mizuho dealer s eye · as the markets inclined slightly towards risk aversion, the yen enjoyed a...

Mizuho Dealer’s Eye August 2014

U.S. Dollar .................................................................... 1 Euro .............................................................................. 6 British Pound .............................................................. 10 Australian Dollar ........................................................ 12 Canadian Dollar ......................................................... 15 Korean Won ............................................................... 17 New Taiwan Dollar .................................................... 20 Hong Kong Dollar ...................................................... 23

Chinese Yuan ............................................................. 25 Singapore Dollar ........................................................ 27 Thai Baht .................................................................... 30 Malaysian Ringgit ...................................................... 33 Indonesian Rupiah ..................................................... 36 Philippine Peso ........................................................... 38 India Rupee ................................................................ 41

Mizuho Bank, Ltd.

Forex Division

Mizuho Bank | Mizuho Dealer’s Eye

August 1, 2014 1

Kazuhiko Fujisaki, Deputy General Manager, Forex Sales, Forex Division

U.S. Dollar – August 2014 Expected Ranges Against the yen: JPY101.00–105.00

1. Review of the Previous Month The dollar/yen pair opened the month at the lower-101 yen mark. It then gained to the lower-102 yen

level on expectations for the release of some strong U.S. employment data. At its regular meeting on

July 3, the ECB Governing Council kept policy rates fixed and made no announcements about further

easing. The U.S. employment data for June was released on the same day. Nonfarm payrolls beat prior

forecasts by rising 281,000 on the previous month. However, the currency pair then fell due to a sense

that positive factors had now run their course. The pair’s slide was also prompted by rising geopolitical

risk related to Ukraine and the Middle East. As the markets inclined slightly towards risk aversion, the

yen enjoyed a gentle appreciation. Disaster then struck as a civilian airplane owned by Malaysian

Airlines was shot down over Ukraine. Speculation grew that the pro-Russia camp had hit the plane by

mistake, believing it to be a military aircraft. As Russia entered into a slanging match with the U.S. and

Europe, geopolitical risk intensified and demand grew for the yen as a safe place to park money. As a

result, the Japanese unit strengthened further. July 10 saw attempts on the lower-101 yen mark, a key

chart point, but the pair then grew firmer on the downside and managed to defend itself at the 101 yen

level.

Amid a dearth of new factors, the pair then traded with a lack of incentives. On July 24, Japan

posted its trade balance for June, with the deficit swelling to a record 822.2 billion yen. While exports

moved sluggishly, imports began to recover from the slide that followed the consumption tax hike. The

yen began falling on speculation that the deficit would widen again in future. Meanwhile, the U.S.

continued to post a series of generally-healthy economic indicators. With the 2Q GDP data set for

release of July 30, speculation grew that the economy would bounce back from its 1Q slump to hit

annualized growth in the region of 3%. A sense of cautiousness about the upcoming FOMC meeting

and growing hopes towards the next set of employment data (set for release at the beginning of August)

also helped the greenback to move firmly, with the currency pair regaining the 102 yen mark on July

29. The 2Q GDP data was then released on July 30. The data beat forecasts by rising an annualized 4%

on the previous quarter, with the GDP deflator rising to 2%. As expected, the FOMC decided to taper

the scale of its asset purchases, with the accompanying statement saying that “the likelihood of

inflation running persistently below 2 percent has diminished somewhat.” As the dollar strengthened

across the board, the dollar/yen pair also soared to around the lower-103 yen mark, though it then

dropped back on news that Argentina would be declaring a selective default. The pair continued to

move at the upper-102 yen mark during Tokyo trading time on July 31.

On the whole, July saw growing expectations for the dollar gaining due to supply and demand


August 1, 2014 2

factors and widening Japanese-U.S. interest-rate differentials, though the unit’s topside was capped by

growing geopolitical risk related to Ukraine and Palestine. The speed of the Japanese unit’s slide was

also slowed by the fact the euro is now being used for carry trades instead of the yen. The currency pair

is also becoming less responsive to factors emanating from Japan, with the markets losing faith in the

Abe administration’s growth strategy, while expectations for further easing will remain muted until

inflation drops below 1%. The market’s lack of movement was also due to the fact that Europe has

entered the holiday season, with the climate of low volatility also playing a role.

2. Outlook for This Month: The dollar/yen pair is expected to move firmly this month. With the U.S. economy on the road to

recovery, attention has shifted to the timing of the first FRB interest rate hike. The euro’s deposit

facility rate is now in negative territories, while the euro now seems safe to use as a carry-trade

currency. Under these circumstances, the dollar is likely to be bought from an interest-rate perspective

as the FRB approaches the end of tapering. On the supply and demand front, imports in April–June slid

back after the previous demand rush, capping Japan’s trade deficit and prompting yen buying.

However, it seems the deficit may grow even larger from here on as seasonal factors wear off. The

markets have already lost faith when it comes to Japan’s growth strategy and expectations for further

easing, but the yen is likely to face more downwards pressure due to supply and demand factors and

anticipation for widening interest-rate differentials. The yen has weakened to the triple-digit range

against its U.S. counterpart, yet it is difficult to justify this situation from the perspectives of position

inclinations and purchasing power parity. With the dollar/yen pair continuing to move flatly, the

markets have seen a slide in the volume of short-term yen short positions, while some par value

adjustment is also likely based on prices, so in the end the pair’s movements will probably be shaped

by supply and demand factors and interest-rate differentials.

As for U.S. economic indicators, attention will be focused on the jobs situation and price movements.

The quarterly refunding will also attract attention in August, but these new notes are likely to be

gobbled up even as tapering draws to a close, with the U.S. treasury market set to move firmly as

investors hunt for yield. Observers will also be watching FRB Chair Janet Yellen’s speech at the

Jackson Hole Symposium. When Yellen assumed the top spot, her dialogue with the markets was

somewhat fraught with difficulties, but her recent comments have been quite balanced and

non-committal in nature, so the speech is unlikely to yield any surprises. With expectations for an

acceleration of the timing of interest rate hikes likely to increase, if Yellen adopts a cautious stance at

Jackson Hole, this may see mid- to long-term interest rates trending downwards for a time.

Turning to Japan, and attention will be focused on price movements, the current account and the

trade balance. On an individual basis, if GDP for April–June turns out to be too weak, the government

will find it very hard to raise consumption tax to 10% within next fiscal year. Amid ongoing fiscal

stimulus, it would seem somewhat inconsistent to raise indirect taxes while cutting corporate tax, but

the markets would certainly invite a further hiking of consumption tax, with most observers believing


August 1, 2014 3

such a move would be met by stock gains and yen depreciation. It is hard to imagine prices rising

further for the time being. If it is confirmed that the pace of inflation is slowing, this may lead to a

surge in expectations for further easing, but it seems the Bank of Japan will have difficulty reaching a

consensus on the issue.

Next we turn to the current account and trade balance. Seasonal factors and a likely slide in the

income balance surplus will probably produce more speculation that the current account surplus will

decrease or even slip into the red on the back of the trade deficit.

If domestic consumption bounces back, the trade deficit may grow larger due to import growth.

There is now talk of switching nuclear power plants back on, but even if the situation returns to

pre-earthquake levels, this will only see a third shaved off the trade deficit. If the government decides

to phase the nuclear plants back in slowly, starting with the regions, then the impact on supply and

demand will be limited.


August 1, 2014 4

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the dollar (9 bulls: 101.00–107.00, Core: 101.00–105.00)

Fujisaki

101.00

–

105.00

FRB tapering has entered its final phase and market participants are expecting interest rates to be lifted in

mid-2015. Under these circumstances, the dollar is likely to be bought on anticipation for widening Japanese/U.S.

interest-rate differentials. Amid a dearth of seasonal factors, the dollar/yen pair’s movements are likely to be

impacted by Japan’s trade deficit.

Kato

102.00

–

107.00

The attention of the markets is shifting back to Japanese/U.S. interest-rate differentials, while speculators have just

begun to reconstruct their positions after the strong deadlock that previously obtained, so there is likely to be

healthy appetite for dollar buying.

Yano

101.00

–

104.00

Anticipation for a rise in U.S. interest rates is growing on the back of healthy U.S. economic indicators. Market

participants are focusing on the October end of quantitative easing and the timing of when interest rates will be

hiked thereafter. Under these circumstances, the dollar/yen pair is set to move firmly as the dollar is bought on

expectations for widening Japanese/U.S. interest-rate differentials.

Noda

101.00

–

106.00

There are signs that the period of declining volatility may be coming to an end. Thereafter, a new trend is likely to

emerge in the near future. The dollar looks set to appreciate on the back of the robust U.S. economic performance.

Takada

101.00

–

104.00

The dollar/yen pair is moving with a heavy topside on the back of U.S. interest rate trends as the markets try to

gauge when the FRB will start to hike rates. With the U.S. economy undergoing its own independent recovery,

though, the pair’s movements will probably be marked by a gentle yen depreciation. The yen will be bought back

for a time, but the pair’s room on the downside will be capped.

Sato

(Masahide)

101.00

–

104.00

With FRB asset purchases set to end in October, expectations for an earlier interest rate hike are likely to swell as

U.S. economic indicators outperform market expectations. As a result, the dollar/yen pair is set to move firmly in

August.

Toriba

101.50

–

103.50

The main theme of the markets will continue to be the movements of U.S. long-term interest rates. Though the

recent FOMC statement contained some adjustments, market sentiments remain unchanged and the dollar is likely

to undergo a gradual appreciation. Market participants should pay considerable attention to the August 1 release of

the employment data.

Shimoyama

101.50

–

105.00

The key points will be U.S. monetary policy and long-term U.S. interest rates. The employment data and the

GDP/CPI figures all point to the strength of the U.S. economy. Under these circumstances, dollar buying looks set

to increase on expectations for an early interest rate hike. Market participants should pay attention to the minutes

of the July FOMC meeting and FRB Chair Janet Yellen’s speech.

Inoue

101.00

–

105.00

Dollar buying will continue on the back of buoyant U.S. economic indicators. Dollar buying by importers will

decrease as Japanese investors hit vacation mode mid-August, with the yen also likely to face appreciatory

pressures due to dollar-selling orders from exporters. However, dollar buying will pick up again if the minutes to

the FOMC meeting (released August 20) point to progression in the discussions over an exit strategy.

Bearish on the dollar (4 bears: 98.50–103.50, Core: 100.00–103.00)

Tate

101.80

–

103.80

The dollar/yen pair remained deadlocked for six months, though this equilibrium was shattered when the pair

broke higher at the end of July. However, the resistance level was being breached amid a dearth of dollar/yen-pair

shorts, so we are unlikely to see attempts on the pair’s topside due to a flurry of dollar short covering. With the

markets also facing a backlash to overly-optimistic expectations regarding an early commencement of interest rate

hikes, the dollar/yen pair will be sold back to around 103 yen in August.

Yamashita

98.50

–

103.00

There remains downside risk. FRB Chair Janet Yellen continues to adopt a dovish stance, for example, as she

focuses on the problem of labor market slack, while the market outlook is also fraught with danger due to swelling

expectations for an interest rate hike based solely on robust U.S. economic indicators.


August 1, 2014 5

Nishijima

100.00

–

103.50

Market participants may chase the dollar/yen pair’s topside at the beginning of the month on the release of the

U.S. employment data, but as these same participants slip into summer holiday mode, active dollar buying is

unlikely to continue. The pair will edge gradually downwards mid-August with an eye on sluggish U.S. interest

rate movements.

Omi

100.50

–

103.00

The core range will remain 101.50–102.50 yen. Just like in July, the pair’s topside will be tested at the beginning

of the month on the release of the U.S. July employment data, with the pair then sliding back down. The pair’s

direction will become clearer after the markets return from vacation next month.


August 1, 2014 6

Yuuka Omi, Forex Sales, Forex Division

Euro – August 2014 Expected Ranges Against the US$: US$1.3350–1.3550

Against the yen: JPY137.00–139.00

1. Review of the Previous Month The euro/dollar pair broke through $1.35 in July. The pair dropped below $1.3503 (the low recorded

when the ECB introduced negative interest rates) and then broke under $1.34.

The pair temporarily hit $1.3701 on July 1 on the back of dollar selling. With the release of the U.S.

employment data looming, though, the pair gained no further and ended up dropping to around the

mid-$1.36 mark. The June employment data was released on July 3. It significantly outperformed prior

expectations and this led to dollar buying, with the currency pair trending downwards. The ECB

Governing Council meeting was also held on the same day. In his subsequent press conference, ECB

President Mario Draghi commented that eurozone economic risk remained on the downside. This saw

the pair hitting the $1.35 level for a time. July 7 saw the release of the German industrial production

figures for May. The data fell sharply, down 1.8% on the previous month. This led to rising speculation

about further easing, with euro selling eventually pushing the pair below $1.36. However, there was a

sense the single currency was somewhat undervalued around this level. With some ECB officials also

making positive comments, the euro was then bought and it ended up trading firmly for a while.

The markets slipped into risk-off mode on July 11 due to concerns about the cash flow problems of

a company connected to a major Portuguese bank, though the currency pair’s movements were quite

muted. The pair headed back towards the $1.35 mark on July 15 as the German ZEW Indicator of

Economic Sentiment fell below forecasts. Euro selling accelerated when the pair broke clearly below

$1.36, with the pair then edging down to the lower-$1.35 level. A risk-off mood swept the markets on

July 17 after a Malaysian passenger plane was shot down above eastern Ukraine. The euro/dollar pair

fell further to temporarily hit $1.3516. The euro/yen pair also hit the 136 yen level for a time, too.

Geopolitical risk then increased after the U.S. and Europe debated introducing sanctions against

Russia in the wake of the aforementioned shooting down of the Malaysian passenger jet. The

euro/dollar pair continued moving with a heavy topside as a result. Euro selling accelerated on July 22

after the pair broke clearly through the psychologically-important $1.35 mark to eventually hit $1.3459.

It then renewed its low for this fiscal year of $1.3477 (last recorded on February 3). The euro remained

bearish thereafter, but it was supported at the key $1.3450 mark and its slide was subsequently halted.

Though it temporarily broke though $1.3450 on July 24, it saw strong buying appetite at its lower price,

with the pair bouncing back to $1.3485. Euro buying was also prompted by the firm results of a

eurozone PMI for July. With the single currency still bearish on July 25, though, the pair dropped to

$1.3421 and closed below $1.3450. The announcement of sanctions against Russia on July 29 saw the


August 1, 2014 7

pair renewing a low at $1.3404.

2. Outlook for This Month: In August, the euro/dollar pair will regain composure to trade in a range around $1.34–$1.36. Amid an

absence of any overarching theme, the pair edged lower in July on the back of risk-off sentiments,

dollar buying and bearish indicators. The weakness of the dollar/yen pair also saw the euro/yen pair

sliding as market participants targeted its low for the year of 136.25 yen. These movements also helped

to push the euro/dollar pair lower. However, attempts on the euro/yen pair’s downside were thwarted

towards the end of the month after the dollar/yen pair gained to the 102 yen mark. The euro/dollar pair

also dropped no further after falling to around $1.34. All of this probably means the market has marked

around $1.34 as the downside target for the euro/dollar pair.

The euro/dollar pair moved bearishly straight after the June ECB Governing Council decided to

implement further easing. However, it remains difficult to gauge a sense of direction for the pair based

on central bank policies or economic indicators, with the pair rising to around $1.37 at the start of July,

for example. It seems the pair is caught between the horns of a dilemma. Its level is strongly correlated

with the direction of further easing, while Europe’s slack CPI figures are deeply impacted by foreign

exchange rates. As a result, its movements will soon be reined in if it heads in the direction of either

euro appreciation or euro depreciation (if the euro weakens, further easing will be put on the back

burner and this will see the euro rising; if the euro strengthens, the CPI data will drop further and the

ECB will discuss further easing, with the pair’s topside being capped and the euro falling as a result).

This is why it seems the pair will form a trading range. Market participants will either aim to break

through certain key levels (points that stand out clearly, such as $1.3503 (the pair’s low directly after

negative interest rates were introduced) or around $1.37 (the level at which short covering came to an

end)) or they will view these levels as support lines and reverse position accordingly.

When negative interest rates were introduced, the euro/dollar pair broke clearly through $1.3503 to

fall to around $1.34. There is probably a feeling that euro selling has run its course for now. A sense of

direction may form on the back of a consensus about further easing or the CPI outlook, but August is

traditionally a time when U.S. and European investors go on vacation, so we may have to wait until the

summer holidays end in September before we see a clear direction forming. For the time being, the pair

will continue trading without a sense of direction, with its topside capped by buy-backs at a support

line at its current level of around $1.34.


August 1, 2014 8

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the euro (5 bulls: 1.3300–1.3700, Core: 1.3300–1.3650)

Tate

1.3310

–

1.3500

The euro/dollar pair has clearly broken out of its two-year trend of euro appreciation. This is evidence that the

euro selling that followed the introduction of negative interest rates is having more of an impact than Europe’s

current account surplus. Market participants will test the pair’s downside in August. With the euro falling, though,

further easing in the near future is becoming less necessary, while the single currency seems to have fallen enough

last month, so the pair may bounce back to around $1.3500.

Takada

1.3300

–

1.3650

As the dollar is bought on rising U.S. interest rates and so on, the euro is likely to be sold for a time, but the

eurozone’s swelling current account surplus will act to cap the euro’s room on the downside. If the U.S. releases

some unsatisfactory economic indicators, we will probably see some unwinding of euro short positions.

Sato

(Masahide)

1.3300

–

1.3700

From early July onwards, the euro trended downwards on speculation about further monetary easing following the

release of some bearish German economic indicators and so on. As the eyes of the markets shift to the movements

of the dollar/yen pair, we will probably see some covering of the euro short positions that have built up. In light of

the eurozone’s current account surplus, the euro will continue to face buying pressure and may well see some

buy-backs.

Omi

1.3350

–

1.3550

The euro/dollar pair’s slide will stop for now. Events from here on will depend on what consensus the markets

form with regards to eurozone CPI and further easing by the ECB. This formation will probably have to wait until

market participants return from vacation next month. This month, the pair will continue moving without a sense of

direction at its current level.

Inoue

1.3300

–

1.3700

The euro is currently moving bearishly as the dollar is bought on firm U.S. economic indicators. However,

eurozone demand looks set to be dampened further by the introduction of more sanctions against Russia. Under

these circumstances, the euro is likely to move firmly in lockstep with the eurozone’s expanding trade surplus.

Bearish on the euro (7 bears: 1.3000–1.3700, Core: 1.3100–1.3500)

Fujisaki

1.3000

–

1.3500

The euro’s deposit facility rate is now in negative territories and we are likely to see more euro carry trades. One

concern is the accumulation of euro shorts by speculators, but as the U.S. moves from QE tapering to interest rate

hikes, the contrast between the dollar and the euro on the interest-rate front will become clearer.

Kato

1.3200

–

1.3500

If U.S. stock movements calm down and volatility remains stable at low levels, the single currency will probably

see more selling on the back of euro carry trades. However, when the euro/dollar pair’s price approaches $1.3300

(the lower range of the “cloud” on the weekly chart), we will probably see a commensurate amount of euro

buying due to position adjustments.

Yamashita

1.3100

–

1.3500

The economic sanctions on Russia in relation to the Ukraine dispute will hit not just Russia but the whole of the

eurozone, too. The ECB may be forced into some further easing, so it is hard to imagine the euro rising this

month.

Yano

1.3100

–

1.3500

Negative interest rates look set to be a long-term phenomenon in the eurozone, while further easing still remains

on the table. In contrast, anticipation over an interest rate hike is growing in the U.S. The euro has moved strongly

up until now, but it seems this trend will undergo some adjustment, with the euro more likely to be adjusted

downwards.

Nishijima

1.3200

–

1.3550

The EU sanctions on Russia over the Ukraine dispute will be seen as a double-edged sword and there will be

concerns about the impact on the eurozone’s economy. Under these circumstances, market participants will start

to focus on the next round of ECB easing. With the euro also being sold on the back of carry trades prompted by

the zone’s low interest rates, the euro/dollar pair is likely to continue moving bearishly this month.

Toriba

1.3200

–

1.3700

The eurozone’s trade surplus will support the euro/dollar pair, but strong investor demand for euro carry trades

means euro depreciation is likely to be the main trend this month. Market participants should pay attention to risk

events such as the regular ECB Governing Council meeting on August 7 and ECB President Mario Draghi’s

subsequent press conference.


August 1, 2014 9

Shimoyama

1.3100

–

1.3500

The key point will be the difference in the monetary policies of the ECB and FRB. The U.S. and several other

developed nations have indicated they will start normalizing monetary policy and raising interest rates. With QE

still on the table in Europe, though, interest rates will face downwards pressure over there. Speculation will grow

about the euro being used as a currency to fund carry trades.


August 1, 2014 10

Taku Kanzaki, Europe Treasury Division

British Pound – August 2014 Expected Ranges Against the US$: US$1.6800–1.7200


1. Review of the Previous Month In July, expectations for an early interest rate hike by the Bank of England receded as the UK

continued to post negative real wage growth. With positions also being adjusted in advance of the

summer holidays, the pound moved bearishly. Sterling kicked off the month trending upwards. It then

renewed yearly highs against its U.S. and Japanese counterparts. With the Manufacturing, Construction

and Services PMIs all beating prior forecasts, sterling gained to the lower-$1.71 mark against the dollar.

As the dollar/yen pair surged on the better-than-expected results of the U.S. employment data,

meanwhile, the pound/yen pair also strengthened to the lower-175 yen level. In his press conference

after the July 3 ECB Governing Council meeting, ECB President Mario Draghi struck a dovish tone as

he gave details of the TLTRO (including the possibility that the operation could add up to the

equivalent of one trillion yen). This saw the pound hitting its highest point against the euro since

September 2012.

Mid-July saw the unit trading bearishly against the dollar and yen, though it remained firm against

the euro. The July UK CPI data was released on July 15, with sterling surging on the

unexpectedly-strong results. In her testimony to Congress on the same day, FRB Chair Janet Yellen

made a series of dovish comments, stating, for example, that a “high degree of monetary policy

accommodation remains appropriate.” This helped the pound/dollar pair to gain to $1.7192 for the first

time since October 2008. However, sterling’s rise was short-lived and it soon fell back on moves to

lock-in profits, particularly against the dollar. The UK weekly average wage growth rate was released

on July 16, with the markets disappointed by the sluggish results. The markets then switched into

risk-off mode after a civilian airline was shot down above eastern Ukraine on July 17. Sterling

continued to move bearishly as a result, particularly against the dollar and the yen.

The minutes to the BoE’s July Monetary Policy Committee (MPC) meeting were released on July

23. These were quite dovish on the whole, as evinced by the comment that “an unexpected increase in

interest rates when real wages were not yet rising could lead to an outsized reaction in asset prices and

destabilize the recovery.” With the June UK retail sales figures (released July 24) also falling below

expectations, the pound moved bearishly towards the end of the month. With the summer holidays just

about to start, sterling’s slide was also propelled by a closing-out of the pound long positions that had

previously helped sustain the UK unit’s rise. This saw the pound dropping to the upper-$1.69 mark and

the upper-172 yen level against its U.S. and Japanese counterparts, respectively. Dollar buying then

accelerated on the release of some firm U.S. economic indicators, such as the June 30 release of


August 1, 2014 11

better-than-expected preliminary GDP data for April–June. The pound/dollar pair reacted by dropping

to the lower-$1.69 mark on the same day. With the dollar/yen pair making gains, though, the

pound/yen pair was dragged back to the mid-173 yen level.

2. Outlook for This Month: With the summer dry season expected to begin in earnest, market participants will find it hard to locate

a sense of direction for the pound in August.

The BoE’s Quarterly Inflation Report is set for release on Wednesday, August 13. This is the most

important indicator when it comes to gauging when the BoE is likely to hike interest rates. The minutes

to the July BoE MPC meeting said that although UK employment-related indicators were improving

strongly, wage growth remained at low levels. This meant that “uncertainty about the degree of [labor

market] slack had risen.” Real wages are moving in negative territories on the back of sluggish wage

growth. As a result, though the BoE recognizes that the UK economy is currently on the path to

recovery, it is unlikely to hike interest rates any time soon. It will be interesting to see what opinions or

forecasts the Inflation Report contains with regards to this matter. The latest jobs and employment data

were released by the UK Office of National Statistics (ONS) in July. It confirmed that the labor market

was improving across a number of areas, in addition to a fall in the unemployment rate. The

employment rate has reached its highest level since the ONS began collecting statistics in 1971, for

example, while the number of job vacancies is also trending upwards at a faster pace to approach the

peak levels before the Lehman Shock. This all suggests the wage growth rate could gradually pick up

from here on. Under these circumstances, the Inflation Report may well point to future improvements

in real wages. If it does so, this will probably see expectations growing again for a BoE rate hike within

the year. However, the markets will enter summer dry season in August. They will also be impacted by

geopolitical risk, such as the enlargement of EU sanctions against Russia. Uncertainty about the future

will also be exacerbated in advance of the looming referendum on Scottish independence (due to take

place on September 18). In light of these factors, market participants may well refrain from chasing the

pound’s topside. With the U.S. economic recovery starting to become more apparent at present, the

pound/dollar pair is likely to trade with a heavy topside. As European interest rates trend downwards

on the back of the ECB’s easing stance, though, the pound is expected to continue moving firmly

against the euro. If the pound/euro pair does move firmly as expected, this will probably act to bolster

sterling’s movements against the dollar, too.

UK economic indicators and events to watch out for this month include: the release of the July

Manufacturing PMI (Friday, August 1), the July Construction PMI (Monday, August 4) and the July

Services PMI (Tuesday, August 5); the BoE MPC meeting (Wednesday, August 6 to Thursday, August

7); the release of the ILO unemployment rate (April–June) and the weekly average wage growth rate

(Wednesday, August 13); the release of the July CPI data (Tuesday, August 19); the release of the

minutes to the August MPC meeting (Wednesday, August 20); and the release of the July retail sales

figures (Thursday, August 21).


August 1, 2014 12

Yasuhiro Nakamura, Sydney Branch

Australian Dollar – August 2014 Expected Ranges Against the US$: US$0.9100–0.9500


1. Review of the Previous Month The Australian dollar weakened at the beginning of July following comments by the governor of the

Reserve Bank of Australia (RBA), though it gradually regained its firmness amid a dearth of new

factors.

The unit opened the month trading at the lower-US$0.94 mark and the mid-95 yen level against its

U.S. and Japanese counterparts. The statement released after the RBA board meeting on July 1 was

much the same as the previous month’s release. However, some observers had been expecting more

comments about the currency exchange rate, so the Australian unit actually gained to the

lower-US$0.95 mark and the lower-96 yen level directly after the statement was released. It then

dropped back on July 2, though, following the release of a worse-than-expected Australian trade

balance for May. On July 3, Glenn Stevens, the governor of the RBA, made some comments about the

possibility of an interest rate cut and the dangers of a strong Australian dollar. The May Australian

retail sales data was also released on July 3 and this dropped significantly below market forecasts. All

this saw the Australian unit dropping further to hit the lower-US$0.93 mark and the lower-95 yen level.

The June NAB Monthly Business Survey was released on July 8. It revealed that business

confidence and business conditions had improved on the previous month. The Australian dollar moved

firmly as a result. The June Australian employment data was then released on July 10. The

employment figures outperformed market expectations, but the full-time employment data was quite

bearish, while the unemployment rate had worsened again to 6.0%. The markets reacted by pushing the

Australian unit lower. The Chinese June trade statistics were also released on July 10 and they revealed

that import growth had dropped below market forecasts. The Australian unit continued falling as a

result to hit the mid-US$0.93 level and the upper-94 yen mark.

The unit’s downside was tested for a time mid-July, but in the end it bounced back up. Major U.S.

stock indices took a beating on July 15 after FRB Chair Janet Yellen voiced concerns about U.S. stock

prices, with the Australian dollar was also being dragged lower. Geopolitical risk then flared up on

news that a Malaysian Airlines aircraft had been shot down over Ukraine. As investors fled to quality,

the Australian unit fell further to hit the lower-US$0.93 mark and the lower-94 yen mark against its

U.S. and Japanese counterparts. Amid a dearth of new factors, though, the environment was ripe for

some position adjustments by speculators before the weekend. With risk aversion also easing off, the

Australian dollar regained its firmness and rallied to the upper-US$0.93 level and the lower-95 yen

mark.


August 1, 2014 13

The unit moved firmly towards the end of the month. The Australian inflation data for April–June

was released on July 23. The CPI figures were in line with market forecasts, but core inflation (the

mean value of the CPI trimmed mean and the CPI weighted median) was higher than market

expectations. This led to growing anticipation for a rise in Australian interest rates, with the Australian

dollar subsequently rising to the mid-US$0.94 mark and the upper-95 yen level.

2. Outlook for This Month: In July, market participants were surprised by the dovish contents of comments made by Glenn Stevens,

the governor of the RBA. As a result, these same participants will be paying more attention than usual

to the statement that follows the RBA board meeting on August 5.

The CPI data for April–June (released June 23) and core inflation were close to the 3% upper limit

of the RBA’s inflation target, but it is likely these results will only have a limited impact on the

decisions and the statement that emanate from the August meeting. Australia repealed the carbon tax in

July and there have already been announcements about lower electric bills and other charges, so price

pressures will probably ease off from here on. Furthermore, according to the RBA’s outlook (released

in May), the axing of the carbon tax will shave off around 0.5 points from the CPI data and 0.25 points

from core inflation.

This means that current inflationary pressures are actually not as strong as the published figures

suggest, with inflation likely to fall well within the range of the RBA’s target. Based on the above, the

August RBA board meeting is unlikely to see growing fears about inflationary pressure based on 2Q

inflation-related indicators.

However, the meeting will probably voice some strong concerns about the strength of the

Australian currency. The Australian trade balance is currently in the doldrums, with a trade deficit

recorded over both April and May, for example. Furthermore, iron ore and coal account for the lion’s

share of Australia’s resource exports and the spot prices of these commodities are moving at extremely

low levels compared to recent years. The export sector had been dragging the economy along from the

latter half of 2013 onwards, so this situation is probably exacerbating uncertainty about the direction of

the economy. With bright signs also remaining thin on the ground in other sectors, the RBA board

meeting will probably hear talk about guiding the currency lower to eradicate concerns about the

direction of Australia’s export sector. The Australian dollar is currently trading close to its level from

around the time of the RBA governor’s speech on July 3. This is a further reason why concerns about a

strong currency are likely to grow stronger.

Indicators related to Australia’s GDP for April–June are set for release from late August to early

September. Uncertainty about the direction of Australia’s economy is still smoldering away on the

back of the sluggish performance of the export sector. Under these circumstances, concerns about the

results of these GDP-related indicators will grow steadily stronger towards the end of August.

The August 3 RBA board meeting will probably see some comments aimed at restraining the

Australian dollar’s rise. It is also highly likely that concerns about the 2Q GDP results will flare up


August 1, 2014 14

towards the end of the month. As a result, the Australian unit is expected to move bearishly this month.


August 1, 2014 15

Katsuhiko Takahashi, Akiko Inoue, Americas Treasury Division

Canadian Dollar – August 2014 Expected Ranges Against the US$: C$1.0700–1.1000


1. Review of the Previous Month With Canada’s May inflation data swinging upwards and the April GDP also beating expectations

(both indicators were released in June), the start of July was marked by speculation that the Bank of

Canada would relax its monetary easing stance at the next Monetary Policy Committee (MPC) meeting.

This saw the U.S. dollar/Canadian dollar pair breaking through the mid-C$1.06 mark. The greenback

then strengthened as U.S. interest rates rose on the U.S. employment data for June. This saw the pair

gaining temporarily to C$1.0681, though this upswing was limited in nature and the pair soon dropped

back to C$1.0621.

The markets then saw the release of a bearish Canadian Ivey Purchasing Managers Index and a

weak Index of Business Confidence. Risk aversion also flared up as U.S. stock markets saw selling for

profit taking in advance of the release of U.S. 2Q corporate settlement results. All this saw the currency

pair gaining to C$1.0694. The minutes of the U.S. FOMC meeting were released on July 9. These

remained dovish and this led to U.S.-dollar selling, with the Canadian unit being bought back to

C$1.0641. The closely-watched Canadian employment data for June was released on July 11. At 7.1%,

the unemployment rate was up on forecasts (for 7.0%) and on May’s result (7.0%). The number of

employees also fell by 9,400, a significant slide on market expectations (for a 20,000 rise) and on

May’s figure (+25,800). These results were met with Canadian-dollar selling, with the currency pair

breaking above C$1.0700 to hit C$1.0737. As expected, the Bank of Canada’s MPC decided to keep

policy rates fixed at 1.00% when it met on July 16. Market participants were watching to see whether

the accompanying statement would contain any changes, but the MPC stated that recent inflationary

pressures were only temporary in nature. The MPC also reiterated its neutral stance with regards to the

interest rate outlook. Previous summaries had mentioned that “the downside risks to inflation remain

important,” but this phrase was now absent, with the July statement also pushing back the date for

when the 2% core inflation target would be reached, from the beginning of 2016 to the middle of 2016.

Some observers had been expecting the MPC to strike a more non-committal stance, but the actual

impression was of the MPC inclining in a more dovish direction. The markets reacted by selling the

Canadian dollar, with the currency pair rising temporarily to C$1.0795. At his subsequent press

conference, though, Bank of Canada Governor Stephen Poloz stated that “we believe [inflation] risks

are roughly balanced. The downside risks to inflation…have clearly diminished.” Risk aversion then

intensified after a Malaysian Airlines plane was shot down over Ukraine, with tensions hardly helped

by the Israeli invasion of Gaza. The Canadian dollar moved firmly on surging oil prices, with the unit


August 1, 2014 16

also helped along by the better-than-expected results of the Canadian CPI data for June. All this saw

the currency pair dropping to C$1.0708.

The Canadian retail sales data for May was released towards the end of July, but the pair was not

impacted much by the mixed results. It was influenced by the greenback’s rise against the euro, though,

with the pair breaking through the short-term resistance line of C$1.0820 to hit C$1.0866. The U.S.

dollar was then bought on strong U.S. GDP data for April–June. As expected, meanwhile, the

Canadian GDP data for May seemed less impressive than the U.S. GDP results. As a result, the pair

gained to C$1.0930 to finish the month moving at highs.

2. Outlook for This Month: The Bank of Canada has forecast it will now take longer than expected to reduce the output gap. It also

stated that the recent upswing in inflationary pressures were due to temporary phenomena rather than

an increase in demand. The Bank also predicted that Canada’s economic growth would continue to

improve, though it stuck to its cautious view that the growth outlook remained fraught with downside

risk. As a result, the Bank looks likely to maintain low interest rates for a considerably long period

going forward. This cautious stance will continue to weigh down the Canadian dollar’s topside.

At the same time, if things continue to go smoothly in the U.S. (Canada’s largest trading partner),

most observers believe QE will come to an end in October. It is likely to be a while before interest rates

are then lifted, though. The greenback will be bought for a time when the U.S. releases some buoyant

economic indicators. However, FRB Chair Janet Yellen continues to strike a dovish pose on the back

of a weak labor market and housing market, so it is hard to imagine U.S. interest rates rising

consistently. As a result, the currency pair’s movements are likely to be capped on the topside. The

Canadian unit’s downside will be bolstered as energy costs rise on growing geopolitical risk in relation

to Ukraine/Russia and Israel/Gaza. This is down to temporary concerns about supplies, though. As the

global economy slows down, it is hard to see this developing into a long-term trend. This means

Canadian-dollar appreciation is likely to be temporary in the short-term. Based on the aforementioned

factors, the Canadian unit looks set to move in a narrow range against the U.S. dollar and the yen in

August.


August 1, 2014 17

Yuki Katsumata, Gyuik Choi, Seoul Treasury Department

Korean Won – August 2014 Expected Ranges Against the US$: KRW1,008–1,050

Against the yen: JPY9.76–10.20 (KRW100)

(KRW9:80–10.25)

1. Review of the Previous Month The dollar/Korean won pair renewed a recent low at the beginning of July, though it bounced back

strongly in the latter half of the month. The trade data was released at the start of July, but the results

were much as expected, though, so the impact on the markets was limited. However, appetite for risk

assets then increased, with U.S. stocks renewing highs, for example. The currency pair also swung

downwards at this time. When the pair broke through KRW1,010, the Ministry of Strategy and Finance

and the Bank of Korea released a joint statement aiming to curb the won’s rise, but buying by exporters

continued and the pair eventually hit a monthly low of KRW1,008.

In a draft written response before his confirmation hearing, Choi Kyung-hwan (who became Deputy

Prime Minister and Minister of Strategy and Finance on July 16) talked about policy coordination

between the government and the BOK. As uncertainty ramped up in advance of the Monetary Policy

Committee (MPC) meeting, the won moved bearishly. At its July 10 meeting, the MPC decided to

keep policy rates unchanged. This was by no means a unanimous decision, though, while the growth

forecast was also downgraded. Indeed, the meeting was quite dovish overall, as evinced by comments

by BOK Governor Lee Ju-Yeol about the existence of substantial downside risk when it came to

economic growth. All this saw the currency pair rising to KRW1,013. Short covering then accelerated

and the pair gained to KRW1,020 in the wake of the credit worries of a major Portuguese bank, with

the pair also boosted when several securities firms said they expected the August MPC meeting to cut

interest rates. The markets then saw dollar buying by South Korean institutional investors and whispers

of dollar demand from a public corporation. At this time, the Minister of Strategy and Finance called

for the speedy implementation of polices. This intensified uncertainty about the future, with the

currency pair reacting by hitting a monthly high at the KRW1,036 level.

The pair then fluctuated violently. The won saw substantial buying by exporters at the

upper-KRW1,030 mark, with the currency pair crashing to the KRW1,025 level, but it then returned to

around KRW1,035 on the back of dovish statements by the Minister of Strategy and Finance during a

parliamentary debate, with the won also hit when the head of South Korea’s Strategy and Finance

Committee called for a 50bp cut in the policy rate. However, real-demand won buying kicked in at the

pair’s higher price, almost as if market participants had been waiting for the pair to hit this level. The

pair dropped down to the KRW1,022 level whilst activating the stop losses of short-term investors.

July 24 saw the release of department store sales figures and the GDP data for April–June (+3.6% on


August 1, 2014 18

the same quarter last year). These indicators confirmed the weakness of domestic demand, with the

won subsequently edging downwards on rising expectations for an interest rate cut. The government

then downgraded its growth forecast and also announced a series of economic policies (an easing of

mortgage regulations and an expansion of financing to small- and medium-sized companies, etc.). This

saw the Korean unit falling back to the KRW1,030 level. However, the currency pair’s topside was

capped by won buying by exporters towards the end of the month, with the pair trading between mid-

and upper-KRW1,020 as of July 30.

2. Outlook for This Month: In August, attention will focus on the decisions made at the Bank of Korea’s Monetary Policy

Committee (MPC) meeting.

As expectations for an interest rate cut flared up last month, the dollar/Korean won pair clearly

reversed its previous trend of won appreciation. It seems the government has been trying to encourage

financial policies (a cutting of policy rates) aimed at stimulating consumer activity, but there had been

no particularly noticeable changes in the BOK’s stance. However, signs of a change did emerge after

the decision was made to appoint Choi Kyung-hwan as Deputy Prime Minister and Minister of

Strategy and Finance. The decision was made mid-June and there was a slight lag before the

dollar/Korean won pair began bouncing back at the beginning of July. The government and the BOK

then released a joint statement after the pair broke through KRW1,010 and there have since been a

number of statements persistently talking about the necessity for policy coordination between the

government and the BOK, so it seems Choi may well have shifted the BOK’s stance. Statements by

BOK Governor Lee Ju-Yeol have also clearly moved in a dovish direction, so interest rates are now

trending downwards as the markets factor in a 25bp rate cut at the August MPC meeting.

The minutes to the July 10 MPC meeting were released on July 29. They revealed that Hae-Bang

Chung had pressed for an interest rate cut. Chung is originally from the Ministry of Strategy and

Finance and was appointed to the Committee at the Ministry’s recommendation. This was also seen as

a sign the government is putting pressure on the BOK. The focus now is on what effect this

government pressure will have. As a result, the August 14 MPC meeting will be the factor attracting

most attention this month. The markets have more-or-less priced in a 25bp rate cut, so the key focus

will be on whether the MPC touches on the possibility of further rate cuts. If the MPC does drop hints

about a further rate cut, the currency pair will probably break through its July high of KRW1,036 to

test the key KRW1,050 mark. On the other hand, if it seems there will be no further reductions beyond

the 25bp cut (or if the MPC decides to leave things unchanged), then the pair will soon return to a

bullish-won trend. The most recent rate cut took place in May 2013. At this time, Sung Keun Ha was

the first member to begin calling for a rate reduction. Now he is urging for the policy rate to be left as it

is (he was the only person to vote for a rate cut in January 2013. He was joined by two more members

in April, with a rate cut then implemented in May after a majority voted for such a move). All this

suggests market participants should be on their guard. Government pressure may only result in


August 1, 2014 19

members aligned to the government voting for a rate reduction; it may not necessarily lead to a

majority decision for such a move.


August 1, 2014 20

Junji Tsujino, Taipei Treasury Department

New Taiwan Dollar – August 2014 Expected Ranges Against the US$: NT$29.80–30.40


1. Review of the Previous Month The U.S. dollar/NT dollar pair continued to trade at the TWD29.80 level at the start of July, though it

then edged towards TWD30.00.

The pair opened July trading around TWD29.85. The Korean won had appreciated at the end of

June, but there were now expectations that this trend would cool off. This also saw the Taiwan unit

weakening slightly to the upper-TWD29.80 mark on July 1. However, the unit faced ongoing

appreciatory pressures from July 2 onwards as Taiwanese stocks continued rising and the Korean won

renewed recent highs again, yet the Taiwan dollar did not manage to top the mid-TWD29.80 mark.

However, though the U.S. posted some better-than-expected June employment data on July 3 and the

dollar then enjoyed a bullish phase, the Taiwanese unit continued moving between mid-TWD29.80

mark and upper-TWD29.80 and did not weaken beyond this range. The unit started sliding on July 7,

though, after the Korean won finally began weakening. After kicking off July 7 at the

upper-TWD29.80 mark, the Taiwan dollar had slipped down to around TWD29.92 at close of trading.

It remained around TWD29.90 on July 8 and 9. The minutes to the U.S. FOMC meeting were released

on July 9. The contents did not exacerbate concerns of an early interest rate hike, so the Taiwan dollar

gained to TWD29.87 on the morning of July 10, though it was then pulled down to around TWD29.90

when the Korean won began falling.

The Taiwanese unit continued moving bearishly towards mid-July. It dropped to TWD29.94 on July

11 as stocks fell on concerns about a major Portuguese bank. The unit then weakened to the

upper-TWD29.90 mark on July 15 as the Korean won slid further. Though stock markets moved firmly,

there were also several days when the markets saw selling-on-balance by overseas investors, so this

firmness did not become a bullish factor for the Taiwan dollar. Excessive expectations for further U.S.

easing dropped off following FRB Chair Janet Yellen’s testimony to congress on July 15. As a result,

the Taiwanese unit rallied to TWD30.00 on the morning of July 16. It then topped TWD30.00 on July

18 as risk aversion flared up after a passenger jet was shot down over Ukraine. This slide was only

temporary in nature, though, with the unit bouncing back to TWD29.97 at close of trading.

The Taiwan dollar faced slightly more appreciatory pressure towards the latter half of the month,

though the U.S. dollar/NT dollar pair’s movements were muted. The pair remained deadlocked just

under TWD30.00 from July 21 to July 25. The markets slipped into wait-and-see mode the following

week in advance of the release of some U.S. economic indicators. The Taiwanese unit appreciated over

July 28–30, in part due to end-of-month demand for the Taiwan dollar, though the pair continued to


August 1, 2014 21

hover at the upper-TWD29.90 mark as it waited for the release of those key U.S. indicators. The U.S.

2Q GDP data was released on July 30. The markets were pleased with the results and reacted by

pushing the Taiwanese unit down against the greenback on July 31. However, the FOMC results,

coupled with the fact this was the last day of the month, meant these movements were muted in nature,

with the currency pair failing to top TWD30.00.

2. Outlook for This Month: As the U.S. dollar appreciates, the U.S. dollar/NT dollar pair is expected to try bunkering down at the

TWD30.00 mark in August.

The June trade statistics saw exports growing slightly and imports increasing significantly, with the

monthly trade surplus falling sharply as a result. The cumulative figures remain in positive territories

compared to last year, but imports of metals, electronics and precision equipment from China are

shooting up. Export orders and industrial production are moving bullishly. The electric and electronic

goods sectors are likely to see movements related to new product release from autumn onwards.

Consumer prices are moving flatly on the whole. Taiwan was hit directly by a typhoon in July, so

prices could well head higher from here on.

The movements of the Taiwan dollar are strongly correlated with those of the Korean won, though

the impact of Korean-won depreciation seems to be lessening. Anticipation for an interest rate cut

seems to be one of the factors behind won depreciation, but it is hard to imagine Taiwan following suit

and implementing its own rate cut. Taiwan’s policy rate stands at 1.875%, but this is the discount rate,

which is actually quite different from market interest rates. The overnight interest rate has already

dropped below 0.4%, so there is not much room for further cuts. (South Korea’s policy rate is a 7-day

repurchase rate; it currently stands at 2.5%). As a result, it seems a fully-fledged rise in the value of the

greenback will be needed for any further Taiwan-dollar depreciation.

When gauging whether Taiwan has any room to maneuver when it comes to interest rate policy, it

helps to examine the overnight rates and term rates to see how much further their differential can

shrink. For example, though the overnight rate is less than 0.4%, TAIBOR 3-month, 6-month and

1-year interest rates stand at 0.87%, 1% and 1.3%, respectively. This is a steep slope compared to the

situation in Japan and the U.S. The yield curves of these benchmark interest rates are formed with an

eye on the negotiable certificates of deposit (NCDs) issued by Taiwan’s central bank. If the central

bank lowers the rate on these NCDs, this could guide market interest rates lower. After the central

bank’s regular board meeting in June, a statement was released in the subsequent press conference.

This contained an answer to the question about whether the bank’s easy money policy was pushing

down real interest rates and having a negative effect on the Taiwanese economy and national wealth.

This stated that compared to real interest rates in other major countries (defined as one-year

fixed-deposit rates minus CPI), the Taiwanese real interest rate stood in 4th place at +0.015, not a

particularly low level. The three higher places were held by China, South Korea and Switzerland. The

currencies of these countries are all facing appreciatory pressures, just like the Taiwan dollar is. The


August 1, 2014 22

pursuance of an easy money policy will decrease the interest earnings of Taiwanese citizens, but with

the bank properly explaining that this loss will be covered by wage rises on the back of economic

growth, it seems there remains space for further easing.


August 1, 2014 23

Takahiko Sasaki, Hong Kong Treasury Department

Hong Kong Dollar – August 2014

Expected Ranges Against the US$: HK$ 7.7500–7.7580

Against the yen: JPY 13.05–13.35

1. Review of the Previous Month

Hong Kong dollar spot exchange market in July: The U.S. dollar/Hong Kong dollar exchange

rate remained near the lower end of the exchange rate policy band.

The U.S. dollar/Hong Kong dollar exchange rate remained near the lower end of the exchange rate

policy band (HKD 7.75 to the U.S. dollar) in July, as was the case in the previous month. There have

been cases of large-scale M&A deals and IPOs, such as in the acquisition of a Hong Kong local bank by

a large financial institution in Singapore. Furthermore, the demand for the Hong Kong dollar has

increased as a result of dividend payments. These factors thus kept the exchange rate near the lower end

of the exchange rate policy band (HKD 7.75 to the U.S. dollar). It is also likely that the inflow of

investment funds caused by the appreciation of Hong Kong stock prices also supported the strength of

the Hong Kong dollar. In the end, trading closed on Wednesday, July 30, local time, at HKD 7.7505 to

the U.S. dollar (versus HKD 7.7505 to the U.S. dollar at the end of the previous month).

Hong Kong dollar short-term interest rates in July: The Hong Kong dollar short-term interest

rates remained generally low, thanks to sufficient fund supply in Hong Kong with low short-term

interest rates in the U.S.

As has been the case so far, the Hong Kong dollar short-term interest rates in July remained generally

low, thanks to low short-term interest rates in the U.S. as well as sufficient fund supply in Hong Kong.

Trading closed on Wednesday, July 30, with the one-month HIBOR at 0.21786% (versus 0.21143% at

the end of the previous month), the three-month HIBOR at 0.37429% (versus 0.37429% at the end of the

previous month), and the one-year interest rate at 0.85000% (versus 0.86286% at the end of the previous

month).

Hong Kong stock market in July: Stock prices appreciated to their highest level in the past three

and half years, thanks to the strength of the Chinese economic indices.

In July, the benchmark Hang Seng Index exceeded its high, recorded at the end of the previous month,

thanks to better-than-expected business sentiment in China as well as active transactions between China

and Hong Kong. However, at the beginning of the month, the index hovered around at the lower-23,000


August 1, 2014 24

level for quite a while. The Hang Seng index continued appreciating to the 24,000 level and almost

reached 25,000 on July 25. Trading closed on Wednesday, July 30 at 24,732 (versus 23,190 at the end of

the previous month).

2. Outlook for This Month:

Hong Kong dollar spot exchange market in August: The U.S. dollar/Hong Kong dollar pair is

expected to trade within a narrow range.

The U.S. dollar/Hong Kong dollar exchange rate is expected to remain within the range of HKD

7.7500–HKD 7.7580 in August. According to a senior officer at the Hong Kong Monetary Authority

(HKMA), the demand for the Hong Kong dollar is expected to continue mounting until September

because of dividend payments. Thus, the trend in the U.S. dollar/Hong Kong dollar exchange market is

likely to remain the same in the coming month. Even though some have expressed doubts about the

pegged exchange rate system, the HKMA announced once again its determination to maintain the pegged

exchange system. As the appreciation of the Hong Kong dollar can be slowed down by providing funds

in Hong Kong dollars based on funds in U.S. dollars, it is unlikely for the pegged exchange rate system to

be abolished.

Hong Kong dollar short-term interest rates in August: As has been the case so far, the Hong

Kong dollar short-term interest rates are expected to remain generally low, thanks to sufficient

funds in Hong Kong as well as low interest rates in the U.S.

As has been the case so far, the Hong Kong dollar short-term interest rates are expected to remain

generally low in August, thanks to sufficient funds in Hong Kong as well as low interest rates in the U.S.


August 1, 2014 25

Tomoko Washiashi, MHBK (China) Treasury Division

Chinese Yuan – August 2014

Expected Ranges Against the US$: CNY 6.1500–6.2200


CNY 5.8600–6.1580


Foreign exchange market: The gap between the People’s Bank of China central parity rate and

the real exchange rate has narrowed.

In July, the People’s Bank of China (PBOC) central parity rate was set toward a weaker yuan at the

higher-CNY 6.16 level at the beginning of the month for the first time in about a month, due to the fact

that U.S. dollar indices rallied in overseas markets. The PBOC central parity rate rallied to the CNY 6.14

level thereafter, which is likely to be the result of the U.S.-China Strategic and Economic Dialogue held

on July 9 and 10. As the U.S. dollar indices against other major currencies rallied, the PBOC central

parity was set toward a weaker yuan once more at the CNY 6.16 level at the end of the month.

On the other hand, the onshore U.S. dollar/Chinese yuan exchange market opened trading in July at

the CNY 6.21 level. While the PBOC central parity rate was set toward a stronger yuan in preparation for

the U.S.-China Strategic and Economic Dialogue scheduled for July 9 and 10, the Chinese yuan

appreciated against the U.S. dollar to the CNY 6.19 level. Even though the PBOC central parity rate was

set toward a weaker yuan near the end of the month, the yuan continued appreciating slowly because of

the strong results of the economic indices. At the end of the month, the media reported that the People’s

Bank of China was to carry out the refinancing of CNY 1 trillion for the China Development Bank using

a monetary tool called “Pledged Supplementary Lending” (PSL), and stock prices were also appreciating

at the same time (which is likely to be the result of the state-owned bank’s acceptance of private capital).

Under such conditions, the Chinese yuan continued appreciating in the offshore exchange market.

Following this trend, the Chinese yuan appreciated in the onshore exchange market as well to the CNY

6.17 level. As a result, the gap between the PBOC central parity rate and the real exchange rate has

narrowed to the level observed in March 2014, when the U.S. dollar/Chinese yuan trading band was

expanded.

Interest rate market: Interest rates appreciated toward the end of the month.

With regard to the Chinese yuan capital market, the interest rates depreciated for all terms at the

beginning of the month, as it was after the end of the quarter. The cumulative amount of reserve deposits


August 1, 2014 26

was larger than at normal times, as it was the end of a quarter. As a result, fundraising needs increased at

financial institutions, leading interest rates to appreciate, especially for short periods, toward the middle

of the month. Toward the end of the month, short-term interest rates continued appreciating despite

concerns over a decrease in fund supply in the capital market as a result of corporate capital demand for

the purpose of tax payment as well as initial public offerings (IPOs). However, IPO-related frozen funds

were released into the market at the end of the month, reversing the trend and leading interest rates to fall.

SHIBORs for different terms and seven-day repo interest rates as of July 30 (closing rates) are as

follows.

O/N SHIBOR: 3.2502 (versus 2.9130 at the end of the previous month)

1M SHIBOR: 4.1440 (versus 5.0040 at the end of the previous month)



Seven-day repo interest rate (closing rate): 3.9700% (versus 4.7000% at the end of the previous

month)


Foreign exchange market: Although it is unlikely that a clear trend will exist, the yuan is

expected to appreciate gradually.

While there are few important events or particularly influential factors in the Chinese yuan exchange

market in August, the Chinese yuan is expected to appreciate slowly. The diffusion indices released in

July, such as the April–July quarter GDP and the July Manufacturing PMI, recorded strong figures.

Furthermore, the media reported that the People’s Bank of China would introduced a new tool for its

monetary policy, fuelling optimistic sentiment in the market regarding the Chinese economy in the times

ahead. This makes it easier for the Chinese yuan to appreciate, especially in the offshore market. On the

other hand, the People’s Bank of China continues to push the Chinese yuan to fluctuate in both directions.

Thus, the appreciation of the Chinese yuan is also likely to be limited in the trading market.

Interest rate market: Interest rates are likely to remain low.

In the coming month, market liquidity is likely to be eased in the Chinese yuan capital market. This is

due to the fact that corporate fundraising needs, which constituted the main factor for the appreciation of

interest rates at the end of July, are expected to decrease in the times ahead, while funds that were frozen

for IPOs have also been released into the market. As the Chinese monetary authorities maintain their

measures of monetary easing, interest rates are expected to rise by only a limited amount in the coming

month.


August 1, 2014 27

Noriko Suzuki, Singapore Treasury Department

Singapore Dollar – August 2014

Expected Ranges Against the US$: SG$ 1.2300–1.2500


1. Review of the Previous Month:

The Singaporean dollar remained strong against the U.S. dollar in July, although the appreciation was

limited to a narrow range, reaching its highest level in eight months.

The U.S. dollar/Singaporean dollar exchange market opened in July at the upper-SGD 1.24 level. In

the first week of the month, the U.S. dollar remained strong against other major currencies. This is due to

the fact that the June ADP employment statistics of the U.S. were released on July 2, recording an

improvement for the first time in a year and seven months, while the June employment statistics of the

U.S. were also released on July 3 with significantly better-than-expected figures, both of which led some

market participants to expect the FRB to raise the interest rate in the near future. However, in the foreign

exchange market in Asia, Asian currencies were generally on a rise, with the Korean won renewing its

high for the first time in six years and the Malaysian ringgit reaching its high for the first time in eight

months as a result of expectations for an interest rate hike. Following this trend, the Singaporean dollar

also remained strong at the upper-SGD 1.24 level.

In the second week of the month, the U.S. dollar long-term interest rates dropped despite the

expectations for an early interest rate high by the FRB. Furthermore, the minutes of the June FOMC

meeting were released on July 10, and there were no hawkish comments—as had been expected in the

market. As a result, U.S. dollar-selling increased. Following this trend, the Singaporean dollar continued

appreciating against the U.S. dollar to approach SGD 1.24.

With the trend from the previous week, the Singaporean dollar continued appreciating and

approaching its high in the third week of the month. However, the preliminary figure for the April–June

quarter GDP of Singapore was announced on July 14, falling below the level previously anticipated.

Furthermore, FRB Chair Janet Yellen made a somewhat hawkish remark at the congressional testimony

on July 15 that “If the labor market continues to improve more quickly than anticipated, increases in the

federal-funds rate target likely would occur sooner and be more rapid than currently envisioned.”

Risk-averse sentiment was also growing in the market due to the crash of a Malaysian Airlines flight in

Ukraine on July 17, along with the intensification of the situation in Israel. As a result, the Singaporean

dollar dropped to the mid-SGD 1.24 level again.

In the fourth week of the month, the risk-averse sentiment in the market decreased to a certain amount,


August 1, 2014 28

while market participants remained cautious about the situations in the Middle East and Ukraine. Thus,

the Singaporean dollar started approaching its high again at the beginning of the week. Thereafter, the

FTSE Straits Times Index renewed its new high for the first time in a year and two months, and Joko

Widodo won the Indonesian presidential election on July 23. In a positive reaction to these events, the

Singaporean dollar appreciated against the U.S. dollar as well, reaching the upper-SGD 1.23 level for the

first time in eight months. However, market participants adjusted their positions in the second half of the

week, as an Islamic holiday was approaching. As a result, the U.S. dollar/Singaporean dollar exchange

rate fell slightly to the lower-SGD 1.24 level. The U.S. dollar/Singaporean dollar pair continued trading

at this level with small fluctuations after the weekend, as it was a holiday in many of the major Asian

countries.


The Singaporean dollar exchange market is expected to see few signs of movement in August, as

many market participants in Europe and the U.S. will be on summer holidays, while there will be no new

factor to influence the exchange market.

Even though it is difficult to expect that the U.S. dollar/Singaporean dollar exchange rate will fluctuate

violently in August, as a general trend, the Singaporean dollar is likely to strengthen in the times ahead

based on the stability of other Asian currencies. Elections in both India and Indonesia have been

completed, and the political situation in Thailand has been stable. Thus, political risks in Asia have been

reduced. With regard to the Chinese economy, the Chinese government has indicated its plan to boost the

economy, and the latest economic indices have demonstrated an upward trend, mitigating concerns over

an economic downturn. Furthermore, the Chinese yuan exchange rate has already hit bottom and the

exchange rate has now been stable, which is also contributing to the stability of Asian currencies. With

regard to U.S. dollar interest rates, which have triggered capital outflow in the past, the U.S. monetary

authorities have been successful in preventing the sharp appreciation of U.S. dollar interest rates through

dialogue with the market. While U.S. dollar interest rates remain low with possibilities of additional

measures of monetary easing in Europe and Japan, the situation in Asia has been stabilized. Thus, the

market conditions make it easier for market participants to actively invest in Asian currencies for higher

returns. If Asian currencies remain strong, the Singaporean dollar is also likely to appreciate further, as

the Monetary Authority of Singapore (MAS) attempts to lead the Singaporean dollar to slowly appreciate.

As the Singaporean dollar exceeded the mid-SGD 1.24 level in July, its high against the U.S. dollar since

the beginning of the year, the next turning point would be the upper-SGD 1.22 level from the viewpoint

of technical analysis.

For the above reasons, the Singaporean dollar is likely to remain strong, fluctuating within a narrow

range, although there is potential for the further appreciation of the Singaporean dollar. However, there

are also potential risks, such as the appreciation of U.S. dollar interest rates as a result of growing


August 1, 2014 29

expectations for an early interest rate hike in the market triggered by significant improvement in the U.S.

economic indices, as well as the sharp appreciation of crude oil prices resulting from the intensification

of the situations in the Middle East and Ukraine—both of which could lead market participants to

significantly reduce Singaporean dollar-buying positions.

Key events in August include the announcement of the definitive figure for the April–June quarter

GDP of Singapore scheduled for August 15 as well as the release of the July export statistics scheduled

for August 18.


August 1, 2014 30

Hiroshi Seki, Bangkok Treasury Department

Thai Baht – August 2014

Expected Ranges Against the US$: BT 31.75–33.00



As banks in Thailand were closed on July 1, the U.S. dollar/Thai baht exchange market opened at

around THB 32.40, after which the exchange rate fluctuated within a narrow range. Then, the June

employment statistics of the U.S. were released on July 3, and the number of non-agricultural employees

increased 288,000 from the previous month (as the market estimate was an increase of 215,000), while

the unemployment rate was 6.1% (as the market estimate was 6.3%), encouraging U.S. dollar-buying. As

a result, the U.S. dollar/Thai baht exchange rate rose to THB 32.44, the highest level observed in July.

Thereafter, risk-taking sentiment strengthened both in the market and in the stock market, and the

Thailand SET Index continued appreciating one day after another, thanks to capital inflows from

overseas investors, which lowered the U.S. dollar/Thai baht exchange rate. On July 9, the governor of the

central bank of Thailand, Prasarn Trairatvorakul, expressed his outlook for expecting an economic

recovery in the coming fiscal year as well as his view that the Thai baht has not been too strong. In

reaction to these remarks, the U.S. dollar/Thai baht exchange rate fell sharply. In the evening of the same

day, the minutes of the FOMC meeting were released in the U.S., leading U.S. dollar interest rates to fall.

As a result, stock prices appreciated in the U.S., spreading risk-taking sentiment in the market. The U.S.

dollar/Thai baht exchange rate thus fell to THB 32.20.

On July 14, the Ministry of Finance in Thailand announced its plan to make an investment of THB 150

billion as the first part of its infrastructure project for the coming fiscal year, in reaction to which Thai

baht-buying dominated the market. Then, the Thailand SET Index continued appreciating on July 16

with expectations for the reopening of investment in infrastructure. As overseas investors also continued

buying Thai stocks, the Thailand SET Index reached its highest level since June last year. Following this

trend, the U.S. dollar/Thai baht exchange rate fell to reach THB 32.10. On July 18, geopolitical risks

increased due to the crash of a Malaysian Airlines flight, reported on the previous day, leading the U.S.

dollar/Thai baht exchange rate to rise to THB 32.23. However, the risk-averse sentiment in the market

decreased on July 21, after the weekend, and there was a general trend to buy Asian currencies. Thanks

to this trend and to capital inflows to the stock and bond markets in Thailand, the U.S. dollar/Thai baht

exchange rate fell below THB 32.10, which had been a resistance line, and continued falling sharply. On

July 22, the National Council for Peace and Order (NCPO) proclaimed an interim constitution, and on

July 23, the Federation of Thai Industries released the June Thai Industries Sentiment Index, which


August 1, 2014 31

recorded an increase for the second consecutive month. In reaction to this, the U.S. dollar/Thai baht

exchange rate fell to THB 31.75, the lowest level in July.

On July 24, the central bank of Thailand gave a warning such that the excessive fluctuation in the Thai

baht exchange market would be controlled if necessary, in reaction to which the U.S. dollar/Thai baht

exchange rate rose to THB 31.85. On July 25, Moody’s released a report that revealed its plan to revise

the rating of Thai government bonds if the country’s reforms are not quickly implemented by the military

government. As a result, the U.S. dollar/Thai baht exchange rate rose to THB 31.88. On July 28, the

Ministry of Commerce in Thailand announced the June export value, which recorded an increase of 3.9%

year-on-year, recording positive growth for the first time in four months. In reaction to this, the U.S.

dollar/Thai baht exchange rate fell slightly to THB 31.80. However, the April–June quarter GDP of the

U.S. was announced on July 30, exceeding the expected level, which led the U.S. dollar/Thai baht

exchange rate to rise sharply to THB 32.21.


The U.S. dollar/Thai baht exchange rate is expected to remain stable.

The central bank of Thailand is scheduled to hold its monetary policy committee (MPC) meeting on

August 6. At the previous MPC meeting held in June, the policy interest was maintained at 2.0% as a

unanimous decision. However, expectations for economic recovery have been growing, as concerns over

political confusion have been mitigated after the military coup in May and as the government has started

to function well, which has made it easier for public works and private investment to recover. Led by the

NCPO, the political uncertainty in the country has been decreasing, and therefore, it is unlikely for the

central bank to carry out an additional interest rate cut. Thus, the interest rate is expected to be

maintained at the current level again.

According to the interim constitution proclaimed by the NCPO on July 22, the president of the NCPO

has greater authority than the interim prime minister, suggesting that the military leadership will remain

strong in carrying out reforms. The NCPO has announced its plan to complete the series of reforms by

July 2015 and will carry out a general election by the end of 2015 after establishing a new constitution in

order to shift to a civilian government. Even though the reforms will take a long time and a sense of

uncertainty persists, market participants are somewhat relieved after the interim constitution was

proclaimed as scheduled. Furthermore, the NCPO had a meeting with major ministries and government

offices, including the Ministry of Transport, on July 29 and approved a project of about THB 2.4 trillion

(equivalent to about USD 75.5 billion) to develop infrastructure around the country. The budget is to be

used over seven to eight years. The amount approved this time is the largest so far with the military

government, and the project is expected to encourage investment in Thailand while stimulating the

country’s domestic economy of Thailand, which has recently been weak. The Ministry of Transport in

Thailand has announced its plan to open bidding for construction work for five projects to develop an


August 1, 2014 32

electric railway in the Bangkok metropolitan area between the end of this year and the beginning of next

year, which has been attracting the attention of overseas investors.

On the other hand, the April–June quarter GDP of the U.S. was announced on July 30, recording

positive growth of 4.0% year-on-year (while the prior estimate was positive growth of 3.0%). As the

GDP recorded negative growth for the last period due to a historic cold wave in January and February,

the result for this period demonstrated a significant recovery that exceeds prior expectation after the

weather conditions had improved. Also, a sense of relief has been spreading in the market regarding the

economic recovery in the U.S., which is likely to strengthen the U.S. dollar. Since July, overseas

investors have been buying Thai stocks & bonds as a result of the inflow of foreign currencies based on

expectations for the economic recovery of Thailand. When the U.S. dollar/Thai baht exchange rate fell

sharply in July, the central bank of Thailand made a timely remark to warn that the excessive fluctuation

of the Thai baht would be controlled if necessary, which kept the U.S. dollar/Thai baht exchange rate

from falling further from THB 31.75. Therefore, the U.S. dollar/Thai baht exchange rate is expected to

remain stable in the coming month, even though the appreciation of the U.S. dollar/Thai baht exchange

rate is likely to slow down due to capital inflow from overseas markets based on expectations for

economic recovery in the second half of this fiscal year.


August 1, 2014 33

Hirotsugu Taguchi, Singapore Treasury Department

Malaysian Ringgit – August 2014

Expected Ranges Against the US$: MYR 3.15–3.22



The U.S. dollar/Malaysian ringgit exchange market opened in July at the upper-MYR 3.20 level. The

Malaysian ringgit appreciated slowly thereafter, thanks to expectations for an interest rate hike at the

Monetary Policy Committee Meeting at the central bank of Malaysia, scheduled for July 10. On July 4,

the Malaysian ringgit continued appreciating further, thanks to strong figures in the June employment

statistics of the U.S., which were announced on the previous day, and which strengthened risk-taking

sentiment in the market, along with the strong figures in the May export statistics of Malaysia, which

spread optimism throughout the market. As a result, the U.S. dollar/Malaysian ringgit exchange rate rose

to the lower-MYR 3.18 level.

At the Monetary Policy Committee meeting, which attracted substantial attention in the market, the

overnight policy rate, which is the policy interest rate of Malaysia, was raised by 25 basis points to

3.25%, as had been expected by the majority. This was the first interest rate hike in three years and two

months since May 2011. The Monetary Policy Committee explained its decision to raise the interest rate

hike in its statement released after the meeting, such that “as the stable growth outlook and the inflation

level continues to exceed the long-term average, the normalization of monetary policy was needed to

ward off the risks of the financial and economic imbalances that undermine the growth of the Malaysian

economy.” As the interest rate hike had already been reflected in the U.S. dollar/Malaysian ringgit

exchange market, the exchange rate fell to the lower-MYR 3.18 level against the U.S. dollar after the

announcement of the interest rate hike as a result of position adjustment.

Thereafter, the U.S. dollar/Malaysian ringgit continued trading within a narrow range for a while. On

July 15, however, the media reported that FRB Chair Janet Yellen made a somewhat hawkish remark

such that “even though the GDP recorded negative growth, other indices generally recorded positive

growth” as well as that “if the labor market continues to improve more quickly than anticipated, increases

in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned.”

In reaction to this, U.S. dollar interest rates rose, encouraging U.S. dollar-buying, and the Malaysian

ringgit depreciated temporarily to the lower-MYR 3.20 level against the U.S. dollar. However, the June

Consumer Price Index of Malaysia was announced on July 16, and the growth rate was +3.3%

year-on-year, maintaining a high growth rate, which led market participants to anticipate an additional


August 1, 2014 34

interest rate hike before the end of the year. As a result, the Malaysian ringgit recovered to the

lower-MYR 3.17 level.

On July 18, the media reported that a Malaysian Airlines flight was shot down over Ukraine, which

increased risk-averse sentiment in the market, and then the Malaysian ringgit depreciated to the

mid-MYR 3.19 level against the U.S. dollar. However, after a certain phase of U.S. dollar-buying, the

Malaysian ringgit was bought back and the U.S. dollar/Malaysian ringgit exchange rate returned to the

mid-MYR 3.16 level.

Toward the end of the month, the Malaysian ringgit weakened to the lower-MYR 3.18 level as a result

of U.S. dollar-buying for the purpose of profit-taking before the holiday of Hari Raya. Furthermore, the

April–June quarter GDP of the U.S. was announced on July 30, revealing a strong figure, while

somewhat hawkish remarks were included in the statement of the FOMC. As a result, U.S. dollar-buying

and ringgit-selling dominated the market on July 31, the following day. In the end, the Malaysian ringgit

weakened to the mid-MYR 3.19 level against the U.S. dollar.


On July 10, the central bank of Malaysia raised the interest rate by 25 basis points, as had been

expected by the majority. This time, the central bank referred again to the instability risks caused by

financial and economic imbalances, which implied an additional interest rate hike in the times ahead.

Indeed, the June Consumer Price Index was announced on July 16 after the interest rate hike,

maintaining a growth rate at the 3% level. Even though this is partly due to the fact that Ramadan (the

fasting month) had started, the appreciation of the prices of food considered to be daily necessities was

leading the overall inflation rate. Thus, it is difficult to expect the uptrend in the inflation rate to slow

down in a short period. Furthermore, the Consumer Price Index has recently been above the level of the

long-term inflation rate of Malaysia. As the government is also likely to revise its framework for the fuel

subsidy before the end of the year, the inflation rate is expected to remain high for a while.

Under such circumstances, many market participants expect that the central bank of Malaysia will

raise the interest rate again before the end of the year. Therefore, ringgit-buying is likely to increase in

the near future based on the interest rate differentials.

With regard to the situation in the U.S., the U.S. dollar temporarily appreciated sharply as a result of

somewhat hawkish remarks made at the congressional testimony held in July by FRB Chair Janet Yellen.

Future remarks by Yellen will therefore be key factors in the times ahead. However, most market

participants do not expect that the U.S. will complete QE tapering and shift to a phase of actual interest

rate hikes until next fiscal year. Thus, given the current interest rate differentials between the Malaysian

ringgit and the U.S. dollar, U.S. dollar-buying based on the appreciation of U.S. dollar interest rates is

likely to be limited.

On the other hand, the outlook for the situation in Israel, Ukraine, and Russia remains uncertain, and


August 1, 2014 35

geopolitical risks may grow temporarily in the times ahead. In such cases, Asian-currency selling may

increase, which needs particular attention.

While market participants should remain cautious about the temporary depreciation of the Malaysian

ringgit that may be caused by growing geopolitical risks, the Malaysian ringgit is expected to remain on

an uptrend in August, thanks to expectations for an additional interest rate hike and to low U.S. dollar

interest rates.


August 1, 2014 36

Satoshi Koizumi, Singapore Treasury Division

Indonesian Rupiah – August 2014

Expected Ranges Against the US$: IDR 11,300–11,800

Against the yen: JPY 0.86–0.90 (= IDR100)

IDR 111.00–116.80


The U.S. dollar/Indonesian rupiah pair traded within a range of IDR 11,500–11,970 in July,

demonstrating violent fluctuations due to oscillating expectations for the presidential election. As the

presidential election took place on July 9, attracting substantial attention in the market, the market trend

will be reviewed in chronological order.

(1) Beginning of the month to the presidential election (July 9)

The U.S. dollar/Indonesian rupiah exchange market opened at around IDR 11,800 on July 1.

Thereafter, the May trade statistics were announced on the same day, recording only a small trade surplus

of USD 70 million, encouraging rupiah-selling. On July 3, the Indonesian rupiah continued depreciating,

and the exchange rate approached IDR 11,970 to the U.S. dollar. U.S. dollar-buying and rupiah-selling

increased thereafter, as market participants started adjusting their positions before the presidential

election scheduled for July 9. As a result, the U.S. dollar/Indonesian rupiah exchange rate fell to

approach IDR 11,700 before the presidential election.

(2) After the presidential election (July 10) to before the announcement of the election result (July 21)

The media reported that Joko Widodo was leading the presidential election immediately after voting

took place, and this was viewed favorably by the financial market. Security investment in Indonesia

accelerated, as can be seen in the fact that the Jakarta Stock Exchange Composite Index reached 5,140

points for the first time since May last year. As a result, the U.S. dollar/Indonesian rupiah exchange rate

fell to approach IDR 11,500. However, uncertainty grew again as the announcement of the presidential

election result approached, and the U.S. dollar/Indonesian rupiah exchange rate fluctuated violently from

the lower-IDR 11,500 level to the upper-IDR 11,700 level.

(3) Announcement of the election result (July 22) to the end of the month (July 25) (The market closed


August 1, 2014 37

from July 28 to July 31, as it was the end of the fasting period.)

The U.S. dollar/Indonesian rupiah exchange market opened at the lower-IDR 11,500 level on July 22,

when the result of the presidential election was due to be out. Thereafter, the rupiah continued

depreciating, and the exchange rate approached IDR 11,600 to the U.S. dollar, as market participants

adjusted their positions before the announcement of the result of the presidential election scheduled for

the evening. However, once the victory of Joko Widodo had been officially confirmed, the rupiah started

to rally, and the U.S. dollar/Indonesian rupiah exchange rate approached the IDR 11,500 level on July 23,

the following day. The exchange market remained stable thereafter until trading closed.

The Jakarta Stock Exchange Composite Index remained robust, thanks to expectations for the new

government under Joko Widodo. Trading in July opened at 4,877 points, after which the index continued

appreciating. On July 8, the index exceeded the 5,000-point mark. The index remained high thereafter,

hovering at around the 5,000–5,100-point level.


After the presidential election, the Indonesian rupiah exchange market is expected to be stable in

August. Joko Widodo will be officially inaugurated as the new president of Indonesia on October 20, and

it is likely that a new coalition will be formed before his inauguration, as the number of ruling party seats

would not reach the majority with the current coalition alone. However, as the victory of Joko Widodo in

the presidential election has been decisive, there will be a certain sense of relief spreading throughout the

market.

On the other hand, a series of Indonesian economic indices will be announced in August, including the

monthly Consumer Price Index (CPI) and trade statistics, as well as the April–June quarter GDP growth

rate, the April–June quarter international balance of payments, and the current account balance.

The July CPI is particularly important, as the effect of the petroleum fuel subsidy cut (a gasoline price

hike from IDR 4,500 to IDR 6,500 per liter), which was carried out in the second half of June last year,

will be fully reflected in the figure. This may result in a large gap between this term’s CPI and 5.5%—the

upper end of the inflation target set out by the central bank of Indonesia, and this requires attention.

Furthermore, when it comes to economic fundamentals, there are several negative factors for the

Indonesian rupiah market, even while the victory of Joko Widodo in the presidential election has been a

positive factor for the rupiah. These negative factors include the decline in the GDP growth rate as well

as the chronic current account deficit. Therefore, the GDP growth rate and the current account balance,

which are to be announced in August, would also be important factors. With such conditions, the U.S.

dollar/Indonesian rupiah exchange rate is not expected to move into any particular direction, hovering at

around the mid-IDR 11,000 level.


August 1, 2014 38

Yasunori Sugiyama, Manila Branch

Philippine Peso – August 2014

Expected Ranges Against the US$: PHP 43.00–44.30


1. Review of the Previous Month:

The U.S. dollar/Philippine peso exchange market opened trading at PHP 43.60 on Tuesday, July 1.

There had been few signs of movement at the beginning of the month, as there were important events

approaching, including the ECB Committee meeting and the announcement of the employment statistics

of the U.S.—both scheduled for July 3. Thus, the U.S. dollar/Philippine peso pair traded within a narrow

range of PHP 43.55–43.65 with a small trading volume from July 1 to July 3.

As the employment statistics of the U.S. were released on Thursday, July 3 with significantly strong

figures, the U.S. dollar/Philippine peso pair opened trading with a slightly strong U.S. dollar and a

weaker Philippine peso at PHP 43.65 on Friday, July 4, the following day. However, the June Consumer

Price Index of the Philippines was announced in the morning, and it remained high at 4.4%, which led

peso-buying to dominate the market based on expectations for the peso interest rates to be higher in the

times ahead. As a result, the Philippine peso appreciated to PHP 43.46 to the U.S. dollar. Trading closed

for the week at PHP 43.465 to the U.S. dollar.

After the weekend, the U.S. dollar/Philippine peso exchange market resumed at PHP 43.50 on

Monday, July 7. As there were few specific factors in the market with a small trading volume, the U.S.

dollar/Philippine peso exchange rate hovered around at the PHP 43.40 level. On Tuesday, July 8, the

following day, the peso strengthened as a result of the fact that the U.S. long-term interest rates were on a

decline. However, the central bank of the Philippines intervened in the market, albeit to a limited extent,

when the exchange rate fell below PHP 43.40, which kept the U.S. dollar from depreciating further.

Nevertheless, the U.S. long-term interest rates continued falling in the evening of the same day, leading

the Philippine peso to appreciate to PHP 43.31 to the U.S. dollar on Wednesday, July 9, the following

day. Furthermore, on Thursday, July 10, the May export value of the Philippines was announced,

recording a positive growth rate of 6.9%, significantly higher than expected. This encouraged

peso-buying, and the Philippine peso appreciated to reach PHP 43.23 to the U.S. dollar for the first time

in nine months. The appreciation of the peso was so rapid that the central bank of the Philippines bought

the U.S. dollar again at the PHP 43.25 level to keep the U.S. dollar from depreciating further. As a result,

the U.S. dollar/Philippine peso exchange rate returned to PHP 43.38. In the evening of July 10, the credit

uncertainty of a major bank in Portugal triggered risk-averse sentiment in the market, leading the overall

stock prices to depreciate. Following this trend, the U.S. dollar strengthened against the Philippine peso


August 1, 2014 39

on Friday, July 11, the following day. The U.S. dollar/Philippine peso exchange rate thus returned to

PHP 43.59 and trading closed for the week at PHP 43.56 to the U.S. dollar.

The credit uncertainty of a major Portuguese bank as observed in the previous week was somewhat

mitigated after the weekend on Monday, July 14. As a result, the risk-averse sentiment in the market

weakened, encouraging some peso-buying. However, market participants remained cautious when the

Philippine peso was strong, as there were possibilities of market interventions by the central bank of the

Philippines. As a result, the peso did not appreciate further from the PHP 43.475 to the U.S. dollar. On

Tuesday, July 15, the following day, U.S. dollar-buying and peso-selling increased as a result of the

appreciation of the U.S. interest rates. Thus, the U.S. dollar/Philippine peso exchange rate also

appreciated to reach PHP 43.67.

The U.S. dollar/Philippine peso exchange market was closed on Wednesday, July 16, as Typhoon

Glenda (Typhoon 9) hit the Manila metropolitan area, making it a bank holiday. On Thursday, July 17,

the following day, there were few active market participants, and the U.S. dollar/Philippine peso

exchange rate remained within a narrow range of PHP 43.50–43.60 with few factors to influence the

market. In the morning of Friday, July 18, the following day, risk-averse sentiment grew in the market, as

the media reported on both the crash of the Malaysian Airlines flight over Ukraine as well as the Israeli

invasion into the Gaza Strip, encouraging U.S. dollar-buying. As a result, the U.S. dollar/Philippine peso

pair opened trading with a weak peso at PHP 43.65. However, U.S. dollar-selling became dominant in

the market thereafter once the U.S. interest rates started declining further. The Philippine peso remained

strong in the following week as a result of the downtrend in the U.S. interest rates, and the U.S.

dollar/Philippine peso exchange rate has so far stayed at the PHP 43.30–43.40 level (as of July 23).


The June Consumer Price Index of the Philippines was announced on July 4, and the result was

+4.4% year-on-year, recording a slight slowdown from the previous month in which the result was

+4.5% year-on-year. However, inflation has been high over the last several months.

The central bank of the Philippines sets out the inflation target rate at the beginning of every year. In

2014, the inflation target was set at “from 3% to 5%,” as was the case in the previous year. While the

inflation rate is still within the target range, the level is approaching the upper end of the target. In

particular, the Philippines is fully dependent on imports when it comes to energy sources. Thus, the

inflation rate in the Philippines has been raised by the appreciation of oil prices caused by the recent

intensification of the situation in the Middle East, which led to the appreciation of electric power prices

and gasoline prices, although the country mainly uses electricity generated through thermal power using

coal.

Given such circumstances, the Special Deposit Account rate, which is currently a virtual regulating

valve for interbank funds, was raised from 2% to 2.25% in June. As the bond repo transaction interest


August 1, 2014 40

rate, which is the official policy interest rate, has been kept at 3.5% for a while, the SDA interest rate is

likely to be raised intermittently in order to fill in the gap between the SDA interest rate and the official

policy interest rate.

With regard to the situation in the U.S., on the other hand, indices related to personal consumption and

housing continue to show mixed signals, while indices related employment are strong. Given such

conditions, the FOMC and FRB Chair Janet Yellen have been committed to a long-term low interest rate

policy. The U.S. long-term interest rates have thus been stable at a low level, while interest rates have

been raised for the peso. Therefore, the Philippine peso is expected to strengthen against the U.S. dollar.

About 10 million people, which is about 20% of the total working population of the Philippines, are

engaged in labor abroad, such as in the U.S. and the Middle East. Remittances from such overseas

Filipino workers (OFWs) have been supporting the domestic personal consumption, leading the

development of the Philippine economy. At the same time, OFW remittances have been contributing to

keep the international balance of payments healthy, by generating a surplus in the current account

balance to supplement the trade deficit. The amount of OFW remittances have been increasing by 6–8%

annually. As the foreign currencies brought into the country are always sold to buy pesos, OFW

remittances also function as pressure to sell the U.S. dollar, thus they are the most influential factor

impacting the U.S. dollar/peso exchange market.

The amount of remittances peaks in the April–June period during the first half of the year, which has

already past. However, remittances have been constantly increasing to almost USD 2 billion per month.

OFW remittances are therefore expected to continue preventing the U.S. dollar from appreciating further

against the Philippine peso in August. Along with the factors related to interest rates discussed above, the

Philippine peso is likely to appreciate slowly against the U.S. dollar.


August 1, 2014 41

Hideharu Nagano, Singapore Treasury Department

India Rupee – August 2014

Expected Ranges Against the US$: INR 58.50–62.00



The U.S. dollar/Indian rupee exchange rate remained within a narrow range in July, as rupee-buying

was encouraged by capital inflow into the stock market in India, while rupee-selling was encouraged by

concerns over the European debt crisis as well as the disappointment regarding the budget plan released

by the new government.

The June Manufacturing Industry PMI of India was announced on July 1, and the result was almost the

same as the previous figure (the result was 51.5, while the market estimate was 51.4). The U.S.

dollar/Indian rupee exchange market opened trading at the INR 60.10 level. On July 2, the SENSEX

Index renewed its all-time high, with growing expectations for economic stimulus to be introduced by

Prime Minister Narendra Modi. Following this trend, rupee-buying was also active, and the U.S.

dollar/Indian rupee exchange rate fell below INR 60. Furthermore, the June Service industry PMI of

India was announced on July 3, reaching its highest level in a year and half (the result was 54.4, while the

previous result was 50.2), thanks to healthy growth in new orders received and in production. As a result,

the SENSEX Index reached the 26,000 level. Then, the U.S. dollar/Indian rupee exchange rate fell

temporarily to the PHP 59.50 level. However, on July 10, market participants adjusted their positions

both on the SENSEX Index and the rupee, as the government was to release its budget plan. As a result,

the U.S. dollar/Indian rupee exchange rate had risen to the INR 59.70 level by the time the government

released the budget plan.

This budget plan kept the goal set out by the previous government such that the fiscal deficit for

FY2014 should be reduced to 4.1% of the GDP. With regard to the expenditure, investment in

infrastructure has been increased, compared to the previous government. On the other hand, revenue is to

be increased by selling the stocks of state-owned companies and by charging for mobile phone service

licenses. Even though the government is doing well in terms of the reduction of the fiscal deficit and the

promotion of investment in infrastructure, which was part of the government’s campaign promises, it

failed in living up to market expectations, as they postponed announcing specific plans with regard to the

timing of the introduction of the Goods and Services Tax (GST) and the optimization of subsidy reforms.

As a result, rupee-selling increased. Furthermore, risk-averse sentiment grew in the market, triggered by

concerns over the financial conditions of the largest bank in Portugal, which encouraged rupee-selling

further. The U.S. dollar/Indian rupee exchange rate thus returned to the INR 60 level, rising temporarily


August 1, 2014 42

to the INR 60.30.

The May Industrial Production of India was announced on July 11, and the result was +4.7%

year-on-year, exceeding the market estimate (+3.6% year-on-year), slowing down rupee-selling.

Furthermore, the June Wholesale Price Index (WPI) of India and the July Consumer Price Index (CPI) of

India were announced on July 14, and the results were +5.43% year-on-year and +7.31% year-on-year,

respectively, both falling below the market estimates (+5.78% year-on-year and +7.70% year-on-year,

respectively). As a result, more market participants expected the central bank of India to ease monetary

policy by witnessing the slowdown in inflation. This encouraged rupee-buying, and then the U.S.

dollar/Indian rupee exchange rate fell below INR 60 again. The U.S. dollar/Indian rupee exchange rate

remained within a narrow range thereafter at around the INR 60.10 level, as rupee-selling was

encouraged by the expansion of India’s trade deficit from the previous figure (USD 11.3 billion) to USD

11.76 billion in the June trade statistics of India, while rupee-buying was also encouraged by the strong

corporate earnings figures that led the SENSEX Index to renew its high once again.


In August, the U.S. dollar/Indian rupee exchange rate is expected to remain within a narrow range at

around INR 60.

The budget plan released on July 10 included the reduction of the fiscal deficit and the promotion of

investment in infrastructure. However, it did not include the tax reforms and the issues of non-performing

bank loans. As the plan was also cautious regarding deregulation for the overseas retail industry, it failed

in living up to market expectations. With regard to the promotion of investment in infrastructure,

however, the plan describes detailed measures. In the times ahead, the focus will therefore be on

reduction in the fiscal deficit as well as the practicability of the investment in infrastructure. As these

matters will take time to complete, the market is unlikely to react in a short time.

With regard to domestic economic indices, the CPI, which indicates the level of inflation, fell below

8% for the first time in two and half years. The governor of India's central bank, Raghuram Rajan,

suggested that he would ease the monetary policy if the CPI falls below 8% in January 2015, which

makes the inflation trend a very important indicator in the times ahead. It has however been expected that

inflation will remain high in the times ahead, and it will take a long time to ease the monetary policy. The

first reason for this is the appreciation of food prices resulting from a lack of precipitation. The total

precipitation during the monsoon period in summer (generally from June to September) calculated using

the data from June to the middle of July was about 41% lower than average. If the weather conditions do

not improve in the times ahead, food prices are expected to appreciate from autumn onward, as a result of

a slowdown in grain production—as was seen in 2009. The second factor is the fact that the crude oil

prices remain high. India is the world’s fourth largest importer of crude oil, and therefore, the

appreciation of the crude oil price would mean the expansion of the trade deficit of India. Thus, it would


August 1, 2014 43

be a factor to encourage rupee-selling. Although the crude oil price has currently been stable, as the

supply of crude oil has not been affected by the situation. However, with concerns over the U.S. air

bombing on Iraq, crude oil prices are expected to remain high in the times ahead.

However, other domestic economic indices indicate the recovery of the Indian economy. Industrial

production recorded positive growth for the second consecutive month, while the number of car sales

was +6.7% year-on-year in June, recording positive growth for the first time in 20 months. Meanwhile,

the Manufacturing Industry PMI exceeded the 50 mark, a level seen as an economic indicator, for the

eighth consecutive month. While corporate exports have been on a recovery, the foreign exchange

market has been stable. Furthermore, price inflation has slowed down and market sentiment has

improved, thanks to expectations for reforms under the Modi government. The Indian economy is

therefore expected to recover slowly, as main factors involving the economic downturn (such as the

decline in the manufacturing industry and the gross fixed capital formation) will taper off. Rupee-selling

is therefore likely to be limited.

This report was prepared based on economic data as of August 1, 2014. This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report is based on information believed to be reliable, but Mizuho Bank, Ltd. (MHBK) does not warrant its accuracy or reliability. The contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment. Furthermore, this report’s copyright belongs to MHBK and this report may not be cited or reproduced without the consent of MHBK, regardless of the purpose.

This document is a translation of a Japanese original.

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