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South Asia Daily Outlook and Strategy - July 22, 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

Carl Rajoo: ([email protected])

ph: 6236-0389

USD/PHP: BSP signals more tightening ahead

USD/PHP started on its backfoot in opening trades gapping down at 44.30, down 15pips from Fri's closing. Despite oil prices being contained and a relatively soft dollar, USD/PHP did not extend retreats. USD/PHP was bought back as the fleeting discount position of 1-mth NDF prices left mkts uncomfortable given underlying inflation/economic risks. Prices hovered around the 44.40 handle before surging to close at 44.53 on late short-covering with Dow futures in the red. Elsewhere FinSec Gary Teves said that govt spending is expected to increase in H2 adding that the govt could borrow an additional $750 mln. Of focus was BSP chief, Amando Tetangco comments after mkt close that "present conditions provide latitude for monetary policy, with buoyancy of aggregate demand suggesting for measured policy response. Protracted inflation, he warned was "corrosive" to growth. What is notable is that softening in the USD/PHP over the last week could leave the USD/PHP susceptible to a squeeze if there is a failure on the central bank's part to follow through on tightening moves and BSP is aware of this; oil is watched as well!

USD/INR: Cautious trades as confidence vote is watched

Opening dips below the 42.70 level, founded on the back of soft oil, a weak greenback and positive equity mkt sentiments was not sustained. Political uncertainty was seen hoisting the pairing above the 42.70 handle with later trades being biased towards the firmer side of 42.75. The ruling Congress making last ditch attempts to garner enough support after its ex-allies, the leftists, pulled out support could prove to be a touch-and-go situation; and the potential instability on the political arena kept most mkt players guarded. PM Singh said that the confidence vote was avoidable and that he had planned to seek House backing after nuclear talks. Ahead of the parliamentary vote, USD/INR is seen being dealt cautiously in the 42.50-42.90 range. Early buying in bonds on the back of softer oil prices gave way to profit-taking - supporting yields - as tighter cash conditions from the second instalment of a 25bps hike in the CRR to 8.75% on 19 Jul began to kick in.It is likely that bond yields will remain supported by caution ahead of the upcoming MPC meet on 29 Jul where more tightening is expected. USD/IDR: Subdued movements in tight range

Previous session saw the pairing consolidating lower in the 9135-9150 region. BI's continual emphasis on its preference for a stable rupiah to slow inflation next year helped tempered upside in the pairing. BI Deputy Governor Budi Mulya expects inflation to slow to 6.5-7.5% next year. In addition, the positive prints in the local bourse were also seen weighing on USD/IDR. For the coming session, USD/IDR is expected to see subdued movements in the consolidative range of 9130-9160. Strong technical resistance is expected at 9158 while support is seen at 9130. The central bank is expected to continue keeping a vigilant eye on upside with the inflation focus. Meanwhile, FinMin plans to swap short-term rupiah debt maturing in 2009-2013 for fixed rate bonds maturing on June 15 2022 with a coupon rate of 12.5% in a bid to ease the country's refinancing risks - a rupiah positive to the extent the 14-year bond offer attracts foreign interest.

USD/SGD: Inflation focus to bias the pairing downwards

The steady climb in the EUR in otherwise quiet trades (with Tokyo away for Ocean Day holiday) saw trades in the USD/SGD being biased towards softer levels. The rally on the local bourse was another factor apart from the firmer EUR that weighed on the USD/SGD, sending the pairing dribbling from early 1.3535 highs to 1.3504 levels during Asian sessions; the base being protected by suspected central bank bids below. USD/CNY being guided higher through a firmer mid-point fix also supported the USD/SGD in its approach to the 1.35 handle. In coming sessions, we expect that the USD/SGD will continue to take cues from the EUR and the USD/CNY before aligning trades; inflation focus ahead of June CPI data on Wed to bias the pairing lower within the 1.3480-1.3560 trading range. Singapore's junior Trade Min S Iswaran said that the city state was not facing stagflation risks though he warned that inflation may still be a challenge for the economy. The expected dip in price pressures in H2, he said will not translate into previous lows. On growth, he said that the govt will be reviewing its 4-6% forecast for the year in Aug.

USD/THB: little changed as strong equities and lower oil seen weighing

USD/THB opened lower on the back of a declining dollar and possible easing of fears after Cambodia and Thailand made it clear that they would like to resolve temple dispute through discussion. However, the pairing saw a quick rebound as the dollar climbed midday and dips below 33.28 were bid up. Trades remained tight for the rest of the session, in 33.28-33.33 range. However, we see strong support at this level as gains in the local bourse, oil remaining somewhat soft and a late decline in the dollar were not able to affect the pairing at all. In fact, bids continued and the 33.33 high was done in spite of all this. As such, we see the possibility of some gains from going long on the USD/THB as we move into this week. However, as earnings season implies added volatility from the constant reporting of various market-moving conglomerates, caution still remains. Wrong way bets could move the pairing unexpectedly, as seen from some movements last week. For now, we still see the pairing supported in the 33.25-33.35 range with a move to 33.45 signaling a long awaited rally.

USD/MYR: Support seen with political headaches in backdrop The pairing saw some choppy action in the earlier part of the session but remained well supported above the 3.2320 level. USD/MYR consolidated in the range of 3.2350-3.2370 towards the end of the session. Meanwhile, 2nd FinMin Nor has indicated that the recent June fuel hikes will cause a one-off spike in inflation rate but inflationary expectations remain contained. He sees 2008 inflation will not exceed 5% and sees June and July inflation hitting 7%. On interest rate policy, 2nd FinMin feels that it should be accommodative and promote growth. However, with most regional central banks on a tightening bias, we feel that BNM cannot risk falling behind and needs to send out a strong signal to investors that they have inflation under control especially when the protracted political drama is not helping to boost investors' confidence. For the coming session, USD/MYR is expected to see downside supported amidst political problems. Range of 3.2250-3.2440 is expected with strong resistance seen at 3.2440.

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