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South Asia Daily Outlook and Strategy - October 11, 2007

Leslie Khoo, [email protected],

Ph: 65-6236-394

Vishnu Varathan, [email protected],

Ph: 65-6236-0396

Kwok Yung Chua, [email protected],

Ph: 65-6236-0385

* USD/SGD: MAS announces "gradual and modest" policy

USD/SGD collapsed below the 1.47 level in a knee-jerk reaction to the announcement that followed Singapore's de-facto central bank's bi-annual policy meeting. MAS pulled no punches with the overall exchange rate stance as it maintained the "modest and gradual" appreciation stance. The details however presented markets with a surprise. While there was no re-centering of the policy band or changes in its width, the monetary authority declared - amid inflationary concerns - that it will "increase slightly" the slope of the SGD NEER policy band. MAS estimated inflation to be in the 1.5-2.0% range this year, and 2-3% next, with H1 2008 inflation seen at 3.5% due to the GST effect. USD/SGD hit Far East session lows of 1.4631 on the policy announcement. Weighing further on the currency pair were the softer dollar and the stellar +9.4% y/y growth performance in Q3 up from +8.7% y/y in Q2, which saw the local bourse hit new records of 3,906.16. Central bank intervention was heard to have lifted the pairing back above the 1.4650 where it consolidated for the rest of trades. USD/SGD is expected to retain its bearish inclinations on the central bank's explicit inflation bias. Corrective bounces are likely to be limited by sell rallies. Near-term range of 1.4600-1.4680 looks likely, with charts indicating that break below the 1.46 figure will expose stronger support at 1.4550.

* USD/PHP: Weighed by the extended dollar weakness and strong inflows

USD/PHP was pressured from opening trades on the combination of the softer dollar and the continued rally on the local bourse. Real inflows into the country added to the weight in the USD/PHP. Gapping lower at 44.25, the USD/PHP was on a one-way ticket to levels further south. BSP intervention stalled downside as the pairing bounced off intraday low of 44.145 to end the session at 44.15. Aug export contracted 4.8% y/y, down from the +4.3% y/y performance in Jul on the back of continued weakness in the electronics sector. However, mkts made light of the faltering exports sector to maintain the downside focus in the USD/PHP. For now we expect that the USD/PHP will be weighed by the strong inflow expectations and dollar weakness stemming from further rate cuts hopes. BSP is however expected to temper rate of decline the pairing though the central bank conceding that a stronger PHP could help buffer inflation from high commodity prices should keep underlying bearishness intact. Near-term range of 44.00-44.50 is expected. Elsewhere, the govt is considering a reduction in oil tariff and excise tax on petroleum to ease the pain on consumers hit by high global oil prices.

* USD/THB: Finally breached 34.20

BOT kept its 1-day repo rate at 3.25% in the 10 Oct meeting. In doing so, the central bank cited positive economic outlook, improving consumer sentiments and risk of inflationary pressure. On the last point, we concur without reservation. While inflationary pressure has been mild so far this year at 2.2% y/y for H1, hitting lows of 1.1% y/y in August, it has bounced back in September on the back of elevated global crude prices and recovering consumer sentiments. We think that underlying inflationary pressure will begin to creep up once gain in coming months. On the currency, USD/THB touched the 34.19 level during the late dealings in the onshore market. Having broken the 34.20 handle which was a tough nut to crack, USD/THB will meet several supports when it moves to the 34.10-34.15 region. On the whole, downward pressure is likely to stay intact amid bullish stock market outlook and weak dollar.

* USD/IDR: Consolidating in the 9020-9120 range as fresh cues eyed

USD/IDR consolidated at lower levels intraday on the back of the pullback in greenback. Market sentiments had tilted in favour of the Fed following up with more rate cuts, softening the dollar and sending USD/Asians lower. USD/IDR was traded in the 9055-9065 range in the earlier session with corporate demand and some short-covering lifting the pairing to highs of 9085 in the later session. Persistent inflows into the local bourse pushed the index to fresh highs of 2,592.325 before closing at 2,591.483 (+1.76%). For now we expect that the USD/IDR will continue to consolidate in the 9020-9120 range. Downside momentum is seen being tempered by cautious bids and corporate demand. The central bank is also expected to stall downside tendency in the pairing in the near-term with equity and bond flows determining direction. In the bond mkt, the govt has delayed the sale of zero-coupon bond planned for Oct 23; no reasons were cited though. Elsewhere, Indonesian toll road company, PT Jasa Marga, is planning on raising about $406.3 million (IDR 3.7 trillion) by selling 30% of its share capital to the public.

* USD/MYR: Downside risk staying intact

USD/MYR was sold down to 3.38 in early trades by UK names and broke the 3.38 handle in late dealings. The currency pair fell to a low of 3.3735 towards the end of the session on Wednesday. At this juncture, we believe that the central bank wants to smooth the volatility and also to slow down the pace of falling of USD/MYR, rather than forcing the currency pair to buck the trend of its regional counterparts. Given the present market sentiment and momentum, downside risk remains firmly intact. Having broken the 3.38 handle, USD/MYR is now facing multiple supports at the 3.3700-3.3750 region. Meanwhile, on the top side, it is seen limited at the 3.3950 level. USD/MYR last indicated at 3.3790-820 amid 3.3800-3.3950 range .

* USD/INR: Weighed by record stock inflows and weak dollar

USD/INR tumbled in opening trades on the softer greenback and the EUR gaining traction on Tue night. Early low of 39.31 was quickly met with intervention from the central bank as well as some oil bids. The bounce-back in the USD/INR was however capped by sell rallies as inflows continued to hammer the pairing. Stubbornly bullish stock sentiments saw the SENSEX print fresh records of 18,703.67. This revived downside momentum in the USD/INR as the pairing went on to test the 39.30 level once again. RBI was however buying aggressively at these levels. At last indication the USD/INR was seen at 39.315-39.325. Expect that the currency pair will continue to be weighed by the inflows into the country and the softer dollar near-term. The central bank is expected to continue supporting from below. For now range of 39.20-39.60 is expected. Bond yields pulled back on bargain hunting, flush cash conditions and hopes of a US rate cut. The 10-yr 7.99% bond pared 2.5bps off its yields at last indication. In other news, India's Reliance Energy Ltd will be involved in a real estate project in the Indian city of Hyderabad worth $1.6 bln.

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