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South Asia Weekly Outlook and Strategy - 24 - 28 March 2008

Kwok Yung Chua, [email protected],

Ph: 65-6236 0385

Vishnu Varathan, [email protected].

Ph: 65-6236 0396

Week Ahead: The key piece of data for the upcoming week is back loaded to Friday when the February personal income and expenditure report is released. Income is expected to rise +0.2% m/m, while spending should come in flat. The core PCE deflator is expected to rise +0.1% m/m, while the headline should be unchanged. This should bring the y/y rate of core inflation down to +2.1% from +2.2%, but still above the Fed's comfort zone. In housing data, Monday's February existing and Wednesday's February new home sales should both fall marginally to 4.8 million from 4.9 million and 585k from 588k, respectively. On Tuesday, the S&P Case-Shiller index for January should decline -10.2% y/y from -9.1%, and by our estimates has further to drop as we are expecting prices to decline 25% from peak to trough. In other data, March Consumer Confidence on Tuesday should remain unchanged at 75. Wednesday's February durable goods report is forecast to show a +0.5% rise in the headline, +1.0% ex-defense, and flat ex-transport. On Friday, the final March University of Michigan Sentiment index should fall to 68.5 from the preliminary reading of 70.5. The Fed comes out of the FOMC meeting shadows to meet face to face with the market. On Wednesday, FOMC dissenter Fisher speaks on the economy, and no doubt upside inflation risks remains a concern of his, notably the elevated level of some measures of inflation expectations, although market based guages have eased in recent days. On the same day, Chicago Fed President Stern speaks, topic unknown. On Thursday, Stern and Lockhart speak on the economic outlook, while Pianalto's topic is yet to be determined. We should also keep an eye out for the Fed TAF auction of $50 billion on Monday, and the first TSLF auction on Thursday. Back in Asia, markets are pretty quiet post-Easter holidays. Taiwan central bank will be holding its monetary policy meeting on Thursday.

USD/SGD: Prices tucked inside higher range

USD/SGD held steady inside range near 1.39 handle with likely risk aversion related outflows keeping it well supported. Stocks lingered inside negative territory for much of the session. The pairing was sold below 1.39, pressured by local banks' sales following the USD/CNY post revaluation low midpoint fix. Trades were quiet with the Malaysian market closed for holidays and ahead of a Good Friday local market holiday. Moving forward, the pairing is likely to trade off cues from the equity markets with February CPI and industrial production due for print in the week ahead. Expect central bank to smooth volatility with prices likely to be contained inside 1.3850-1.3920.

USD/PHP: To consolidate cautiously

USD/PHP mkts were also off for a long weekend for Holy Thu and Good Friday. The PHP has been hit hard by risk aversion in recent sessions as previous retreats in the pairing were deemed a tad overdone. Weakness in the PHP started to be thrust into the forefront as concerns about the health of the global economy has been mounting. Further weakness in Philippines' external sector coupled with jittery investor sentiments translates into a much softer balance of payments position. OFW remittances continue to be the bastion of support for the PHP and even this could be compromised if the global slowdown takes a toll on overseas workers. Rising oil prices, a weaker global outlook and stress in credit mkts have seen buy dips being the dominant strategy in USD/PHP trades. Data and financial mkt conditions ahead still look supportive of the UISD/PHP. We expect that the pairing will consolidate in the 41.40-41.90 range. BSP is seen smoothing volatility in trades. Jan import and trade balance data awaited.

USD/THB: Expected to consolidate in the 31.00-31.35 range; pressure to ease

USD/THB found that it was not immune to risk aversion that was sweeping through the region. The pairing was hoisted up from early sub 31.20 levels to intraday highs of 31.27. The Thai bourse was also buffeted by the rout in US mkts on Wed night, and Thai stocks were down some 1.2% at last indication. Though the THB has been on the rise so far after the shackles of capital controls were removed and optimism over the new administration was exuded, it looks like inflows into Thailand may begin to ebb of not reverse somewhat in coming session. Mkts have been very volatile given the uncertainty surrounding the fate of financial institutions taking hits from sub-prime/exposure to risky assets. The damage is accentuated by the tight credit environments which further suffocate mkts. The USD/THB, in coming sessions, will find it hard to buck the rebound in regional pairings whenever another episode of risk aversion hits. Feb trade numbers printed the second consecutive month of negative trade balance at -$688 mln as exports grew a weaker 16.4% y/y while imports surged 33.1% y/y. This added to the support in the USD/THB as concerns about Thailand's trade sector were raised, and this should further hamper unchecked retreats in the USD/THB. For now we expect that BOT will remain at the 31.00 base. Consolidation in the 31.35 range is expected as global mkts are watched for cues.

USD/IDR: Mkts closed till next week

Indonesian mkts were closed for an extended long weekend from Thu - Prophet Muhammad's birthday on Thu and Good Friday. The USD/IDR has seen volatile sessions as it gyrates in tandem with equity and bond flows in and out of the country. Turbulence in global credit mkts with negative news of financial institutions popping up from time to time means that investors are now in a cautious mood. The IDR which gains from its high-yielding allure may not find itself that many fans as the surge in JPY amid risk aversion squeezes out carry interest. Investors are also prone to abandon risky Indonesian at the first signs of trouble. Risk of margin calls ahead could also see the USD/IDR being biased upwards as investors remain poised to liquidate positions. In coming session the fate of other high yielding currencies such as the AUD and Kiwi will be watched closely as well though the IDR will be more susceptible to impact from risk aversion in terms of relative risk perceived. Expect that the USD/IDR will consolidate in the 9145-9320 range near-term. BI is seen capping rallies above in the USD/IDR.

USD/MYR: Caution expected

USD/MYR mkts were closed for Prophet Muhammad's Birthday yesterday. The Malaysian mkts were spared the fallout from the plunge in US equity mkts on Wed night. ASEAN bourses were all in the red as uncertainty prompted locking in of profits and the long weekend for Good Friday saw investors staying by the sidelines after the initial selling. USD/SGD was lifted well off its sub 1.38 levels as it soared above 1.39 before easing back somewhat. Wed night NDFs indicated that USD/MYR would have suffered a similar fate. Mkt sentiments are geared towards being pessimistic with the occasional rallies in stock mkts being followed up by sessions of selling. At home there is still some dust being kicked up in the political scene and this could heighten perceived risks in the Malaysian economy. In coming sessions we expect that the USD/MYR will be dealt in the 3.1600-3.1900 range with moves expected to be volatile. Extended dips will likely be met with bids.

USD/INR: Underpinned b