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South Asia Daily Outlook and Strategy - March 18, 2008

Vishnu Varathan, [email protected],

Ph: 65-6236-0396

Kwok Yung Chua, [email protected],

Ph: 65-6236-0385

USD/SGD: Wary market ahead of FOMC

USD/SGD eased off its session highs after surging towards 1.39 on extended risk aversion amidst stock losses. MAS was touted to be in supporting at the base after early selling was prompted by the Fed cutting its discount rate to 3.25%. Risk aversion took on the session's theme as USD repatriation were sought which kept the USD/SGD well supported during the Asian intra day dealings. Meanwhile, Non-oil domestic exports (NODX) grew 7.3% y/y in February, faster than the +2.8% y/y growth seen in January. On a seasonally adjusted basis, growth contracted by 0.4% on the month. Non-electronics, grew at 13.9% y/y while pharmaceuticals (a sub category of non-electronics) was up 7.6% y/y. The monetary authority has to maintain a delicate balance to ensure that inflation targeting does not jeopardize growth. Chances are that a status quo will be the outcome of the next MPC meet in mid April. The upcoming session should see prices well supported off risk aversion as the pairing stays with its corrective stance with the 1.39 handle eyed ahead of 1.3930. Market will likely consolidate amidst 1.3850-1.3900 with investors staying cautious in the lead up to the FOMC interest setting meet while broad based USD weakness and MAS intervention fears could cap gains.

USD/PHP: Playing the cautious game; BSP stalls move up

USD/PHP gapped higher in opening trades as was expected in the aftermath of the Bear Stearns news. There was little offering interest to speak of as the pairing got off the opening lows to hit intraday highs of 40.72 where it had closed the session for the day. The mood was evident from the 3.88% loss on the local bourse. Mkts were certainly spooked and the up-move in the USD/PHP was seen being capped by central bank offers above. It is notable that even the Fed's inter-meeting easing of the discount rate by 25bps and increased expectations of deeper rates cuts by the Fed have done little to allay fears of a wider fallout from the credit crisis. In the bond mkt, the Treasury rejected all bids for the 91-Day, 182-Day and 364-Day T-bills. Not only were the bids well below the amount of bills on offers but the yields bid were also too high. Risk aversion certainly had a part to play in propping up yields. In coming sessions the USD/PHP is expected to be dealt in the 41.50-42.08 range. Expect that underlying uncertainly and jittery credit mkts will offset dollar weakness emanating from the steep rate cuts expected of the Fed.

USD/THB: Range bound trades as more cues are eyed

USD/THB started the session on its backfoot as attention was initially on the record lows in the dollar. However being oblivious to the tremors reverberating through credit mkts all the way down to global equity mkts was really not a tenable state for even the Thai mkts which have been very bullish on THB. USD/THB bounced off the 31.34 lows in early trades and was put through the paces right up to 31.45, but managed to slip back towards the 31.40 handle as JPY crosses came off lows. The Thai bourse had lost some 1.38% at close. In coming session, we expect that the USD/THB will consolidate in the 31.30-31.55 range as it eyes global credit mkts and the dollar. While the promise of more and deeper rate cuts by the Fed should render the dollar softer and bias the USD/THB lower, more focus should be shifting to the jittery state of affairs in global financial mkts and the probability of sluggish US growth weighing the region down as well. BOT is seen supporting the USD/THB meanwhile. In the bond mkt THB3 bln of 28-Day bills, THB6 bln of 91-Day bills and THB5 bln of 182-Day bills were issued at yields of 2.984%, 2.841% and 2.811% respectively.

USD/IDR: Supported on risk aversion while BI guards above

The mood of risk aversion was immutable. With the likes of the AUD and NZD getting hammered by fire sales of Bear Stearns shares and the Fed move validating panic in the mkt did not go down very well with jittery mkts. The USD/IDR was lifted all the way from lows of 9235 to print highs of 9340 - despite BI intervention. AS the local bourse pared a small part of its losses and JPY crosses came off troughs, USD/IDR managed to slip back below the 9300 handle. In coming sessions however we expect that the will remain underpinned in the 9230-9365 range. BI Deputy Governor, Budi Mulya said that the weakness in the IDR was temporary and caused by risk aversion adding that the central bank was in the mkt defending the IDR. Mulya also said that the IDR could strengthen on the back of Fed rate cuts. Separately, FinMin Indrawati Mulyani said added that Fed's inter-meeting move to reduce discount rate by 25bps was a validation of slowdown in the US. On that note the possibility of cutting growth forecast from 6.4% was also mentioned. On the stock mkts, she commented that the volatility was a product of uncertainties in the mkt.

USD/MYR: Spooked higher; cautious trades ahead

The extended tumble in US equities on the back of the fears triggered by Bear Stearns caught the short exposure in the USD/MYR off balance. Opening trades saw the USD/MYR being yanked all the way up to highs of 3.1970 with buying pressure from the rise in the USD/SGD supporting the upmove in the USD/MYR as well. The local bourse pulled back 1.45% at close paring some of its earlier losses. The record rally in oil prices also raised the spectre that the government will feel the burden of oil subsidies. The Fed pulling off an emergency discount rate cut of 25bps and speculation of a deeper rate cut at the FOMC on Feb 18 did not quite inspire the kind of optimism that it would have in the not too distant past. Risk aversion is seen to be removing the allure of yield plays from interest rate differentials. It appears that mkts are on the edge of their seats just waiting for the next shoe to drop and a coordinated effort by central banks/govts all over will be required to arrest the next wave of bearishness in equity mkts. SGD/MYR was pushed higher as the MYR had its short exposed. In coming session, expect the USD/MYR to be dealt in the 3.1750-3.2030 range with dips being supported.

USD/INR: Seen consolidating with upside bias

USD/INR was lifted off the ground from the opening bell. The local bourse crashed on risk aversion and high oil prices certainly did not help sentiments. Fears of capital outflows saw the USD/INR hit highs of 40.81 before dollar weakness and the record rally in the EUR made some room below for the USD/INR to ease and the local bourse too pared some losses by mid session (though it slipped back in later trades). However good support below kept the USD/INR well supported above the 40.70 handle save for the opening deals below. FinMin Chidambaram continued to emphasize that the govt will tackle inflation together with the central bank. Apart from fiscal initiatives to hold prices down, he said that RBI will focus of price stability. Indications that RBI will be hawkish added to the blow in stocks and SENSEX extended losses dropping by 5.75% at last indication. Bond yields meanwhile were underpinned by inflation fears as well as tight cash conditions ahead of corporate tax payments. USD/INR is seen consolidating with an upside bias in coming sessions. Near-term range of 40.55-40.95 is expected.

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