quoted as saying the movement of goods and services among ASEAN countries after the implementation of the AEC in 2015, he ex-pects that intra-ASEAN trade will increase to 30% share and touch 35% five years later in 2020.

Foreign Direct Investment (FDI)The other key factor both as a stimulus at the early stages – as well as a force to sustain growth momentum in the subse-quent stages – is the severe lack of infrastructure investment in the region. According to the Asian Development Bank more than US$8 trillion of infrastructure investment will be required in Asia between 2010 and 2020, and over US$800 million of that for ASEAN.

For example, one fact to underscore the lack of infrastructure investment in the region: in China by 2020, investment in high speed rail is projected to reach US$300bn (the equiva-lent of Malaysia’s nominal GDP in 2013), with track length of 25,000km. In contrast, ASEAN’s first high speed rail has barely gotten off the ground, with Malaysia and Singapore still in the planning phase of the 330km KL-Singapore line, with estimat-ed cost of US$12bn and is slated for 2020 completion. Thai-land is also reportedly going ahead with its high speed rail project for completion in 2021, which will eventually be part of the 3,000km Kunming-Singapore line that passes through

Laos, Thailand and Malaysia.

The lagging in infrastructure investment as well as the open-ing up of economies like Myanmar have presented oppor-tunities within ASEAN have already attracted investors’ at-tention, with increased investment inflows. As shown in the chart below, ASEAN has surpassed China for the first time in terms of volumes of foreign direct investment (FDI) inflows after falling behind for more than a decade (see chart on the right).

We anticipate the FDI flows into ASEAN will continue to gath-er momentum. The stock of FDI accumulation in ASEAN has been rising at a steady pace of about 16% annualized rate since 1980. Even with a conservative assumption of about 8% annual growth (i.e. half the historic growth rate), the stock of investment in ASEAN is expected to nearly double to US$2.7

ASEAN

ASEAN: Total Trade

25%

75%

12%

7%

14%

24%

76%

10%

14%

8%

28%

72%

6%

24%

4%

0% 20% 40% 60% 80%

Intra-ASEAN

Non-ASEAN

EU

China

US

2030 20202013 2003

Source: ASEANstats; UOB Global Economics & Markets Research Projections

% share of total

FDI Into China And ASEAN5

117,586.2

124,737.2

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1997 1999 2001 2003 2005 2007 2009 2011 2013

FDI into ChinaFDI into ASEAN5

Source: CEIC; UOB Global Economics & Markets Research Est; ASEAN5 = ID, MY, PH, SG, TH

US$ millions

ASEAN: FDI Stock

0.1 0.26 0.33

1.55

2.72

6.06

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1993 2000 2003 2013 2020 2030

Source: UNCTAD; UOB Global Economics & Markets Research Est

US$ trillions


ASEAN

trillion in 2020, and to US$6 trillion by 2030, from US$1.6 tril-lion in 2013.

The China Connection Amidst all these optimistic projections for ASEAN as a result of AEC’s crucial role in driving trade and investment into the region, the other main driving force will be that of China.

China has been playing an active role in building trade and investment relations with ASEAN in the past decade, extend-ing the historic relationship that dates back to thousands of years. In 2013, China’s President Xi Jinping mooted the idea of the New Silk Road, or the Maritime Silk Road that starts from Fujian province and linking all the littoral countries of the region.

From the perspective of trade and investment, this Maritime Silk Road concept will further deepen China’s connection with ASEAN, with AEC serving as a main catalyst. As China faces its domestic “growing pains” of rising labour costs, land costs, and appreciating currency, it is increasingly seeking new production and market bases, and ASEAN will be the natural destination given the geographic and historic ties.

So far, China has been playing a rising role in ASEAN. As shown in the chart below, China’s share in ASEAN’s total trade has more than doubled from 5% in 2000 to 14% in 2010, and to 16% share in 2013, or US$405 billion. Based on our projec-tions, China’s share (excluding Taiwan and Hong Kong) could reach 23% by 2030, or US$1.5 trillion.

Similarly on the investment front, China’s push in recent years to investment overseas (in order to balance out investment inflows and also partly to reduce appreciation pressure on the RMB), have seen ASEAN as a main beneficiary. This has resulted in both inflows and outflows of China’s direct invest-

ment closing the gap than was the case 10 years ago.

As shown in the charts below, China’s overseas direct invest-ment (ODI) has accelerated since 2007 (see chart on the next page). Of note is that Asia represents the bulk of China’s an-nual ODI flow to the world, accounting for 73% share in 2012.

In 2003, China’s ODI to ASEAN was around US$600 million and accounted for only 2.2% of China’s annual ODI flow to Asia, and that figure has climbed to 8% by 2013. Based on our projections, the share could rise to 14% by 2030, with flow of US$185 billion, or 6 times larger compared to 2013.

ConclusionThe rise of China, coupled with the establishment AEC from 2015, is expected to provide new catalysts for growth in ASE-AN. Even with the use of fairly conservative assumptions in

ASEAN: Total Trade With China

40.8

284.7405.1

663.2

1,486.7

5.4%

14.2%16.1%

18.0% 22.5%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1000

1200

1400

1600

2000 2010 2013 2020 2030

ASEAN total trade with China (LHS)China's share of ASEAN total trade (RHS)

Source: CEIC; UOB Global Economics & Markets Research Est

US$ billions

China: FDI And ODI

72715.0

117586.0

21,164.0

101,000.0

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

2002 2004 2006 2008 2010 2012

FDI to ChinaODI from China


US$ billions

China: ODI Destinations - Annual Flows

21,16426,506

55,907 56,529

68,81174,654

87,804

7,66316,593

43,548 40,40844,890 45,494

64,785

0

20,000

40,000

60,000

80,000

100,000

2006 2007 2008 2009 2010 2011 2012

Total China ODIChina ODI to Asia


US$ millions


our economic projections (i.e. in most of forecasts in this re-port, we assumed just half of the compounded growth rates seen in the previous period), the future of ASEAN is indeed promising. For instance, after 2020, ASEAN’s economy would be larger than that of the UK, and would overtake that of Ja-pan by 2025.

Domestic factors such as population growth and the rise in the middle income class in ASEAN will pave the way for AEC’s promise of an integrated production platform and market size, and to leverage on a region that is already outward ori-ented in its trade and investment. This will see ASEAN’s share of global total trade to rise from 6.7% in 2013 to nearly 8% by 2030, which is no small feat given that other larger trading groups such as EU will be seeing a dwindling share of global trade.

At the same time, the shift in domestic conditions in China is propelling further outward orientation, which will result in closer integration and relations with ASEAN through trade and investment. These two channels could see ASEAN’s total trade with China rising to US$1.5 trillion and investment in-

flows from China rising to US$185 billion, from US$405 billion and US$31 billion, respectively.

China: ODI To ASEAN

0.614.4

31.2

63.4

185.0

2.2%

6.3%

8.0%10.0%

13.8%

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%

0.020.040.060.080.0

100.0120.0140.0160.0180.0200.0

2003 2010 2013 2020 2030

China: ODI to ASEAN (LHS)China ODI to ASEAN as % share of ODI to Asia


US$ billions % share

ASEAN


� The Shanghai-Hong Kong Stock Connect is slated to be-gin in October to allow investors to purchase Shanghai-listed stocks, thus opening up a new investment channel to deploy offshore RMB.

� This latest initiative reflects China’s determination in market reforms and towards the opening of the capital account, and the speed of which is astonishing given that an equivalent program, QFII, has existed more than a decade.

� The excitement at the official launch is likely to squeeze the RMB liquidity but we do not expect persistent dis-ruption given the availability of offshore RMB. Neverthe-less it is advisable to stay long on RMB going into the launch.

Background The Shanghai-Hong Kong Stock Connect (also known as “through-train”; 沪港股市互联互通机制 (“沪港通”)) will al-low investors in Mainland China to trade Hong Kong stocks, and Hong Kong (and overseas, in general) investors to trade Shanghai-listed stocks. One key aim of this project is to deep-en China’s integration with international markets and for the greater global role of the RMB.

The initiative was announced on 10 April 2014 by regulators in China and HK. The connectivity test has been completed and another test is scheduled for mid-September before official implementation, which is widely expected to be on 13 October, one week after the end of China’s National Day Golden Week holiday.

To understand how the new program will impact on the off-shore RMB market, it is important to have some understand-ing of the mechanism.

The Stock Connect is a new capital-account channel for cross-border capital flows. The existing channels include the QFII/RQFII schemes for foreign institutional investors (“Qualified Foreign Institutional Investors”/“Renminbi Qualified Foreign Institutional Investors”) to invest in mainland securities and QDII for mainland investors (“Qualified Domestic Institutional Investor”) to invest in overseas stocks and bonds, all of which are limited to institutional investors and required to be li-censed, and subject to restrictions in terms of injection and repatriation of capital, among other limitations.

One key differentiating feature of the Shanghai-HK Stock Connect is that it is open to both institutional and retail in-vestors, thus broadening the investor base which is expected to lift trading liquidity significantly in both Shanghai and HK stock markets, subject to daily and cumulative trading limits,

which are explained in detail below.

Northbound Trading Link (Hong Kong Shanghai) � Allows HK and overseas investors to purchase stocks

traded on the Shanghai Stock Exchange (SSE) � Daily net quota = RMB 13bn (~13.3% of SSE’s daily turn-

over) � Aggregate net quota = RMB 300bn (~3.1x of SSE’s aver-

age daily turnover)

Southbound Trading Link (Shanghai Hong Kong) � Allows China investors to purchase stocks traded on the

Hong Kong Stock Exchange (HKSE) � Daily net quota = RMB 10.5bn (~21% of HKSE daily turn-

over) � Aggregate net quota = RMB 250bn (~7.1x of HKSE daily

turnover)

It is important to note that the daily quotas under the Shang-hai-HK Stock Connect scheme are on a NET BUY basis, rather than gross amount, i.e. investors will always be allowed to sell their cross-boundary securities regardless of the quota bal-ance. This means that theoretically the daily limits would not be hit if buy and sell orders offset each other.

The calculation is: Daily Quota Balance = Daily Quota – Buy Orders + Sell Trades + Adjustments. Note that the Daily Quota will be refreshed and remain the same every day, subject to the balance of the Aggregate Quota. Unused Daily Quota will NOT be carried over to next day’s Daily Quota.

Based on this mechanism, it is our view that the cumulative quotas (for both northbound and southbound) will not be exhausted anytime soon, due to the daily limits.

Assuming the net daily quota is maxed out continuously, it would take 23 sessions for Northbound (RMB300bn ÷ RMB13bn), and 24 sessions for Southbound (RMB250bn ÷ RMB10.5bn), to exhaust the cumulative quotas.

This means that on a daily basis, even in the extreme situa-tion of one-sided net purchases (no sale) of Shanghai stocks by HK investors, the maximum liquidity that will be absorbed offshore is RMB13bn. Will it cause distress to the offshore RMB liquidity condition?

Considering the availability of RMB liquidity in HK, we be-lieve it is unlikely to cause severe stress to the system per-sistently: RMB deposits in HK reached RMB937bn as of July 2014, with global RMB deposit pool (including HK) exceeding RMB1.5tn. RMB loans outstanding in HK was RMB123bn as of end-February, meaning a loan-deposit ratio of 13%. In addi-tion, HKMA has a bilateral swap line of RMB400bn on standby should the system run short of RMB liquidity. IMF estimates that average daily trading volume of RMB in HK at close to

CHINA FOCUSThe Shanghai-HK Through Train–Pushing Ahead Market Reforms


US$50bn (~RMB300bn equivalent). These figures suggest that offshore liquidity should be sufficient to handle quotas being maxed out temporarily, though it should be conceiv-able that the regulators would step in should financial condi-tions are being disrupted.

For comparison, the current size of the QDII/QFII/RQFII schemes are (as of 26 August 2014): Approved QDII quota US$82.593bn; Approved QFII quota US$59.674bn; and Ap-proved RQFII quota RMB278.6bn.

Implications For The RMBThe latest initiative highlights China’s determination to move along the market reform path, with greater sense of urgency, and the shift towards less cumbersome regulation.

Consider that the QFII program started in 2003 (QDII in 2007 and RQFII in 2011), it has taken more than a decade to arrive at today’s scale. In contrast, the Shanghai-Hong Kong Stock Connect project was first announced in April 2014 and is slat-ed to commence operation in less than a year. This is truly an astonishing pace considering the operational complications that need to be overcome and coordinated: different sets of regulatory and legal frameworks, operating environments, clearing and settlement cycles, down to different trading hours and holiday schedules and potential weather interrup-tions. In addition, unlike the QFII/RQFII/QDII schemes where Mainland China regulators have to sole discretion to dictate the conditions that investors must abide by, the “through train” project requires coordination and cooperation of regu-lators from both sides.

As for the RMB, the opening of the Shanghai market to for-eign investors will allow another alternative to deploy off-shore RMB liquidity, in addition to the usual loans, insurance, bond, and other investment vehicles. This will increase the attractiveness to for offshore RMB holders with an alternative avenue to generate yields and returns. The program is also another step towards opening up of the capital account and further RMB internationalization, as it allows an opening for backflow of the RMB to the mainland.

Notwithstanding the daily limits set, as the Northbound trade is required to be funded by RMB, it is conceivable that there would be upward pressure on the offshore RMB FX rate and interest rates, and tightened liquidity in the initial stages of the program, though the situation is likely to normalize once the excitement is over.

Nevertheless, it may still be prudent to keep sufficient RMB liquidity at hand, rather than short, ahead of the launch. The extent of offshore RMB tightness should be short lived and may not be as large as some expect, as explained earlier.

Over the medium term, we remain positive on RMB, with our end-2014 target of 6.15/USD already within sight, our pref-erence is for a firmer RMB exchange rate for end-2014 but should be capped inside 6.10/USD. However, we are wary of the impact of US Federal Reserve’s moves ahead with the up-coming FOMC meeting in mid-Sep and the winding down of the US Fed’s QE tapering program by October, which would see USD supported and possibly further volatility for the RMB and other Asian currencies ahead.

CHINA FOCUS


Near term, as noted below, there is still scope for weaker RMB on technical basis, and it shows that the movements for the currency will remain volatile especially after the widening of the daily trading bands from 1% to 2% on 17 March early this year. This is one important point to keep in mind after the cur-rency enjoyed a period of almost uninterrupted appreciation against the USD from 2005 to 2013.

Technical View - USD/CNH: 6.1515We hold the view that USD is in a recovery phase and expect a rebound towards 6.1620. A move above this level could lead to extension towards 6.1760 but a clear break above this level appears unlikely at this stage. Only an unexpected break below last month’s low at 6.1350/55 would indicate that the longer-term bearish trend towards 6.1000 has resumed.

CHINA FOCUS


US FEDERAL RESERVE IN FOCUSWho Matters In The FOMC?

� Sensing the Fed is finally on the cusp of normalizing pol-icy interest rate, there will be a sharper intensity in mar-ket’s Fed watching, not just about the FOMC decisions and the minutes, and also Fed officials’ commentary.

� A recent St. Louis Fed report highlighted that between 2008 and 2014, the Fed Reserve bank presidents ac-counted for all of the dissents since 2008 which is un-usual according to the authors. In prior years, both Fed Presidents and Fed Board Governors dissented.

� In 2014 FOMC decisions so far, Charles Plosser and Rich-ard Fishers are the key dissenters. And we believe that they may be joined by Loretta Mester in the dissent camp for the remaining FOMC decisions in 2014. But their dissent is unlikely to have a large effect on policy, as Fed Chair Janet Yellen will still be able to press ahead with majority support rather than seeking unanimity (7-3 votes in the base case scenario).

� In 2015 FOMC, Richard Fisher, Narayana Kocherlakota, Loretta Mester, and Charles Plosser will rotate out of their voting positions, and the incoming voters are Chicago Fed President Charles Evans (Dove), Rich-mond Fed President Jeffrey Lacker (Hawk), Atlanta Fed President, Dennis Lockhart (Centrist – tentative dovish bias), and San Francisco Fed President, John Williams (Dove) which we should pay more attention to. So it seems there will be more doves replacing the departing hawks (Fisher and Plosser) for now, which in our view benefits Yellen’s dovish approach.

� The rest of the important 2015 FOMC voters are the 5 Fed Board Governors and the New York Fed Presi-dent, William Dudley. It is unlikely for US President Obama to fill the 2 vacant Governor seats next year, so the number of FOMC voters is expected to remain at 10 in 2015.

Who Are The Key Players In 2014 FOMC?In response to the onset of the 2008 financial crisis, the US Federal Reserve started cutting its benchmark policy interest rate, the Fed Funds Target Rate (FFTR), first on 18 Sep 2007, by an initial 0.5% cut to 4.75%, and by the time we reached the 10th rate cut on 16 Dec 2008, it was lowered by a final 0.5%, to between 0% and 0.25% where it has remained ever since. And when the aggressive cuts in short interest rates proved to be insufficient, the Fed also embarked on unconventional quantitative easing (QE) programs as part of their expansion-ary monetary policy to help turnaround the ailing US econo-my and the sharp increase in unemployment.

After quite a few false starts (of expecting interest rate hikes

throughout the last few years) and the QE program com-ing to an end in the next FOMC meeting on 28-29 Oct 2014, the market is sensing that the Fed is finally on the cusp of normalizing the FFTR. The market consensus is currently ex-pecting the Fed’s rate-lift off to take place in the summer of 2015 (we are expecting it to be announced in the 16-17 June 2015 FOMC). Thus, there is increasingly intense interest in Fed watching, both in terms of the FOMC decisions & minutes as well as the comments from senior Fed Reserve officials that are participants in the FOMC (voters and non-voters).

First, it is instructive to have a bit of background to the mon-etary policy formulation process within the US Federal Re-serve. The Federal Reserve controls the three tools of mon-etary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and re-serve requirements, and the Federal Open Market Committee (FOMC) is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which de-pository institutions lend balances at the Federal Reserve to other depository institutions overnight.

The FOMC which consists of 12 members--the seven mem-bers of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York (permanent seat); and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. Non-voting Reserve Bank presidents attend the meetings of the Committee, participate in the discus-sions, and contribute to the Committee’s assessment of the economy and policy options. (Information taken from http://www.federalreserve.gov/monetarypolicy/fomc.htm)

Currently, there are 2 vacant governor seats which are unlike-ly to be fill anytime soon as there is not much Senate session days left before the mid-term elections on 4 November 2014, and the Senate has taken an average of 119 days to confirm Obama’s 10 Fed Board nominations since 2009. So there are only 10 voting members in the 2014 FOMC comprising of:

1. Fed Board of Governors, Chair Janet Yellen2. Fed Board of Governor, Vice Chairman Stanley Fischer

(permanent FOMC voter)3. Fed Board Governor Jerome Powell

(permanent FOMC voter) 4. Fed Board Governor Lael Brainard

(permanent FOMC voter)5. Fed Board Governor Daniel Tarullo

(permanent FOMC voter)6. New York Fed president and Vice Chairman, William Dudley

(permanent FOMC voter)


7. Dallas Fed President Richard Fisher(voter in 2014 FOMC)

8. Minneapolis Fed President, Narayana Kocherlakota(voter in 2014 FOMC)

9. Cleveland Fed President Loretta Mester(voter in 2014 FOMC)

10. Philadelphia Fed President Charles Plosser(voter in 2014 FOMC)

An Interesting History Of FOMC Voting & DissentIn a recent report published in the 3Q 2014 Federal Reserve Bank of St. Louis Review (16 Sep 2014), the authors, Daniel Thornton and David Wheelock, found that over the period 1957-2013, Fed Reserve bank presidents dissented 241 times, and Fed Governors dissented 208 times. While the number of dissents by governors surpassed the number of dissents by presidents in many years, Thornton and Wheelock noted that presidents have accounted for all but four (72 of 76) dissents between 1994 and 2013. If the period is narrowed down to between 2008 and 2014, then the Fed Reserve bank presi-dents accounted for all of the dissents since 2008 which is unusual according to the authors. The report also found that “over the FOMC’s history, Fed Reserve Bank presidents more often dissented in favor of tighter policy than easier policy, whereas a majority of dissents by Federal Reserve governors were in favor of easier policy.” But the report also noted that not all dissents were for or against the current policy stance but the voter “dissented because he or she disagreed with language in the Committee’s statement about possible future changes in policy.”

Of course history cannot serve as an accurate guide to how the current FOMC members will vote and we do have two new FOMC board Governors (Stanley Fischer and Lael Brainard, confirmed by Senate in June 2014) and a new Fed President (Loretta Mester who succeeded Sandra Pianalto as Cleveland Fed President with effect from 1 June 2014).

So far in 2014, we have went through 6 FOMC and three were passed with unanimous decisions (January, April and June) while the other three were passed with dissenters.

In March 2014 FOMC, Narayana Kocherlakota dissented due to the language used in the statement and not against the policy stance. However, in the July 2014 FOMC, Charles Plosser dissented as he objected to the Fed’s guidance of keeping short-term interest rates near zero for a “consider-able time” after its bond-buying program ends. In the Sep-tember 2014 FOMC, Charles Plosser dissented for the second straight meeting with the same objection and he was joined by Richard Fisher who dissented on similar grounds as he “be-lieved that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommoda-

tion than is suggested by the Committee’s stated forward guidance.”

Will There Be More Dissents In 2014?If the US remains on its current course of continued, moderate improvement (both in the economy and the labor market), then both Plosser and Fisher will likely continue to dissent in the Oct 2014 and Dec 2014 FOMC meetings. And we note that both Plosser and Fisher will be rotated out of their voting roles in the 2015 FOMC, so they probably have to make their voices heard louder (via their dissent votes) in the last 2 FOMC decisions of 2014. The question is whether anyone else will be joining them in voting against policy decision.

We note that the recently appointed Cleveland Fed Presi-dent, Loretta Mester, began her career in the Federal Reserve Bank of Philadelphia where she rose to the position director of research at the Federal Reserve Bank of Philadelphia and chief policy advisor prior to her current appointment. Since Mester retained her role under the hawkish Philadelphia Fed president Plosser, the initial expectations were that her views would likely align with his. That said, she has voted for the FOMC monetary policy action in the last 3 FOMC decisions, unlike her former boss. Her recent comments (5 Sep 2014) noted that while the “exact timing” of rate hikes depends on the economy, Mester opined that the Fed is much closer to achieving its economic goals than it has been for a long time, as the economy is on firmer ground. She also wants the Fed to make clearer that the timing and pace of future interest rate hikes will be driven by the performance of the economy although she declined to say when she thinks the lift-off will be.

In comparison, Minneapolis Fed President, Narayana Kocher-lakota’s latest comments (22 Sep 2014) warned against raising interest rates with inflation so low and opined the unemploy-ment rate overestimates labor market recovery. Instead, he advocates that the Fed to set the goal to bring inflation to 2% to avoid “European and Japanese” situations and proposed the Fed set a 2-year time horizon to achieve its 2% inflation target. This puts him clearly in the dovish camp, as opposed to Plosser and Fisher.

As for the New York Fed President and Vice Chairman, William Dudley (permanent voter in FOMC), his recent comments (22 Sep 2014) noted that he would be “very happy” to be able to raise rates some time in 2015 if conditions warrant. But he also stressed that it was important to practice patience rather than risk a premature rate hike “just for the sake of rais-ing them.” He also commented it is not yet clear how large or small the central bank’s balance sheet should be in the long term. And in unusually direct remarks about the US cur-rency from the central bank, Dudley said “If the dollar were to strengthen a lot, it would have consequences for growth.” Thus, our read is that Dudley is still and will remain on Yellen’s

US FEDERAL RESERVE IN FOCUS


side in the dovish camp.

Thus if we were to pick another FOMC voter likely joining the dissent camp in October and December, we think Mester is most likely given her recent opinions and her long working relationship with Plosser, and that certainly increase some pressure on the doves within voting FOMC members. We assume that the Fed Board Governors, Dudley & Kocher-lakota will remain supportive of Yellen, so even if we get one more dissent, the margin will still be a comfortable 7-3 in her favor, and she will still be able to press ahead with majority support rather than seeking a unanimous agreement.

Looking Into 2015 FOMCGoing into next year, the composition of the 2015 FOMC will change. The 5 current Fed Board Governors will remain as will the New York Fed President and Vice Chairman, Wil-liam Dudley who has a permanent vote in FOMC. There remain 2 vacancies on the Fed Board of Governors which we think US President Obama will have a difficult nominating and for the US Senate to confirm their appointments in 2015 because of 1) the uncertain outcome for the 4 November 2014 mid-term elections which could shift the power balance from Democrats to Republicans in the Senate in 2015, and 2) it is likely to be another politically difficult year for Obama in 2015 as the debt ceiling negotiations will likely re-surface to haunt us again in the odd-numbered years where there are no US presidential and Congressional elections.

As for the four Reserve Bank Presidents, Richard Fisher, Na-rayana Kocherlakota, Loretta Mester, and Charles Plosser will rotate out of their voting positions in 2015 FOMC but will re-main as non-voting Reserve Bank presidents attending the meetings of the FOMC. Replacing them as voters in the 2015 FOMC will be:1. Chicago Fed President, Charles Evans (Dove)2. Richmond Fed President, Jeffrey Lacker (Hawk)3. Atlanta Fed President, Dennis Lockhart (Centrist – ten-

tative dovish bias)4. San Francisco Fed President, John Williams (Dove)

And these will be the ones we will be watching them closely in addition to the other six permanent voters on the FOMC. As far as we can tell for now, Evans and Williams

are likely to be in the Dove camp (Evans acknowledged the significant improvements in the labor market but thinks in-flation is nowhere near target and it remains appropriate to keep rates low till well into 2015 [July 2014] while Williams still believes there is significant slack in labor market while he is not concerned about inflation at all, and rate hikes are not likely to happen till middle of 2015. And even if rates are hiked, the process is likely to be very gradual so as not to up-set the markets [22 Aug 2014]).

And while Lockhart is widely considered to be a centrist, we viewed him as having a dovish bias based on his latest com-ments (He expected changes to the Fed policy statement in upcoming meetings and he said the Fed is still focused on a mid-2015 rate lift-off. He is not worried about inflation and he is one “who prefers we let a little more time pass in order to have the evidence accumulate that we are on a solid track and we are likely to stay on that track.” [23 Aug 2014]) Lacker is probably the sole hawk within the incoming Reserve Bank Presidents (In early August, Lacker warned that the market may be underestimating the pace of Fed Reserve rate tight-ening cycle over the next two years. And in the September FOMC, Lacker identified himself as the lone dissenter on the Fed Reserve’s updated exit strategy plan and explained his opposition is due to the Fed’s plan to keep holding mort-gage-backed securities in their updated exit strategy. Lacker also previously opposed to Fed’s buying of MBS as he felt it gives an advantage to that sector of borrowings over other types of borrowings by consumers).

So it seems that in 2015, there will be more doves replac-ing the departing hawks (Fisher and Plosser) for now, which in our view benefits Yellen’s dovish approach to de-liver forward guidance for the eventual rates lift-off at a more gradual trajectory, as compared to previous rate normaliza-tion cycles. And with Richard Fisher and Plosser announcing their retirements from their posts in April 2015 and March 2015 respectively, this will be perceived as “less heat from the hawks” on the rate debate among the FOMC participants next year. Furthermore, their successors (which will be selected by the boards of their respective reserve banks, and subject to the approval of the Federal Reserve board of governors) have not been named. And even when selected to office, these two new Fed Presidents will not be able to vote on FOMC un-til their rotation takes place in 2017.

US FEDERAL RESERVE IN FOCUS


MALAYSIA FOCUSThe Impact Of GST

It took 10 years from when the Goods and Services Tax (GST) was first mooted in Malaysia to its implementation on April 1,2015. The move was announced at Budget 2014 to replace the existing Sales and Services tax as the government was un-der pressure to rein in its persistent fiscal deficits which it has been running since the Asian Financial Crisis.

The GST is one of the key strategies to help Malaysia achieve its target of a balanced budget by 2020. In the upcoming Budget 2015, the government is expected to follow up with more fiscal consolidation measures, in particular, to reform its fuel subsidy scheme.

With the GST, we expect headline inflation rate to rise to 4.0% in 2015 from our estimate of 3.0 this year. As the impact is not expected to be sustained, we do not think Bank Negara Ma-

laysia (BNM) will tighten monetary policy based on the GST consideration alone. The central bank has highlighted the ac-cumulation of economic and financial imbalances in recent meetings that led to the 25 bps Overnight Policy Rate (OPR) hike in July. As growth is likely to slow in 2015, there is little basis to raise the OPR beyond its pre-Lehman level.

In addition to the announced cuts in personal and corporate income tax rates, offsetting packages will help to reduce the short-term impact of the GST on private consumption and business costs.

Higher domestic interest rate is also a headwind to growth. Overall, the impact of GST implementation on economic out-look in 2015 will be further mitigated by some frontloading in expenditure in the first quarter as well as a firm labour market.

Comparison Of GST Rates And Revenue From GST In Selected Asian Countries

Country Year ofImplementation

Initial Standard Rate(%)

Current Standard Rate(%)

Consumption Tax Revenue(% of Govt Revenue)*

Japan 1989 3.0 8.0 16.0

Singapore 1994 3.0 7.0 16.1

Taiwan 1986 5.0 5.0 -

Indonesia 1984 10.0 10.0 25.3

Philipines 1988 10.0 12.0 14.5

Thailand 1992 10.0 7.0 30.3

Vietnam 1999 10.0 10.0 23.7

China 1994 17.0 17.0 22.3

Australia 2000 10.0 10.0 10.6

South Korea 1977 10.0 10.0 24.7

India 2005 12.5 12.5 13.5

Source: Royal Malaysian Customs Department, Ernst & Young 2013, CEIC, UOB Global Economics & Markets Research* 2013 or latest

GST rate in Malaysia is lower than in most Asian countries. Based on revenue collection from the consumption taxes in other GST countries, there is potential improvements in Malaysia’s fis-cal position after its implementation. Revenue collected from the sales and services taxes only acccounted for 7.5% of total central government revenue in 2013, paling in comparison to the consumption tax revenue in the GST countries.


Short-term Inflationary Impact:Average 3-mth Inflation Before And After GST

2.6

0.2

0.7

1.1

3.1

0.7

1.2

3.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1994 2003 2004 2007

Before GSTAfter GST

Source: CEIC, UOB Global Economics & Markets Research

SINGAPORE


1.1

0.6

1.5

2.7

2.1

3.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1997 2014

Before GSTAfter GST


JAPAN

3% GST 5% GST 7% GST4% GST 3% GST 8% GST5% GST

Comparing the average inflation rates in the countries before and after GST implementation or changes to the GST rates, it can be shown to have a short-term impact on CPI. Thailand was an anomaly as state-owned companies were asked to shoulder the GST impact in 1992 and the sharp depreciation of THB during the Asian Financial Crisis brought up the inflation rate in 1998 despite the lowering of GST rate.


4.9

8.3

4.6

9.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1992 1998

Before GSTAfter GST


THAILAND


3.1

6.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000

Before GSTAfter GST


AUSTRALIA

10% GST 7% GST 10% GST

MALAYSIA FOCUS


No Long-Term Implication On Inflation From GSTFrom The Experiences Of Other Asian Countries

-1

0

1

2

3

4

5

6

7

90 92 94 96 98 00 02 04 06 08 10 12


SINGAPORE


-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

85 88 91 94 97 00 03 06 09 12


JAPAN

Inflation rates revert to long-term averages in the years after GST implementation. In Japan and Thailand, the dip in the inflation rates after the GST rate change in 1997/98 could be partly at-tributed to economic downturn following the Asian Financial Crisis.


-2.0-1.00.01.02.03.04.05.06.07.08.09.0

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13


THAILAND


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

87 90 93 96 99 02 05 08 11


AUSTRALIA

Ave 1987-99 = 3.7%

Ave 2000-13 = 3.0%

MALAYSIA FOCUS


Private consumption spending could be dampened after the GST. Short-term tightening in monetary policy could add further downward pressure to growth.

Potential Impact On GrowthAnd Private Consumption In The Short-Term

-5

0

5

10

15

20

86 89 92 95 98 01 04 07 10 13

GDPPCE


SINGAPORE


-6

-4

-2

0

2

4

6

8

85 88 91 94 97 00 03 06 09 12

GDPPCE


JAPAN

% change% change


-15

-10

-5

0

5

10

15

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

GDPPCE



0

1

2

3

4

5

6

92 95 98 01 04 07 10 13

GDPPCE


THAILAND AUSTRALIA

% change% change

MALAYSIA FOCUS


MALAYSIA FOCUS

Malaysia: No Lasting Impact On Inflation

0.0

1.0

2.0

3.0

4.0

5.0

6.0

86 90 94 98 02 06 10 14F 18F

Malaysia Annual CPI (%)


BNM Has One More Rate Hike By 1Q2015

-4

-2

0

2

4

6

8

10

Jan-06 Dec-07 Nov-09 Oct-11 Sep-13 Aug-15

CPI (y/y % change)OPR (%)


Malaysia: Expected Slowdown In GDP And PCE Growth In 2015

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

92 95 98 01 04 07 10 13 16F

GDPPCE


Sources Of Central Government Revenue (%), 2013

Income taxes , 52.0

Other direct

taxes, 4.5

Export duties, 0.9

Import duties, 1.2

Excise duties, 5.7

Sales tax, 4.7

Service tax, 2.8

Other indirect

taxes, 1.3

Non tax , 25.5

Non revenue receipts,

1.4


Expected frontloading of private consumption spending in 1Q15 and firm labour market will mitigate GST impact on GDP in 2015. But high-er interest rates and high household debt will continue to pose headwinds to growth.

GST provides an avenue to diversify the gov-ernment’s revenue sources. Combined rev-enue contribution from sales and services tax was just 7.5%, well below that of the petro-leum taxes which raked in 13.9% of the total revenue in 2013.

Ave 1986-2014 = 2.67%

Post GST CPI Forecasts

% change

Headline inflation is expected to moderate back into its long-term average in the next few years. As inflationary impact is expected to be short-term, the central bank is unlikely to react aggressively with its monetary policy. We maintain our forecast for another 25 bps rate hike in 1Q15 to bring the OPR back to pre-Lehman level. Monetary policy continues to be centered on preventing a build-up in economic and financial imbalances.

UOB forecasts inflation to peak below 5%y/y in 2015


Unexciting Growth: Slowest Since 2010Growth was nothing more than disappointing after Indo-nesia registered just 5.2% y/y expansion in the first half of 2014. Other than the mineral export ban at the start of the year, depressed palm oil prices, high domestic interest rates and cautious investment before the parliamentary and presidential elections have all weighed on the eco-nomic growth.

Recent trade data remained worrisome, as weak exports continued and the prolonged contraction in imports of machinery & transport equipment pointed to sluggish investment. The weak July data was in part due to distor-tion from different timings of the Hari Raya holiday and the trade data is likely to improve along with better invest-ment sentiment after the July Presidential Election and the resumption of some mineral exports.

We have lowered our full-year growth forecast for Indo-nesia to 5.2% from earlier 5.5%, which factors in a slight improvement in the growth rate to 5.3% in 2H14. Bank Indonesia expects full-year growth at the lower end of its 5.1-5.5% forecast range.

Stabilising Inflation But Risk Of FurtherInterest Rate Hikes After Fuel Price Adjustment Headline inflation has continued to moderate in line with our expectation. At 4.0% y/y in August, the inflation rate is at its lowest in 19 months and is likely to remain within the central bank’s 3.5-5.5% target in the coming months. The key risk arises from the potential hike in fuel prices which is inevitable if Indonesia is to rein in its current account and fiscal deficits.

Our base-case scenario is a 20-30% hike in fuel prices per annum in 2015-2016 which would lead to a resurgent in in-flation towards an average of 6.0-7.0%. Recently, it emerg-es that the government could be planning to hike fuel prices by Rp3,000/litre (46%) in late October/November. In this case, we expect headline inflation to jump to 8.0-8.5% y/y by year-end, bringing the average inflation rate to 6.5% this year instead of 5.8%.

Bank Indonesia (BI) has been on hold so far into 2014 after its last interest rate hike in November 2013. Although infla-tion has halved from a peak of 8.2% y/y in January this year and GDP growth in the first half of the year had surprised on the downside, the country’s current account deficit was the dominant factor in the monetary policy.

We foresee risks of further rate increases ahead. Other than

the annual adjustment to fuel prices, BI will also have to contemplate the impact on capital flows as US starts its rate hike cycle. If the new government goes ahead with a fuel price hike in late October/November 2014, there could be pressure to hike interest rate even before the end of the year.

Short-Term Upward Pressure On USD/IDRDuring the third quarter, USD/IDR rose towards 12,000 from its low of 11,508 in July with some profit-taking on the IDR after the elections. USD strength is likely to con-tinue into 4Q14 as investors eye the termination of the Fed QE in October and an eventual rate hike in the US next year. The finalisation of the fuel subsidy cut plan is likely to be positive for the IDR in the medium-term, but in the short-term, there could be some upward pressure on USD/IDR as a result of the surge in inflation. Having said that, we expect monetary policy to be tightened to counter the en-suing surge in the headline inflation rate if there is any ma-jor adjustment to the fuel prices. Our end-4Q14 target for USD/IDR is now at 12,200 and any deterioration in Indone-sia’s trade balances could pose upside risks to our forecast.

INDONESIA

UOB Economic Projections 2012 2013 2014F 2015F

GDP 6.3 5.8 5.2 5.8

CPI (average, y/y %) 4.0 6.4 5.8 6.2

Unemployment rate (%) 6.1 6.3 6.2 6.1

Current account (% of GDP) -2.8 -3.4 -2.9 -2.4

Fiscal balance (FY, % of GDP) -1.9 -2.3 -2.5 -2.1

Weak Exports And Machinery Imports Weighed On Growth

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-60

-40

-20

0

20

40

60

80

Jan-09 May-10 Sep-11 Jan-13 May-14

Trade Balance (US$bn) - RHSExport (y/y %)Import (y/y %)

Source: CEIC; UOB Global Economics & Markets Research


MALAYSIA

Another Upside Surprise To 2Q14 GDP Malaysia’s 2Q14 GDP growth accelerated to 6.4% y/y from 6.2% in the first quarter. This was the fastest growth pace since 1Q13. Net export was the key driver of the strong economic performance in the second quarter as exports strengthened while imports slowed. Fixed investment rose on better global outlook but private consumption growth moderated slightly and public expenditure contracted in the quarter.

After the exceptionally strong GDP expansion of 6.3% y/y in the first half of the year, we have upped our full-year growth forecast to 5.9% from 5.6% with GDP in the second half to moderate as a result of base effect. The government is expecting 2014 growth at between 5.5-6.0%.

The moderation in bank loans growth from double-digit pace at the beginning of the year is in line with expecta-tion of weaker economic growth later this year. Higher do-mestic interest rates and macro prudential measures could weigh on investments and private consumption ahead but government’s promotion of large-scale infrastructure proj-ects will likely remain a key growth driver.

Expectation For Budget 2015Budget 2015, the final budget under the 10th Malaysia Plan (10MP), will be tabled on 10 October. Other than an-nouncing the balance of the infrastructure developments including projects for the airports, ports and rails under 10 MP, there would likely be further measures to address the rising costs both to households and businesses from the GST implementation next year. Although the govern-ment may announce plans for affordable housing, there is worry of more property cooling measures to tackle the high household debt. Another key area to watch will be fis-cal consolidation measures, particularly targeting the fuel price subsidy.

Bank Negara Retaining Slightly Hawkish BiasBank Negara Malaysia (BNM) was on hold in September after having raised its benchmark Overnight Policy Rate (OPR) by 25 bps to 3.25% in July. The hike in July was the first since June 2011 as the central bank pointed to the prospect of risks arising from the accumulation of broader economic and financial imbalances. Economic growth has strengthened while we expect inflation to rise to 3.0% and 4.0% in 2014 and 2015 respectively, higher than the annual average of 2.5% between 2006-2013.

Despite keeping interest rate steady in September, BNM has remained slightly hawkish as it indicated that “further adjustment to the degree of monetary accommodation” is still being considered. As inflation is expected to ease more sharply from September due to a high base effect, we are placing our bet on the next rate hike in 1Q15 as the central

bank seeks to manage inflation expectation as well as con-tain the financial imbalances ahead of the GST implemen-tation. As GST impact on CPI is only transient, the central bank is unlikely to react aggressively to the ensuing infla-tion after the its implementation.

We expect the OPR to be hiked by another 25 bps next year which would restore it to its level before the Global Finan-cial Crisis. October Budget which could address the need to cut subsidy spending further, may pose some risk to our estimate, by bringing forward the rate hike. The next mon-etary policy meeting scheduled on 6 November will be the last meeting for this year.

USD/MYR Likely ToContinue Strengthening In 4Q14Strong economic growth and higher interest rates lifted the MYR in the earlier part of 3Q14 but the currency has since depreciated by more than 3% from its closing high this year of 3.1410/USD. As we approach the termination of the Fed QE expected in October, there will be upside risks to USD/MYR, particularly as Malaysia’s growth rate is expected to moderate in the second half of the year. We expect USD/MYR to end the year at around 3.27. If BNM chooses to hike its OPR in November, that may provide a temporary respite to the MYR.


GDP 5.6 4.7 5.9 5.2

CPI (average, y/y %) 1.7 2.1 3.0 4.0


Current account (% of GDP) 5.8 4.0 5.3 4.7


Contributions To GDP Growth

-10.0

-5.0

0.0

5.0

10.0

15.0

2Q12 4Q12 2Q13 4Q13 2Q14

Net exportChange in StocksGFCFGovernment consumptionPrivate consumptionGDP y/y



1H14 Economic Growth Moderates To 3.5% y/ySingapore’s economy grew 2.4% y/y in 2Q, lower than 4.8% y/y in 1Q as growth slowed across all sectors. The manufacturing sector grew by just 1.5% y/y, sharply lower than the 9.9% y/y achieved in 1Q as both the contraction in electronics output and a slower growth in transport en-gineering output hampered production. Going forward, both the high base seen in the second half of 2013 (6.1% y/y) and the on-going weakness in the electronics cluster would dampen manufacturing growth in the second half of 2014. Trade-related services sectors such as the whole-sale trade segment also slowed due to both a slowdown in non-oil re-exports as well as weak performance from non-oil domestic exports. Supporting services sectors such as transport & storage (2.0% vs 5.5% y/y in 1Q), business services (2.3% y/y vs 3.3% y/y in 1Q), and the finance and insurance (5.5% y/y vs 5.7% y/y in 1Q) also grew at a slower pace.

With 1H economic growth at 3.5% y/y, we maintain our 2014 GDP growth forecast of a similar 3.5%, on the upper end of government’s 2.5% - 3.5% forecast. That said, recent weakness in Singapore’s manufacturing industries (con-tributing to a fifth of GDP) posed material downside risks to full year growth. In particular, the “firm-specific factor” in the semiconductor cluster would reduce the growth rate in the electronics manufacturing sector for the rest of the year. Singapore’s NODX remained weak so far this year. In the first eight months, NODX declined 1.4% y/y as the 3.5% y/y gain in non-electronic exports failed to negate the broad weakness in electronic exports (-11.8% y/y). With electronic exports contracting for the 25th month, it had been playing a smaller part in Singapore’s NODX. For ex-ample, the share of electronic NODX in overall NODX had declined to 28.6% this year. This compared to the 66% and 41% share during years 2000 and 2010 respectively.

We postulate that Singapore’s NODX may continue to shrink as 1) Lower-value added industries continue their shift outside of Singapore due to industry-specific com-petitiveness disadvantage; 2) The movement for manufac-turers to specialize in services exports rather than goods exports; 3) the smaller contribution of our manufacturing industries as we towards a services-oriented economy.

Domestic Risk Factors: Higher Labour Costs Add Towards Core Inflationary PressuresSingapore’s labour market conditions remain tight as the latest manpower ministry report showed that unemploy-ment rate remained at a low 2%, while for “every 1 unem-

ployed person, 1.36 jobs remained unfilled”. Taking this met-ric into consideration, Singapore’s labour market had been tight for 16 consecutive quarters, and would translate into higher wage costs for businesses. We maintain our view that rising business costs will add pressures to mark-ups of final prices and pushing Singapore’s core inflation towards 2.4% in 2014, compared to 1.7% last year.

USD/SGD To Reach 1.29 by End 2014Although 2014 GDP may come in slightly lower than last year, it would not be at a critical level for the central bank to adopt any form of monetary loosening. Rather, the tight la-bour market coupled with higher core inflationary expec-tations will see the MAS maintaining their current policy stance of a “modest and gradual” SGD NEER appreciation. That said, the completion of QE tapering (expected in Oc-tober FOMC) will likely see market anticipating Fed’s move to start the rates normalization cycle and adding more de-mand for the USD. As such, we maintain our target for the USD/SGD to reach 1.29 by end 2014. The 3M SGD SIBOR will likely remain at the current 0.40% level by the end of 2014.


GDP 2.5 3.9 3.5 3.9

CPI (average, y/y %) 4.6 2.4 1.6 2.2



Fiscal balance (FY, % of GDP) 2.0 1.3 1.3 1.4

SINGAPORE

1H2014 Report Card: Slower Growth Across All Sectors

9.9

6.4

5.7

5.5

3.8

3.3

2.6

2.1

1.5

4.4

5.5

2.0

1.7

2.3

2.5

0.5

0 10 20

Manufacturing

Construction

Finance & Insurance

Transport & Storage

Wholesale & Retail Trade

Business Services

Infocomms

Accomm & Food Services

2Q 20141Q 2014

Source: CEIC

2013 GDP Share

2%

4%

13%

18%

8%

11%

5%

20%


THAILAND

Growth Supported In 2QAs Consumption And Exports RoseThailand’s 2Q GDP grew 0.4% y/y, as it recovered some of the growth that were lost in 1Q when GDP fell by 0.5% y/y. Better-than-expected economic growth came on the back of stronger private consumption expenditure (PCE), government expenditure, and exports. However, to-tal investment in 2Q remained weak and fell 6.9% y/y, al-though better than the 9.3% y/y contraction in 1Q.

The weakness in total investment was due to both the decline in public (-6.7% y/y) and private (-7.0% y/y) invest-ments. In particular, the poor performance in construction, and machinery & equipment investments dragged on the latter’s growth. Nevertheless, although Thailand’s Board of Investment (BOI) reported a 69.4% decline in the value of net applications for investment promotion in the same period, the number of projects applying for investment promotion began to improve towards the end of 2Q. The Business Sentiment Index (BSI) still remained below the 50-mark for the 4th consecutive quarter, despite some recov-ery towards the end of 2Q. Going forward, public invest-ment remains vital in contributing to economic growth. In September, the newly-appointed Thai parliament had approved a budget proposal of THB 2.58 trillion ($80 bil-lion) for fiscal year 2015. PM Prayuth had also ordered state agencies to front-load spending from the first quarter (2015) to boost local demand.

Sentiments on the ground had been picking up. Thai con-sumer confidence had been steadily improving in the sub-sequent months since a recent low of 67.8 in April this year to reach 80.1 in August, a level seen before the political crisis started in Oct 2013. Pent-up demand will likely show up in stronger consumption growth in the second half of 2014. Meanwhile, there were cheers in the export sector as the gradual recovery in external demand saw 2Q export value gaining 8.9% y/y (in THB terms) as export demand for rice, tapioca, petrochemical, machinery & equipment, and electrical appliances rose.

We maintain our 2014 Thailand GDP growth forecast of 1.5%, as we deem the economic growth in 2H would not come in strong enough to reduce the drag from 1H. In particular, the manufacturing sector had contracted for 5 consecutive quarters and fell 2.1% y/y in 1H 2014, while the manufacturing production index (MPI) declined 6.1% y/y in the same period. Judging from the excess capacity still lingering in the manufacturing sector, we think that

MPI will contract further 5.4% y/y in 2H this year.

Monetary Policy Expected To Be On HoldWhile THB To Weaken Against The USDOn 17 Sep 2014, the Bank of Thailand (BoT) kept their pol-icy rate unchanged at 2% with unanimous votes and for the fourth straight meeting to support the economy as the newly appointed government stepped on the fiscal accelerator to increase spending and revitalize growth. We think that the BoT will maintain the current 2% rate at least until after 1H of 2015, as the expected inflationary climate would remain stable. The improvement in the THB since June this year had narrowed the loss of the THB against the USD from 6.2% at one time since the political crisis started Oct 2013 to the 3.6% depreciation presently (as of 23 Sep). With the completion of the QE in the US in October this year and the expected interest rate normalization in the US in 2Q 2015, we expect depreciation pressure on the THB going forward. We expect the THB to move weaker against the USD towards 33.50/USD by end 2014 from around the 32.21 level currently.


GDP 6.5 2.9 1.5 3.9

CPI (average, y/y %) 3.0 2.2 2.2 2.4


Current account (% of GDP) -0.4 -0.6 0.4 0.8


2Q2014 Report Card: Improvement In Performance For Most Sectors

6.1

5.3

3.4

2.2

0.3

-0.7

-1.6

-3.2

-4.2

7.4

3.4

-3.1

1.4

-0.4

-1.6

-2.7

-11.9

-3.1

-14 -10 -6 -2 2 6 10 14

Finance

Tpt, Storage, Comms

Utilities

Agriculture

Wholesale & Retail

Real Estate

Manufacturing

Construction

Hotels & Restaurants

1Q 20142Q 2014

Source: CEIC

2013 GDP Share

5%

2%38%

4%

13%

8%

4%

10%

5%


INDIA

Economic Growth QuickenedTo Fastest Pace In More Than Two YearsIndia’s GDP grew 5.7% y/y in the three months ended June 2014, accelerating to the fastest pace in more than two years, after the central bank had refrained from raising interest rates. Quicker-than-expected economic growth helped support PM Modi’s pledge of narrowing India’s budget deficit to a 7-year low after he had kept subsidies largely unchanged in his spending plan. Private consump-tion, investment and net exports contributed to overall economic growth during this quarter.

Several industries grew on a robust pace. Output from the finance & insurance industry jumped 10.4% y/y, while utili-ties output grew 10.2% y/y. Additionally, India’s manufac-turing industries grew 3.5% y/y, the fastest pace in 9 quar-ters, while the mining sector gained 2.1% y/y, the fastest pace in 9 quarters as well.

India’s April-June current-account deficit (CAD) widened to a one-year high (US$7.8b from US$1.2b a quarter ago) after policy makers eased some restrictions on gold im-ports, easing from the emergency measures taken when the deficit widened to an all-time high of $88 billion, as faster economic growth boosts inflows. With that, gold imports surged 65% y/y in June after the government al-lowed more banks and traders to buy bullion overseas. Nevertheless, the latest quarter CAD was still lower than the US$21.8B deficit a year ago and had only amounted to 1.7% of GDP, which was below the 2.5% of GDP CAD target that RBI had set.

Both the recovering economy and PM Modi’s rise to power had already brought inflows of nearly US$14b of foreign funds into Indian equities this year as investors bet that his drive to cut red tape will revive stalled projects and underpin the economic recovery. However, to keep this sustainable, Modi has to conquer a mountain of tasks such as overhauling India’s strained public finances, stringent land acquisition laws, chaotic tax regime and rigid labour rules. During his first 100 days in office, Modi showed little appetite for such structural changes, and there is concern that sharply higher growth in the last quarter could reduce the urgency. That could be damaging for an economy that is still hobbled by slack consumption and weak business investment. Persistently high inflation and years of stag-nant growth have forced consumers to cut discretionary spending. For example, consumer goods output, a proxy for consumer demand, has grown in just two of the last 19 months, and it fell 7.4% y/y in July. Additionally, firms are shying away from fresh investments, as capital goods pro-

duction fell 3.8% y/y. With that, we still maintain our 2014 GDP growth forecast at 4.8%, slightly higher than last year as domestic demand conditions remain trying.

Policy Rates To RemainAt Current Level Till End 2014The Reserve Bank of India (RBI) had left the benchmark repurchase rate at 8% for a third straight meeting (Aug 5) while flagging upside risks to the RBI’s target of lowering inflation to 6% by January 2016, citing the government’s price support for crops, deficient rainfall and oil prices amid global conflicts. While the RBI do not have an official target, governor Rajan said that he hopes to bring inflation down to 8% by the start of 2015. Year-to-date, inflation in the first eight months of 2014 averaged 8.2% y/y and al-though this is near to the Rajan’s target, we believe that the RBI will keep the current 8% policy rate unchanged until a lower inflationary trend is in place. Our view for the US QE tapering and subsequent interest rate normalization in the US remains intact and that broad USD strength will filter through Asia and the INR will probably continue on a slight depreciating path, where it could move towards 62.40/USD by end of 2014.


GDP 4.8 4.7 4.8 5.4

CPI (average, y/y %) 9.3 10.9 7.5 7.8



Fiscal balance (% of GDP) -5.9 -5.9 -4.8 -4.5

Risks of Higher Food Inflation Due To Lower Rainfall

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014

OverallFood

Source: CEIC


CHINA

Tepid Recovery Pace Ahead China’s economic data for July and August suggest the speed of recovery appears to have moderated, after the pace quickened in 2Q14. Recall that headline growth rate in 2Q14 came in at 7.5%y/y vs. 7.4% in 1Q14, while the q/q growth rate accelerated to a seasonally adjusted 2%q/q in 2Q14, a turnaround from the slowest pace in more than 2 years in 1Q14, which was at 1.5%q/q.

The latest China’s HSBC manufacturing PMI data came in at a preliminary 50.5 in September, from a final reading of 50.2 in August, while the employment sub-index shed more than a point, dropping to 46.9. These data are consis-tent with some of the data earlier. For instance, the China’s industrial production for Aug came in much weaker than expected at 6.9%y/y vs. 9% in July, dipping further below the average monthly growth of 12.3% during the 2009-2013 period. Earlier, the bright spot of record trade surplus of US$49.84bn in August was mostly illusory, as it came amidst a back-to-back decline in imports in August while exports growth performance was largely in line with its re-gional peers such as Taiwan and South Korea.

Taken all these together, the first two months of the third quarter look to be mixed at best. However, no indications of such came from Premier Li Keqiang who spoke at the Keynote in Summer Davos in Tianjin in early September and noted that economic growth will come in within range of the 7.5% target. On our part, the weak data in July and August point to a sub-part growth rate in 3Q14, and we are trimming China’s growth forecasts for the second half and the year as a result. For 3Q14, we are adjusting down our headline growth forecast from 7.7%y/y to 7.2%y/y, and to 7.5%y/y in 4Q14, from 7.9%y/y originally. For the full year of 2014, the changes would suggest economic growth of 7.4%, slightly below that of the official forecast of 7.5%. For 2015, we are keeping China’s economic forecast un-changed at 7.5%.

Targeted Monetary Policy Measures In Place With growth momentum showing signs of deceleration in recent months, there have been numerous calls for the monetary authorities to ease policy. Indeed, the central bank actually been reluctant to turn on the liquidity tap generously, given that it has to consider far more factors than just keeping to the economic growth target, e.g. worries about property market, shadow banking sector, residual negative effects from the RMB4tn stimulus mea-sures. The new direction remains targeted in nature, i.e. selective cuts in loan-to-deposit ratios and reserve require-ment ratios (RRR) for preferred sectors. The closest to the large scale easing was in mid-Sep, when it was reported that the PBoC had injected RMB500bn into the Big 5 local banks via the SLF (Standing Lending Facility), with terms of 3 months. The SLF move was equivalent of a 50bps cut in RRR in the past, though the major difference is that SLF comes with a term limit. We expect to change to China’s

policy rates for now. We look for the headline RRR for major banks to remain at 20%, and benchmark deposit and lend-ing rates unchanged at 3% and 6%, respectively.

As for the RMB, the sharp and unexpected depreciation seen in March/April this year, coupled with the widening of the trading bands, suggests that the one-way apprecia-tion of the RMB will be a thing of the past. A one-way track for the RMB will also impede the efforts of the ongoing in-ternationalization of the currency, which has seen its pace pick up significantly since early 2014 as the Xi Jinping-Li Keqiang government pushes out more market reforms in various sectors. This means that going forward, not only will the RMB become less predictable (with one-way ap-preciation now over), the wider trading bands also could see more volatile RMB trading ahead, and possibility of bouts of depreciation, in response to market dynamics and fundamentals.

With our target of 6.15/USD now met, we are adjusting our end-2014 forecast to 6.10/USD, which would still represent a full year depreciation of 0.8% for the full year, the first such occurrence since 2009. Further ahead, we see RMB having limited upside towards 6.00-6.05/USD at end-2015, given the lackluster economic performance as well as po-tential headwinds from the US Fed’s rate hikes. While we are still positive on the outlook for the RMB over the me-dium to long term, we expect more volatility ahead as well as the possibility of bouts of depreciation.

China: Real GDP Growth

7.20

%7.

50%

7.36

%7.

46%

0%

2%

4%

6%

8%

10%

12%

1Q10 1Q11 1Q12 1Q13 1Q14 1Q15


Forecast


GDP 7.7 7.7 7.4 7.5

CPI (average, y/y %) 2.7 2.6 2.6 3.0





In Danger Of Recession?Japan’s final 2Q-14 GDP contraction was revised worse to 7.1%q/q annualized rate (from -6.8%) as the fall in consum-er spending worsened to -5.3% (from -5.2%) while business spending plunged -5.1% (from -2.5%). Japan’s latest set of monthly data was also weak, mostly below expectations. While July CPI inflation was expected (headline at 3.4%y/y, core at 2.3%y/y), industrial production grew at much slow-er 0.2%m/m (-0.9%y/y) after -3.4%m/m (+3.1%y/y) slump in June. July jobless rate unexpectedly ticked up higher to 3.8% (from 3.7%) but the biggest negative surprise was the collapse in household spending at -5.9% (after 3% con-traction in June). The data underscores weakness in the domestic economy following the sales tax hike and damp-ens hope of a speedy consumption recovery. That said, 3Q business survey index (BSI) showed business sentiment improving in 3Q after turning negative in 2Q, giving hope that there may be some turnaround in sight.

However, Japan continued to be mired in a trade deficit in August that has persisted since July 2012. The August trade deficit eased to -JPY948.5bn slightly better than Ju-ly’s JPY 962.1bn deficit. Due to the persistent trade deficit, the current account remains in a JPY638bn deficit for first 7 months of 2014. We see it immensely difficult to reverse the trade deficit which may worsen due to a weaker JPY in 2H. We worry the malaise in consumer weakness could persist, causing 3Q to contract further and send Japan into a temporary technical recession. While some rebound is factored into late-2014, we revised our 2014 GDP growth lower to 1.5% (from 2.1%).

More QQE Soon?The Bank of Japan (BOJ) Governor Kuroda has continued to confound those who expect more easing as the BOJ re-frained from any new quantitative and qualitative easing (QQE) measures and reiterated the similar policy stance since April 2013. We still expect additional easing down the road due to concerns that the malaise in consumer weakness could send Japan into a technical recession and put the Oct 2015 sale tax hike at risk. There will be 2 BOJ policy decisions in October and we think the 31 October 2014 MPM date is the most likely one for BOJ to ease mon-etary policy further as it is accompanied by an assessment of BOJ’s outlook for Japan. There remains a significant pos-sibility for the BOJ to delay easing but the longer the BOJ delays, the more it will have to inject into the system later.

JPY Weakening Towards 110We still expect the USD/JPY to breach 110 by year-end on the back of the expected late-2014 additional monetary stimulus. We already saw the USD/JPY breach 109 before the end of 3Q and the 110 could be breached in late Sep/

early Oct. The eventual delivery of more QQE in late 2014 and the possible crystallization of the Fed Reserve rate lift-off timeline during the same period may even see the USD/JPY hitting 115 although BOJ may not tolerate weakness significantly beyond 110 in the near term and could inter-vene.

Taking Another Stab At 3rd ArrowPM Shinzo Abe took another stab at reform as he an-nounced on 3 Sep the first changes in his cabinet since re-taking office in late 2012. Two things stood out: 1) Yasuhisa Shiozaki, who is seen as an aggressive pro-reformist and fa-vors reforming the Government Pension Investment Fund (GPIF) to enable the fund to buy more risky assets, was named as health minister, which would put him in charge of GPIF (as the fund is under the charge of the health min-istry). 2) PM Abe named five women to his new 18-strong cabinet and comes close to matching his declared aim for 30% of women in senior positions in business and politics by 2020. This is seen as a strong push by PM Abe to lead by example to get more women into the workforce to ad-dress a growing gap in Japan’s greying labour market. We continue to be positive of corporate tax & GPIF reform but more cautious about the success of TPP, labour market& migration reform.


GDP 1.5 1.5 1.5 2.0

CPI (average, y/y %) 0.0 0.4 3.0 2.0

Unemployment rate (year end) 4.3 4.0 4.2 4.2

Current account (% of GDP) 1.0 0.7 -0.3 0.1


JAPAN

The Sharp Spending Pullback In 2Q14 May Extend Into 3Q

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Mar-96 Sep-00 Mar-05 Sep-09 Mar-14

GDP growth (%q/q SAAR)Personal Consumption growth (%q/q)


Sales tax increased from 5% to 8% on

1 April 2014

Sales tax increased from 3% to 5% on

1 April 1997


Growth Moderated In Second QuarterEconomic growth was a respectable 3.7% y/y in 1H14 but part of this had come from a low base effect and there are concerns that the recovery will be stalled after the Sewol ferry accident in April. Overall, there was a broad-based slowdown in the economy in 2Q14 with private consump-tion growth easing to 1.5% y/y (weakest since 3Q12) from 2.5% in 1Q14. Exports and fixed investments growth also moderated compared to the first quarter on weaker-than-expected global demand recovery. Bank of Korea (BoK) has cut its 2014 and 2015 growth forecasts to 3.8% and 4.0% respectively in July.

Focus On Getting Growth To Higher TrackThe Korean authorities have followed up with quick suc-cession of fiscal and monetary policy easing. The govern-ment’s KRW41 tn (US$40 bn) stimulus package announced in July includes KRW11.7 tn in expanded fiscal spending and KRW29 tn in extra financing support. To boost invest-ments, Bank of Korea (BoK) has raised the ceiling of cheap loans to SMEs and the government relaxed mortgage curbs in August to boost the property market. Proposed tax measures to encourage businesses to reduce their cash reserves in favour of investments, wage increases and dividends are targeted at the country’s structural growth concerns. In addition, the government has proposed an expansionary budget for the next three years with spend-ing set to grow by an average of 4.7% per year (vs. 4.0% in 2014). This is expected to bring the budget deficit higher to 2.1% of GDP in 2015 from 1.7% estimated for this year.

Inflation Bound Higher But Risks Are ContainedHeadline inflation has slipped to 1.4% y/y in August from 1.6% in July but core inflation edged higher to 2.4% y/y from 2.2% in July. Despite edging higher from the start of the year, the headline inflation has remained subdued. We expect the low base effect to continue to exert upward pressure on the inflation rate which we forecast will rise to an average of 2.0% y/y in 4Q14. The central bank expects inflation at 1.9% in 2014 before picking up to 2.7% in 2015. Higher inflation trajectory ahead reduces the likelihood of further rate cuts.

Mixed Views On Interest RateIn August, the BoK cut its benchmark base rate by 25 bps to 2.25%, the first cut since May 2013. The interest rate is now at its lowest since November 2010. We perceive the August cut as a one-off move to support the government’s stimulus, in particular, on the housing market. Clearly, the strong push by Finance Minister Choi Kyung Hwan to boost growth and the real estate market means that the BoK remains under pressure to cut its benchmark interest rate further if the macroeconomic outlook fails to improve.

In our view, a further rate cut is not necessary. We expect economic growth to be on track for 3.7-3.8% this year, sup-ported by recent measures. Instead, we are wary of the potential impact of lower interest rates and easier mort-gage on encouraging further household debt which has hit 85.6% of GDP by end-2013.

On balance, we expect the interest rate to stay steady for the rest of 2014 while a confluence of factors including higher domestic inflation, improvement in growth out-look and US’ monetary policy normalisation to increase the odds of BoK raising its interest rate gradually next year.

USD/KRW Higher On Interest Rate Cut Prospect KRW has fallen sharply from its 6-year high of 1,008.45/USD at the start of July as the government signaled sup-port for lower interest rates. A sharper correction in JPY has brought JPY/KRW to its lowest since August 2008, which will likely keep the BoK’s tone on a dovish bias in the short-term. Nonetheless, some improvement in South Korea’s economic outlook and a strong current account position will mitigate pressure arising from expectation of Fed rate normalisation. This could support the KRW as we move into the fourth quarter. Our end-4Q14 target for USD/KRW is now at 1,040.

SOUTH KOREA


GDP 2.3 3.0 3.7 4.0

CPI (average, y/y %) 2.2 1.3 1.6 2.1

Unemployment rate (4Q avg) 3.0 3.0 3.2 3.0



Tackling Sluggish Private Consumption Growth

-6.0-4.0-2.00.02.04.06.08.0

10.0

2005 2007 2009 2011 2013

Net exportsInventoryGFCFGovt consumptionPrivate consumptionGDP


ppt contribution to growth


EUROZONE

Latest ECB’s MeasuresUnderscore Draghi’s Determination The ECB unexpectedly lowered all interest rate targets to fresh record lows in September and took its rate on bank deposits further into negative territory. It also announced that it will start to buy asset-backed securities (ABS) in Oc-tober. Whilst we won’t be getting any details till then, the purchases will now include residential mortgage-backed securities (RMBS). ECB President Mario Draghi had also indicated that he would like to “significantly steer the bal-ance sheet towards the dimensions it used to have at the beginning of 2012”. The figure of early 2012 was reportedly around EUR2.7trn. Against the current EUR2.0trn, this plac-es the new programmes at a price tag of about EUR700bln.

But Is This QE?Draghi has long insisted the central bank would continue to take what it feels is appropriate action to get the Eurozone economy on track. Whether the latest policy announce-ments – which also include covered bond purchases as well as the targeted longer-term refinancing operations (TLTROs) announced in June – qualify as Quantitative Eas-ing (QE) is an open question. Draghi had mentioned that “The definition of QE is not really related to its size but rath-er to its modalities. QE is an outright purchase of assets…rather than accepting these assets as collateral for lending. The ECB would outright purchase these assets. It would in-ject money into the system”. But then he made the point that outright central bank purchases of assets, whether pri-vate sector or government, count as QE. We think that what Draghi suggests QE is, is exactly what the ECB is engaging in. Yet “credit easing” as he put it, is the primary aim of these measures. We also acknowledge that the ECB has left the door open for buying sovereign and other debt issued by government entities.

Too-Low Inflation CouldDerail The Weak EconomyThe latest moves are supposed to juice growth and prop up inflation, which is running at dangerously low levels in the Eurozone. The ECB downgraded GDP growth for 2014 to 0.9% and 2015 to 1.6% (from 1.0% and 1.7% respective-ly), in line to our growth forecast for this year but above our 2015 projection of 1.4%. Inflation is seen at 0.6% this year instead of 0.7% previously whilst the inflation outlook for 2015 is maintained at 1.1%, both just a fraction of the ECB’s 2.0% target and probably good reason enough for Draghi to drop the long-standing phrase that risks to the inflation outlook were “broadly balanced”. We think that if growth

and inflation forecasts for 2015-16 are revised lower at sub-sequent meetings, then it may justify outright QE including government bonds.

Euro To Remain In The Doldrums EUR/USD has not seen much of a rebound since it punched through the key 1.300-figure. Even without the latest move by the ECB, we have had compelling reasons to believe that the EUR/USD will move lower. On the domestic front, there have been clear setbacks to Eurozone growth pros-pects. Domestic politics and geopolitical uncertainties will also add to the pressure. More importantly, the notion that Fed policy “normalization” is on track to see policy inter-est rates begin to rise by the middle of 2015, and continue to move gradually higher from there is consistent with an overall broadly firmer dollar tone. But the ECB’s move in September clearly widens the perceived gap between US monetary policy and Eurozone monetary policy. This should see the EUR/USD remain under renewed pressure, we see a year-end target of around 1.2600.


GDP -0.7 -0.4 0.9 1.4

CPI (average, y/y %) 2.5 1.3 0.6 1.2




Deflation Threat Places Pressure On ECB

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

CPI (y/y%)

Source: Bloomberg, UOB Global Economics & Markets Research


AUSTRALIA

Rebalancing Still UnderwayAustralia’s GDP growth was solid in Q2, particularly given the strong Q1 print. The economy expanded 3.1% from a year earlier, beating market expectations of 3.0% but com-ing in lower than last quarter’s 3.4%. GDP grew at 0.5% from the previous quarter, also beating expectations of 0.4%. This figure printed lower than the first quarter’s 1.1%. Whilst the first and second-quarter GDP readings together suggest a picture of moderate growth, we remain cau-tiously optimistic about the economy. In fact, one of the more standout data release of late has to be the employ-ment report, where an extraordinary 121k rise in employ-ment alongside a decline in the unemployment rate to 6.1% was registered in August. However, given the persist-ing volatility in the labour market, we are taking this out-come with a heavy dose of caution. The search for the next growth cycle is crucial, especially as the mining-dependent economy transitions away from resources-led expansion. And although the housing sector has flourished as interest rates remain at a record low, there are increasing concerns of property bubbles and over-investment in China. We think that more time is needed to assess how the transition will occur from declining mining investment to a pickup in non-mining sectors. We have revised our growth fore-cast for 2014 slightly higher to 3.0% but are keeping to our 2015 forecast of 2.9%.

Rates To Stay On HoldThe RBA kept the cash rate steady at a record low of 2.50% in September, where it has been unchanged at its current low level for more than a year now. The central bank re-peated its stance held since the beginning of the year that “the most prudent course is likely to be a period of sta-bility in interest rates”. There was a tweak in the currency language though, with the RBA stating that “the exchange rate remains above most estimates of its fundamental value, particularly given the declines in key commodity prices”, adding that “it is offering less assistance than would normally be expected in achieving balanced growth in the economy”. On a whole, more timely indicators have sug-gested further improvement in economic conditions; and with very low interest rates supporting the booming hous-ing market, the RBA has little incentive to cut its cash rate further. The high currency, on the other hand, is constrain-ing Australia’s great rebalancing act, and thus interest rates are likely needed to stay low for longer to support the economy. This on balance reinforces our view that the RBA will keep rates on hold over the near-term.

Down-Move BeginsAUD/USD had hovered within the 0.9200-0.9500 range for bulk of 3Q, largely due to the status-quo monetary poli-

cy stance the RBA has been adopting. However, the pair has fallen sharply since early-September, amplified by the strength of the USD on firming Fed policy tightening bets against the Australian central bank that is not. This should continue to be a catalyst that will see further correction in the AUD/USD going forward. Chinese data will be another important catalyst for the Australian dollar. Indeed, bear-ish Chinese data has added to worries about a 40% slide in iron ore prices this year and further soured the outlook for commodity-led currencies. Going forward, chief among these potential risk factors will be the extent to which a softening property market in China is coinciding with a weakening credit cycle. That said, it has been clear that the RBA prefers a lower currency. The central bank has been attempting to talk its currency lower, albeit the lack of suc-cess. Governor Stevens highlighted the bearish view on the currency in his semi-annual monetary policy statement. He specifically remarked that short-term speculators that are long the currency are underestimating the risk that the Aussie dollar will drop. Although he suggested that the RBA had not seriously considered currency intervention, the “high” AUD is constraining this rebalancing act. We look for a lower AUD/USD from here, with an end-year target of around 0.8700.


GDP 3.6 2.3 3.0 2.9

CPI (average, y/y %) 1.8 2.5 2.7 2.5




AUD And Interest Rate Differential

0.8

1.0

1.2

1.4

1.6

1.8

0.85

0.90

0.95

1.00

1.05

1.10

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14

AUD/USD Curncy - LHSAU-US 10Y Interest Rate Diff



NEW ZEALAND

Growth Remains UpbeatNew Zealand’s growth figures for the second quarter came slightly above expectations, with the q/q reading at 0.7% versus 0.6% expected and 1.0% last, whilst the y/y stood at 3.9% versus 3.8% expected and 3.8% last. The NZ Bureau of Statistics reported that business services (up 4.2%) was the main driver of the growth, with agriculture, forestry and fishing (down 2.8%) partly offsetting the growth. The expenditure measure of GDP was up 0.5% in 2Q14. Invest-ment was up 1.5% and household consumption expendi-ture was up 1.3%. Inventories built up $650 million, due to distribution inventories. Exports of goods and services fell 2.9%, driven by food, beverages, and tobacco. Imports of goods and services rose 2.9%, mainly due to capital goods. Although recent indicators have shown some cooling of growth in the second half of the year, the latest GDP re-port underscores the broad-based nature of New Zealand’s economic growth. This is driven by the Canterbury rebuild and strong demand for new housing in Auckland, accom-panied by an improving labour market and strong inwards migration. Monetary Policy: A Pause For NowAfter lifting the OCR at four consecutive meetings from March to July, the RBNZ left the OCR unchanged at 3.50% for the rest of 3Q. This was a widely expected move after the central bank announced a “pause” in its programme of rate hikes during the July monetary policy review. New Zealand inflation accelerated less than expected and dairy prices slumped, easing pressure on the central bank to continue raising borrowing costs.

The other important factor providing the RBNZ with a bit more time has been the NZD. The currency’s rise earlier this year has limited the cost of imports and helped contain in-flation, even as economic growth accelerated. Previously we saw room for another 25bps rate hike by year-end, al-though we highlighted that it was very much contingent on the Q3 CPI print due on 23 October. However, the Sep-tember meeting and the accompanying statement saw the RBNZ saying “it is prudent to undertake a period of moni-toring and assessment before considering further policy adjustment”. The interpretation for this is that RBNZ is ef-fectively rule out further rate hikes for the rest of 2014.

NZD Under PressureThe NZD continues to be the highest-yielding currency in the G10 FX space. Yet, the NZD/UZD pair has fallen sharply over the past quarter on a pause in rate rises by the RBNZ. In fact, weaker dairy prices and underperforming New Zealand price-growth data suggest that the New Zealand central bank may be relatively slow to resume interest rate hikes. This, alongside the prospect of a sooner-than-expected start to Fed tightening, is likely to add pressure on the NZD in the coming months. Having said that, if the currency falls at a faster pace or to a much lower level than the RBNZ expects, then could be a need of tighter policy in response since a weaker currency can also import inflation. The RBNZ thus faces a careful balancing act going from here. On balance though, we look for a lower NZD/USD as we head towards the end of 2014.


GDP 2.9 2.4 3.3 2.9

CPI (average, y/y %) 1.1 1.2 1.7 2.1



Fiscal balance (% of GDP) -2.1 -0.3 -1.1 0.1

Inflation Remains Well Contained

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Sep-00 Feb-04 Jul-07 Dec-10 May-14

CPI (%y/y)


RBNZ Target Band


UNITED KINGDOM

Scottish Referendum Came And WentPolitics had been the key theme since the beginning of September when opinions polls created heightened un-certainty about the likely outcome ahead of the Scottish referendum on 18 September. As it turned out, the Scottish voted “NO” to independence and thus continue to form an integral part of the UK, eliminating huge economic and political uncertainty of untangling the 307-year-old union. That said, the focus will slowly turn to how the UK govern-ment delivers its promise of more powers for the Scottish parliament, based at Holyrood, Edinburgh. This could still complicate fiscal consolidation in the UK. But for now, a sig-nificant downside risk to UK growth has been eliminated. As such, we are keeping to our 2014 GDP forecast of 3.0%.

Huge Relief For BoEBut Rate Hike Could Still Come LaterAs highlighted in the last quarterly report, we were ex-pecting a split in the voting pattern to occur soon. And true enough, it was during the August meeting that two members from the MPC pushed for a 25bps rise in interest rates, marking the first dissent on policy faced by Gover-nor Mark Carney since he took office in July 2013. Whilst the split vote was not surprising, the 7-2 rather than 8-1 outcome was rather notable. The question from here is whether Both Martin Weale and Ian McCafferty will quickly gain the support of a majority. Overall, it seems that the remaining seven, including the Governor Mark Carney, agrees that the failure of wages to rise above the rate of in-flation meant there was little domestic pressure on prices over the next couple of years. This should serve to buy the MPC some more time. Besides, a premature tightening in monetary conditions could leave the economy vulnerable to unexpected shocks. We are therefore maintaining our view that the BoE will hold off on rate hikes until early next year, possibly only in 2Q 2015.

Sterling Needs Greater BoE Dissent To ReboundGBP/USD fell quite significantly over the past quarter. At the same time as US economic data surpassed expecta-tions, the UK data flow mostly disappointed, lowering BOE rate hike expectations. Political risk added to the downside in the GBP/USD in the run-up to the Scottish referendum. The pair has turned back up post-referendum, and this re-lief could dominate for the time-being. We do not, howev-er, see much gains from here as the shine on the GBP/USD has already begun to come off even before intensified po-litical concerns came into play. We think that the currency will probably need greater BoE dissent first to move higher. In that regard, two dissenters do not necessarily mean that chances for a rate hike have increased, and recent history has suggests it is not a given. Andrew Sentence began voting for rate rises in June 2010 but was on his own for seven months before Martin Weale joined him. A month later, in February 2011, Spencer Dale joined them in voting for rate rises and there were four months of a 6-3 split. An-drew Sentence left the MPC in May 2011 and two months later, the others dropped the call for rate rises. So even a period of 6-3 voting does not necessarily mean rates will rise. We probably need to see a dissention from internal members (i.e. Carney, Broadbent, Shafik, Cunliffe, Haldane) to be considered much more hawkish. The broader USD theme, in our view, should continue to be in play and this reinforces our view of a lower GBP/USD.


GDP 0.3 1.7 3.0 2.6

CPI (average, y/y %) 2.8 2.6 1.7 1.9




Member Internal / External Voting History Hawk / Dove Term Last Vote

Mark Carney Internal Neutral 1 Jul 2013 - 30 Jun 2018

Ben Broadbent Internal Neutral 1 Jul 2014 - 30 Jun 2019

Nemat Shafik Internal 1 Aug 2014 - 31 Jul 2019

Sir Jon Cunliffe Internal Neutral 1 Nov 2013 - 31 Oct 2018

Andy Haldane Internal 1 Jun 2014 - 31 May 2017

Kristin Forbes External 1 Jul 2014 - 30 Jun 2017

David Miles External Dove 1 Jun 2009 - 31 May 2015

Ian McCafferty External Neutral 1 Sep2012 - 31 Aug 2015 HIKE

Martin Weale External Hawk 1 Aug 2010 - 31 Jul 2016 HIKE

Source: BoE, UOB Global Economics & Markets Research


UNITED STATES OF AMERICA

Still Positive On US GrowthGDP grew by 4.2%q/q SAAR (up from advance estimate of 4%) while the contraction in 1Q was unchanged at 2.1%. The increase in real personal consumption spend-ing (which accounts for more than 2/3 of the US economy) was unchanged at 2.5% while it was the upward revision of fixed investments growth (to 8.1% from the advance esti-mate of 5.9%) and a faster increase in the exports of goods & services (to 10.1% from 9.5%) helping to narrow the trade deficit, which contributed to most of 2Q’s upward growth revision.

And looking at the July surge in durable goods, healthy retail sales, strong US consumer confidence, positive labor numbers (in IJC and NFP) and housing data, it gives us quite a bit more confidence, this good run of growth in US GDP could sustain into 2H 2014. Although it may not exceed the 4% seen in 2Q, but we will believe above 3% is likely in 2H. We continue to be positive on US growth outlook but re-vised our forecast for 2014 GDP growth to 2.7% (from 3%) with the US housing market and the US consumer provid-ing the out-performance factors.

That said, August jobs was a disappointment, coming in at 142k (from 212k in July), falling short of forecast by 80k and breaking the 6-month streak of more than 200k monthly job additions. Even as unemployment rate edged lower to 6.1% (from 6.2% in July), that was due to the fall in US labor force. Total number of unemployed still hovered 9.6mn while labor force participation rate remained stub-bornly low at 62.8% (since April 2014). The small sparkle in the data was the slight uptick in earnings, albeit modestly by 2.1%y/y (0.2%m/m) but not really to the pre-recession increment pace. Under-employment remains elevated at 12.0% (from 12.2% in July) as those who are forced to work part-time because of inability to secure full-time employ-ment was still at a prohibitive number at 7.3mn. Whether this weak NFP is a worry or an aberration remains to be seen.

FOMC: Readying For Lift-Off (Or Not?)The September 2014 FOMC saw the Fed continue to trim the Fed’s monthly QE further by another US$10bn to US$15bn and announce an updated exit strategy plan while making minimal changes to the text of the FOMC statement. The concern about “overwhelming” markets with too many changes at once in one FOMC could be the reason for the Fed to defer changing the language of the FOMC statement significantly in September, and instead leave those changes for preparing the markets for rates lift-off to a later date (either in 28-29 Oct 2014 or 16-17 Dec 2014 FOMC).

We reiterate our view the QE to be fully terminated by the 28-29 Oct 2014 FOMC with US$15bn cut as last step. We still expect the rate normalization to take place in 2015 (possibly starting in 16-17 Jun 2015 FOMC), bringing the FFTR to 1.25% by end-2015, and 3.25% by end-2016.

A Flatter UST Yield Curve ViewEven as the Fed continues to taper QE, the long-end US Treasury yields did not rise as high as we initially project-ed. The 10-year UST yield is presently at 2.6% (19 Sep 14) with our target at 3% by end-2014 (the same as where we were at end-2013%). We expect the UST yield curve to flat-ten further once rate hike expectations crystalized by late-2014, which will drive up short-end yields. 2Y UST already at 0.57% (at 19 Sep 14) from the recent low of 0.27% at 21 Nov 13, could be closer to1% by end-2014.

Return Of The (US$) King Our expectation for USD strength against major and Asian FX started to play out in 3Q-14 as the market fully priced in the QE taper and grows increasingly concerned about the Fed’s interest rate hike timeline. We believe significant dollar strength will materialize further when the Fed gives a concrete rate hike timeline before the year is up.


GDP 2.3 2.2 2.7 3.2

CPI (average, y/y %) 2.1 1.5 2.0 2.5

Unemployment rate (year end) 7.9 6.7 5.7 5.2



Expecting Stronger Dollar And Flattening Yield Curve

79

80

81

82

83

84

85

1.8

2.0

2.2

2.4

2.6

2.8

Dec 13 Feb 14 Apr 14 Jun 14 Aug 14

US Treasury 10Y-2Y Yield spreadUS dollar Index (DXY) - RHS

Source: Bloomberg


EUR/USD – 1.2850The low of EUR/USD as of the time of writing is at 1.2816, this level is not far away from the major long-term support zone at 1.2745/55. 1.2745 is the low in 2013 and 1.2755 is the rising trend-line support stretching back to 2001. With Weekly RSI at extreme oversold lev-els, a sustained break below this zone appears unlikely. However, a move towards 1.2660 will not be surprising but any such move will likely lead to a rebound towards 1.3050/1.3150 before further EUR weakness can be expect-ed. In other words, we believe that EUR is close to making an interim low and a recovery is imminent but any rebound is viewed as part of a broader consoli-dation phase instead of the start of a bullish reversal.

GBP/USD – 1.6385Since 2010, GBP/USD rebounded each time when Weekly RSI hit extreme oversold levels. The current set-up is similar and GBP has likely made a low at 1.6052 and a rebound towards 1.6750/1.6800 is likely in the early part of Q4. However, bearish longer-term outlook for this pair suggests that an-other bearish phase is likely closer to the end of this year or beginning of next year.

AUD/USD: 0.8880While the AUD weakness that started in September appears incomplete, most indicators are at over-extended levels and even a break below the year-to-date low at 0.8660 is likely limited to the next support at 0.8520. Overall, we expect another leg lower towards 0.8520 but this level could provoke a rebound towards 0.9110 and lead to a consolidation phase between 0.8520 and 0.9110 which may last until end of this year.

FX TECHNICALS


NZD/USD: 0.8095NZD just made a fresh 2014 low of 0.8042 as of the time of writing. The down-move appears incomplete and is expected to extend towards the major support at 0.7900 before a more sus-tained recovery is likely. Only a break back above 0.8200 would indicate that a rebound towards 0.8400 is underway.

USD/JPY: 108.50The stupendous rally that started from near 101.00 appears to be close to com-pletion. However, another leg higher towards 100.00/100.50 will not be sur-prising but this is expected to lead to pull-back towards the 105.50/00 sup-port.

USD/SGD: 1.2660The up-move in USD is approach-ing the falling trend-line resistant at 1.2720. Strong upward momentum suggests that a break above this level is likely. The absence of any significant resistant could lead to a quick run-up towards 1.2795 and possibly 1.2860 closer to the end of the year. 1.2540 is acting as a very strong support now.

FX TECHNICALS


USD/MYR: 3.2380Weekly MACD just turned positive as of the time of writing. This suggests that USD could continue to move higher to-wards the major resistant at 3.3100 in Q4. Any pull-back is expected to hold above 3.1650.

EUR/SGD: 1.6250While the sharp drop in EUR is clearly oversold, there are no signs of stabili-zation just yet. Another leg lower to-wards the major support near 1.6005 is likely before a recovery can be ex-pected. Overall, the current movement is suggesting that this pair is close to making a mid-term low and a rebound towards 1.6480/00 is likely by end of the year.

GBP/SGD: 2.0750After trading in a volatile manner in Q3, further volatility is unlikely in Q4. Most indicators are unwinding from oversold conditions and the current movement is likely the early stages of a prolonged sideway consolidation phase. Expect this pair to trade between 2.0185 and 2.1100 for the rest of this year.

FX TECHNICALS


AUD/SGD: 1.1200After trading between 1.1530 and 1.1830 for about 4 months, AUD broke below the support and is currently ap-proaching the year-to-date low near 1.1085. A break below this level will not be surprising but indicators are quickly approaching oversold and the next major support at 1.1000 is likely strong enough to hold for a rebound towards 1.1500 by end of the year.

JPY/SGD: 1.1600JPY/SGD is currently at levels not seen since 1998. The down-move appears incomplete and further weakness is likely in Q4. However, extremely over-sold conditions could slow the pace of any further decline and the major sup-port at 1.1300 may not break so eas-ily. 1.1300 is the low seen during the height of the Asian Financial Crisis in 1997.

FX TECHNICALS


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Disclaimer

This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and area subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reli-ance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and ac-counting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.


UOB Research Team

Jimmy Koh Head of Research(65) 6539 [email protected]

Alvin LiewSenior Global Economist(65) 6539 [email protected]

Lee Sue AnnTreasury Economist(65) 6539 [email protected]

Suan Teck Kin, CFASenior Asian Economist(65) 6539 [email protected]

Ho Woei ChenAsian Economist(65) 6539 [email protected]

Francis TanAsian Economist(65) 6539 [email protected]

Quek Ser LeangMarket Strategist(65) 6539 [email protected]

More reports available on:URL: www.uob.com.sg/researchEmail: [email protected]: UOBR

MCI (P) 006/01/2014

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Currency Forecast & Interest Rate Trends · highlight. The insurgence in Syria and Iraq remains a real threat which has now led to the US & its allies’ expanded military action