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South Asia Daily Outlook and Strategy - May 01, 2008

Vishnu Varathan, [email protected],

Ph: 65-6236-0396

Kwok Yung Chua, [email protected],

Ph: 65-6236-0385

Joanna Tan: [email protected],

Ph: 65-6236-0385

Daniel Soh, [email protected],

Ph: 65-6236-0394

USD/SGD: Underlying bearishness curbs reticent bulls

USD/SGD remained supported by the USD rebound as it kept firm just about the 1.36 level during intra day trades. Broad USD continued to drive the pair amidst indication that the Fed was near the end of its monetary easing cycle. Singapore's preliminary unemployment for the first quarter of 2008 rose to a seasonally adjusted 2.0% from a revised 1.7% (prelim 1.6%) in Q4. Jobs creation rose strongly to 68,400 in Q108 (Q407: +62,500) led by 42,000 jobs being created in the services sector compared to the 13,400 new jobs in construction and 11,900 new positions in Manufacturing. Going forward, the upcoming session should see a lull in trading activity with local markets and most of the world away for the Labour Day holiday. Expect prices to be contained inside broader consolidation range of 1.3550-1.3650 thus, though neutral bias could likely be thrown out off a breach of either the 1.3660 resistance or 1.3570 support as market deliberates after post FOMC session.

USD/PHP: Upside mood not fading soon

Though USD/PHP bulls were muted by central bank offers in Wed's trades, the upside bias in the pairing was quite apparent; BSP intervention failing to trigger sustained downside was also rather telling. USD/PHP finished on a strong footing at 42.265 as the dollar beat the EUR back down. Risks that inflation could continue to spiral were underlined by the Philippines grappling with sourcing for rice supplies and the exorbitant price tag on crude. The fiscal burden of subsidies and slippage in current account standing from slowing growth accentuated the softened condition of the PHP. Add to that the bullish mood in the dollar, uptrend in the USD/PHP is seen remaining intact for now. Near-term range of 42.10-42.45 is expected with BSP smoothing flows above. BSP chief has warned of more upside pressure in prices and that Apr CPI print could be 6.4-7.0% y/y on the back of surge in food and oil prices. He warned that the central bank will remain vigilant, watching for any signs that cost-side inflation is spilling over to the demand end of things. While he said that the inflationary outlook for 2008 is "clouded"; he reassured that the 3.5% (give or take 1 percentage point) inflation target for 2009 would be achievable.

USD/THB: Near-term consolidation as stronger dollar and inflation focus weigh off

USD/THB moved broadly in line with the other regional pairings as lift from early dollar demand was almost ubiquitous. Bids took the USD/THB to highs of 31.77 from the 31.73 early lows. Later in trades, when the EUR pulled made a comeback - transient as it was - USD/THB tracked the USD/SGD lower to 31.70 though support was evident at those levels. EUR could not hold on to its gains and the USD/THB maintained some upside bias as the dollar stamped its superiority ahead of the FOMC announcement on Wed. On the data front Mar Current Account balance posted a surplus of $920 mln (Feb: +$752 mln); and Mfg Pdtn eased to a 10.1% y/y growth pace (Feb: +14.9% y/y). The firmer current account balance however did not dispel he clouds over global growth outlook and the ramifications on Thailand's export sector. Elsewhere the FinMin stressed that inflation remained within expectations adding that the govt was not complacent. He said that the govt was confident of balancing policies to simultaneously spur growth while keeping inflation under wraps. We expect that in coming sessions, the upside pressure from a stronger greenback will be tempered by BoT's hawkish bias and firmer CPI prints seen in the pipeline. Near-term consolidation is expected amid 31.55-31.90 seen.

USD/IDR: Confined in a tight bind; focus on April inflation data

USD/IDR was trapped in a tight bind between 9225-9235 amidst the quiet markets. The renewed strength in dollar and losses in the local bourse continued to exert pressure on the rupiah along with inflation and fuel hike concerns. Comments by the government on possibility of a 29% fuel hike in June stoke market jitters on the politically sensitive and unpopular move; and this added further pressures to the local equity and bond markets. However, BI offers retained a tenacious rein on USD/IDR and curbed upside aspirations ahead of the firmer CPI data expected on May 2, given the strength in external price pressures on oil and food. For the sessions ahead, USD/IDR is expected to continue the consolidation mood and stay within the range of 9220-9245. Clean break of 9245 will leave room for more upside towards next resistance of 9320.

USD/MYR: Awaits directions from dollar, USD/SGD

Initial selling pressures in USD/MYR were deterred by the heavy euro and continual strength in the greenback. With USD/SGD supported, downside tendencies in USD/MYR were stalled at 3.15 levels. Position adjustments ahead of the FOMC rate announcement also lifted the pairing higher as shorts were squared on expectations of a firmer dollar as the Fed nears the end of its monetary easing cycle. In the coming sessions, the 3.15 mark will be a tough barrier to break down. A decisive down move to sub 3.15 levels will see USD/MYR head for 3.1440. Range of 3.1490-3.1650 is expected. In the near term, the greenback will dominate the tone in trades. Proximate cues should be taken from the USD/SGD. Potential exposure to volatility should see BNM smoothing flows while inflation focus will lingers in the background.

USD/INR: Near-term focus on dollar signals

USD/INR spent the session in consolidation as it was tugged both ways by a multitude of factors. Oil buyers ramped up month-end demand and the USD/INR found that dips below 40.40 level found buyers without too much trouble. A sharp squeeze in late trades saw the USD/INR spike above 40.61 though offers were seen capping here. RBI adopting a hawkish tone while being measured in its tightening was somewhat of a mixed signal; the hesitation with regards to headline rate hike still of some focus. RBI governor Reddy stressed on Wed that the flexibility with regards to all monetary tools remained. On the exchange rate he said that it was a function of demand and supply factors. In coming sessions we expect that the USD/INR will continue to focus on the bullish dollar signals. Upside should however be capped by the central bank's commitment to inflation containment. Near-term range of 40.25-40.70 is expected. Elsewhere S&P affirmed its "BBB-" ratings and "Stable" outlook for India's sovereign ratings. The outlook, said S&P, supports the country's strong economic prospects, external balance sheet, and deep capital markets.

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