FX: Trade war turns ugly for Asia ex Japan currencies

Export-led Asia ex Japan currencies – the South Korean won (-5% ytd as of September 17), the Taiwan dollar (-3.3% ytd) and the Singapore dollar (-2.6% ytd) – are likely to feel the sting from the escalation in China-US trade tensions. US President Donald Trump finally announced that, with effect from September 24, an additional USD200bn worth of Chinese goods entering the US will be subject to a 10% import tariff, with the rate set to increase to 25% by from January 1, 2019. Trump warned that tariffs will fall on the remaining USD267bn worth of Chinese imports if Beijing retaliates. We have, last week, lifted our end-year target for USD/SGD to 1.42 from 1.40.

China’s Commerce Ministry warned last week that it would target USD60bn of US goods into the mainland on any new tariffs. Earlier hopes for both sides to renew trade talks and ease tensions have evaporated. Wary that China may tolerate more depreciation in the Chinese yuan (-5.1% ytd), markets are keeping a close eye at the psychological 7 level against the USD. Many believed that the yuan’s 7.7% depreciation in June-August was in response to the US tariffs on USD50bn of Chinese products. Having noted the Vietnamese dong’s depreciation with the yuan during the same period, we believe that policymakers there will be looking to keep their exchange rate competitive.

India: A bearish flattening in its yield curve

INR debt markets continue to endure volatility. From a narrow 7.7-7.8% band (generic) at the start of 3Q, INR 10Y bond yields breached 8% in August, to a four-year high past 8.2% last week. A lower close on Friday on expectations of relief measures evaporated pushing yields up early Monday before a softer close at 8.10%. Short-end rates are rising on rate hike expectations, flattening the yield curve.

Scale of further selloff in the INR bond markets hinges on external triggers and impact on the currency. A likely return in the emerging market stress (read DBS Macro Strategy dated 17 Sep), alongside a bounce in Brent prices close to USD78pb, just as the US-China trade dispute looks set to escalate (fresh tariffs have been announced this morning), points to a difficult external environment for the Indian bond markets. Debt FPIs outflows resumed in September after a reprieve in July and August.

Domestically, markets were underwhelmed by government’s guarded response to defend the currency. Friday’s announcements included, a) effort to boost inflows – through exempting Masala bonds from withholding tax and allowing banks to become market-makers, easing portfolio investors’ restrictions into corporate bonds and encouraging manufacturing firms to raise short-term ECBs; b) plans to curb imports and lift exports, with more details due later; c) committed to the -3.3% of GDP fiscal deficit target for FY19, factoring in higher direct tax and non-tax revenue collections. Monday’s press reports pointed to a likely increase in import duties on consumer goods, along with gold. These measures might trigger a modest improvement in the current account gap, are likely to be overshadowed by a rising oil import bill. Focus hereafter shifts to the next RBI meeting as markets frontload rate hike risks (see here).

Liquidity, which had slipped into deficit, will receive a breather from Wednesday’s INR100bn OMO buyback, first since mid-July. This infusion was necessary to offset strong FX intervention, likelihood of a bigger H2 borrowing, tax outflows and festive-driven drain.

For 10Ys, pullback will be shallow, with 8% marking the floor and likelihood of a fresh test of 8.23% high on the cards if external risk-off weighs on the INR. Rate hike expectations (DBSf +50bps within FY19) will underpin the 2Y above 7.8%, despite a fleeting relief through bond buybacks.

Philip Wee

FX Strategist


Radhika Rao



Group Research

DBS Bank Ltd

Economics Research website


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