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South Asia Daily Outlook and Strategy - June 20, 2008

Vishnu Varathan, [email protected],

Ph: 65-6236-0396

Joanna Tan, [email protected],

Ph: 65-6236-0385

Daniel Soh, [email protected],

Ph: 65-6236-0394

Sue Ann Lee, [email protected],

Ph: 65-6236-0391

USD/SGD: Consolidation near-term with EUR and stock mkt moves providing leads

The strong EUR on Wed night saw the USD/SGD starting the session a tad heavy. Initial upside in the EUR/USD saw the USD/SGD being pressured though suspected MAS bids below 1.3670 levels helped to rein in retreats. Sentiments turned and the plunge in regional stock mkts prompted a bit of covering in short positions with the USD/SGD being buoyed. The sharp pullback in the EUR against the greenback sent the USD/SGD sailing over the 1.37 handle as short bets were squeezed out by the dollar move accentuated by risk aversion. In coming session, we expect that the inability of the EUR to hang on to gains could leave the USD/SGD susceptible to bouts of buy-backs. We do expect that the moves in the USD/SGD will be muted by its currency basket weighting as well as CNY proxy trades - given the aggressively bearish moves in the USD/CNY of recent. However equity mkt sentiments will remain closely watched. For now we think that the USD/SGD will be supported below 1.3650 while offers above 1.3745 should stall on the tightening bias in the SGD NEER.

USD/PHP: Upside risks outweigh

USD/PHP was in range-bound trades in the early session, but as expected the pairing was lifted along with other regional pairings as risk aversion swept through Asian equity mkts. The paring of short positions in previous sessions in the USD/PHP had printed the pairing for a bounce back to 44.50 levels where central bank bids were weighing on it. Elsewhere BSP chief Tetangco said that the economy was resilient enough to withstand measured tightening if such a need arose. He said that inflation is expected to peak at 10-11% in Q3 before coming off. The central bank chief justified the last rate hike saying that it was to pre-empt further spillover from commodity prices to the broader economy, shrugging off IMF suggestions that the central bank was behind the curve. On SDAs, BSP said that there were no plans for modifying availability. Tetangco assured that the PHP was supported fundamentally. In coming sessions, we expect that the USD/PHP will be dealt in the 44.20-44.70 range with a clean break above 44.51 being eyed for now.

USD/THB: Cautious as political woes compound risk aversion

Whether it was the comments from BoT on Wed that the THB will not be used as a tool to combat inflation was a cue or not is not clear. What is clear however, is that a rebound in oil prices which stoked inflation fears, and stocks tumbling on risk aversion does little to allay concerns of investors who are already grappling with the unstable state of political affairs in Thailand. Ahead of the planned anti-govt rally today, USD/THB was squeezed up to highs of 33.44 as the local bourse collapsed by over 3%. BoT came in to sell dollars to protect the USD/THB from further upside pressure, but aside from capping the surge, it did little to soften the USD/THB.We expect that concerns about inflation and that politics derailing the economy from its growth targets will see the the THB dented by investor withdrawing their funds from Thailand. The anti-govt rally today will be watched cautiously and that should keep short bets at bay. Meanwhile range of 33.15-33.55 is expected to be traded. IMF said that a rate hold was appropriate despite inflationary pressure.

USD/IDR: Steady consolidation below 9300 mark

USD/IDR was steady below the key 9300 level as it consolidated between 9280-9295 during the last session, resisting the regional trend of northbound actions. Buying interests below the key 9300 mark helped to limit downside as offshore players squared previous short positions adding to the support from demand from local banks and companies keen to buy below 9300. Notably, the local bourse was the only Asian bourse in positive territory albeit on the low side while the others succumbed to the mood of increasing risk aversion. Some focus on the $2.2 bln bond sales earlier to plug the budget deficit remains as it probably spells influx of funds boosting the rupiah. The next session should see the pairing in steady range plays between 9270-9310. The central bank is expected to intervene to keep USD/IDR stable and arrest any uptrend above 9300. Strong technical resistance stands at 9310.

USD/MYR: Plagued by political troubles; downside limited

USD/MYR was spurred higher to above 3.26 on the back of political risks. The broad-based uptrend in the regional pairings also helped support USD/MYR. After the no confidence vote by a Sabah party against PM Abdullah, the ruling coalition held an emergency meeting. The further developments are likely to exacerbate the coalition's unity and spell more trouble ahead for the PM. Downside in USD/MYR are likely to be hampered by domestic woes. The coming session should see the pairing supported above 3.2450. Range of 3.2390-3.2780 is expected. BNM is likely to check excessive up moves above 3.2700. Separately, the government has indicated that it will slow the pace of most development projects citing rising costs except the key projects like the 2nd Penang Bridge and the Northern Corridor development.

USD/INR: Underpinned by jitters

The stronger EUR was overlooked as the broad-based slump in Asian stock mkts and rebound in oil prices were seen as the dominant cues for the USD/INR to gap above the 42.90 handle. SENSEX going on to lose more than 2% while oil importers demanded more greenback on the bounce in crude prices saw the USD/INR being lifted to highs of 42.985; but intervention fears at those levels saw bids running out of steam. Overall, the USD/INR remained underpinned in trades while the oil price move, inflation worries and expectation of govt bond auctions saw bond yields surging by more than 10bps. In coming session, we expect that the USD/INR will have its focus tilted upwards given the risks of a dollar bounce and underlying concerns about the economy/inflation/financial mkts; RBI intervention is expected to cap rallies for now as the central bank tries to filter some price pressure through the currency channel. The chief economic advisor in the FinMin said that the 11th Plan average growth was expected to be 9% for the 2007-2012 period; very low probability of Current Account deficit exceeding 2.5% of GDP.

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