TWD Outlook Post General Election 2016
· The opposition DPP wins General Election 2016 as expected
· PBoC reportedly to raise RRR for offshore yuan deposits effective from 25 January
· Yuan steady in the near term but still faces depreciating pressure
Asia Overview - Taiwan's main opposition DPP won both the presidency and control of the legislature for the first time in the general election held on Saturday. In the near term, the impact on the TWD is limited while the CBC is expected to smooth FX volatilities. However, any ripples in cross-strait relations after the elected government takes office on 20 May could undermine the TWD modestly from time to time.
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Reuters reported on Sunday that the PBoC is preparing to raise the RRR for yuan deposits placed in offshore yuan clearing banks and participating banks to a normal level effective from 25 January. The RRR for offshore yuan deposits introduced in 2014 had been set at zero. We think it is aimed at maintaining offshore yuan liquidity conditions tight to curb speculations over the yuan depreciation.
The PBoC has held USD/CNY fixing steady for a sixth straight session, although the daily reference rate rose 21 pips to 6.5637 on Friday. It was still significantly lower than the previous official closing level of 6.5887 on Thursday. A string of lower-than-expected USD/CNY fixings could maintain the yuan stability towards Chinese New Year, while continuing to serve as a major market mover for EM Asian currencies in the foreseeable future.
Most EM Asian currencies declined against the dollar last Friday, led by the INR amidst a broad risk-aversion sentiment. The JPY was the top gainer on demand for safe-haven assets. The JPY is now the largest held net long with a USD 2.7bn position according to the latest CFTC data. Regional major equity indexes fell into the red last Friday, with Shanghai Composite tumbling 3.55%.
Taiwan • The DPP won a landslide presidential election victory on Saturday, while securing a majority in the Legislative Yuan for the first time in the history. The longtime ruling party, the KMT, was defeated.
The stunning victory is a double-edged sword, in our view. While it could reduce political dispute to push forward necessary economic reforms to boost Taiwan's economic growth, it could also raise China's concerns about its political policies. The DPP has continuously rejected the "1992 consensus" that Beijing regards as the basis for cross-strait relations.
As the elected DPP government would benefit from cross-strait stability as well, the party needs to clarify its cross-strait policy in a way that is acceptable to both China and the US to assure peaceful and stable relations, while meeting the concerns of its Taiwanese supporters.
USDTWD: We see a limited impact of the expected election result on the TWD in the near term. However, the island's sluggish growth outlook suggested by a flat 2-5Y TWD ND IRS may lead to more equity outflows and a weaker TWD. In the medium term, we are still bearish on the TWD this year given divergent monetary policies, large trade exposure to China and prospective uncertainties in cross-strait relations.
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The CBC is expected to smooth extreme movements in local FX market post the election. In the near term, the yuan volatility could continue to drive movements in regional FX markets including USD/TWD FX rate. The yuan's sharp movements had sent USD/TWD risk reversal significantly higher in the past years. We would buy USD/TWD on dips and expect the pair to reach 34.0 at the end of 2016. If cross-strait relations fail to remain peaceful, all regional currencies including the TWD and the CNY will trade lower against the USD markedly.
CHINA • The nation's aggregate financing rose to CNY 1.815tn in December from CNY 1.018tn the previous month, above market estimate of CNY 1.15tn. A surge in the aggregate financing could be largely attributed to CNY 353bn of entrusted loans and CNY 154bn of undiscounted bankers' acceptances. In the meantime, China's commercial banks extended CNY 597.8bn of new yuan loans last month, missing market expectations of CNY 700.0bn. A weaker growth in the country's medium-to-long term loans could herald a further slowdown in the economy. It imposes persistent depreciating pressure for the yuan.
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In addition, FX Purchases (a gauge of capital inflows) had been a major channel for the PBoC to expand its monetary base during the past years. The PBoC's FX purchases dropped CNY 708.2bn to CNY 24.85tn at the end of December after falling CNY 315.8bn the previous month, undermining the nation's monetary base (reserve money). Last Friday, the central bank offered CNY 100bn of six-month funds at 3.25% to nine financial institutions through the MLF, replenishing the country's monetary base via raising its Claims on Other Depository Corporations. We expect the PBoC to cut RRR as well in the near future to bolster China's sluggish economic growth.
The rise in RRR for offshore yuan deposits confirm our thoughts that the PBoC will continue to dampen market speculations about the yuan depreciation through tightening offshore yuan liquidity conditions. It is mildly supportive of the yuan.
USDCNY and USDCNH: Onshore USD/CNY closed at 6.5840 at 11:30pm HKT on Friday, down 33 pips from the official closing price of 6.5873 at 4:30pm. USD/CNY was trading around 6.5870 during Friday's Asian session, while USD/CNH range traded in a range of 6.6110-6.6200 from 10:00am last Friday. The offshore pair opened lower this morning, likely in response to the rise in RRR for offshore yuan deposits announced yesterday according to Reuters.
We think the PBoC will continue to stabilize the yuan FX market ahead of Chinese New Year on 8 February and is even likely to extend the pattern of USD/CNY fixing to the annual meeting of National People's Congress kicking off on 5 March. The onshore-offshore spread is expected to stay well contained in the near term. We are still modestly bearish on the yuan and would buy the dollar in the coming months.
As the yuan still faces depreciating pressure over the medium term, its present stability provided by the PBoC could add to an upward pressure on USD/HKD. USD/HKD is likely to trade towards the upper bound of the 7.75-7.85 trading band. However, we think the HKMA will certainly step in to defend its Currency Board system and offer dollars to the market if the 7.85 level is hit. As the dollar-selling intervention could drain HKD liquidity from the banking system at the same time, we could see a shrinking aggregate balance and rising HKD Hibor as well as the front-end HKD IRS curves.
In addition, USD/CNY fixing and spot could finally return to a crawling-peg regime such as the SGD NEER band after market fears over sharp falls in the yuan subsides. If the PBoC decides to maintain the yuan FX rate for a longer period at the expense of continuing falls in its FX reserves, the depreciating pressure accumulated may lead to another one-off correction in dollar/yuan FX rate unless we see a strong recovery in the nation's economy.
· The opposition DPP wins General Election 2016 as expected
· PBoC reportedly to raise RRR for offshore yuan deposits effective from 25 January
· Yuan steady in the near term but still faces depreciating pressure
Asia Overview - Taiwan's main opposition DPP won both the presidency and control of the legislature for the first time in the general election held on Saturday. In the near term, the impact on the TWD is limited while the CBC is expected to smooth FX volatilities. However, any ripples in cross-strait relations after the elected government takes office on 20 May could undermine the TWD modestly from time to time.
Reuters reported on Sunday that the PBoC is preparing to raise the RRR for yuan deposits placed in offshore yuan clearing banks and participating banks to a normal level effective from 25 January. The RRR for offshore yuan deposits introduced in 2014 had been set at zero. We think it is aimed at maintaining offshore yuan liquidity conditions tight to curb speculations over the yuan depreciation.
The PBoC has held USD/CNY fixing steady for a sixth straight session, although the daily reference rate rose 21 pips to 6.5637 on Friday. It was still significantly lower than the previous official closing level of 6.5887 on Thursday. A string of lower-than-expected USD/CNY fixings could maintain the yuan stability towards Chinese New Year, while continuing to serve as a major market mover for EM Asian currencies in the foreseeable future.
Most EM Asian currencies declined against the dollar last Friday, led by the INR amidst a broad risk-aversion sentiment. The JPY was the top gainer on demand for safe-haven assets. The JPY is now the largest held net long with a USD 2.7bn position according to the latest CFTC data. Regional major equity indexes fell into the red last Friday, with Shanghai Composite tumbling 3.55%.
Taiwan • The DPP won a landslide presidential election victory on Saturday, while securing a majority in the Legislative Yuan for the first time in the history. The longtime ruling party, the KMT, was defeated.
The stunning victory is a double-edged sword, in our view. While it could reduce political dispute to push forward necessary economic reforms to boost Taiwan's economic growth, it could also raise China's concerns about its political policies. The DPP has continuously rejected the "1992 consensus" that Beijing regards as the basis for cross-strait relations.
As the elected DPP government would benefit from cross-strait stability as well, the party needs to clarify its cross-strait policy in a way that is acceptable to both China and the US to assure peaceful and stable relations, while meeting the concerns of its Taiwanese supporters.
USDTWD: We see a limited impact of the expected election result on the TWD in the near term. However, the island's sluggish growth outlook suggested by a flat 2-5Y TWD ND IRS may lead to more equity outflows and a weaker TWD. In the medium term, we are still bearish on the TWD this year given divergent monetary policies, large trade exposure to China and prospective uncertainties in cross-strait relations.
The CBC is expected to smooth extreme movements in local FX market post the election. In the near term, the yuan volatility could continue to drive movements in regional FX markets including USD/TWD FX rate. The yuan's sharp movements had sent USD/TWD risk reversal significantly higher in the past years. We would buy USD/TWD on dips and expect the pair to reach 34.0 at the end of 2016. If cross-strait relations fail to remain peaceful, all regional currencies including the TWD and the CNY will trade lower against the USD markedly.
CHINA • The nation's aggregate financing rose to CNY 1.815tn in December from CNY 1.018tn the previous month, above market estimate of CNY 1.15tn. A surge in the aggregate financing could be largely attributed to CNY 353bn of entrusted loans and CNY 154bn of undiscounted bankers' acceptances. In the meantime, China's commercial banks extended CNY 597.8bn of new yuan loans last month, missing market expectations of CNY 700.0bn. A weaker growth in the country's medium-to-long term loans could herald a further slowdown in the economy. It imposes persistent depreciating pressure for the yuan.
In addition, FX Purchases (a gauge of capital inflows) had been a major channel for the PBoC to expand its monetary base during the past years. The PBoC's FX purchases dropped CNY 708.2bn to CNY 24.85tn at the end of December after falling CNY 315.8bn the previous month, undermining the nation's monetary base (reserve money). Last Friday, the central bank offered CNY 100bn of six-month funds at 3.25% to nine financial institutions through the MLF, replenishing the country's monetary base via raising its Claims on Other Depository Corporations. We expect the PBoC to cut RRR as well in the near future to bolster China's sluggish economic growth.
The rise in RRR for offshore yuan deposits confirm our thoughts that the PBoC will continue to dampen market speculations about the yuan depreciation through tightening offshore yuan liquidity conditions. It is mildly supportive of the yuan.
USDCNY and USDCNH: Onshore USD/CNY closed at 6.5840 at 11:30pm HKT on Friday, down 33 pips from the official closing price of 6.5873 at 4:30pm. USD/CNY was trading around 6.5870 during Friday's Asian session, while USD/CNH range traded in a range of 6.6110-6.6200 from 10:00am last Friday. The offshore pair opened lower this morning, likely in response to the rise in RRR for offshore yuan deposits announced yesterday according to Reuters.
We think the PBoC will continue to stabilize the yuan FX market ahead of Chinese New Year on 8 February and is even likely to extend the pattern of USD/CNY fixing to the annual meeting of National People's Congress kicking off on 5 March. The onshore-offshore spread is expected to stay well contained in the near term. We are still modestly bearish on the yuan and would buy the dollar in the coming months.
As the yuan still faces depreciating pressure over the medium term, its present stability provided by the PBoC could add to an upward pressure on USD/HKD. USD/HKD is likely to trade towards the upper bound of the 7.75-7.85 trading band. However, we think the HKMA will certainly step in to defend its Currency Board system and offer dollars to the market if the 7.85 level is hit. As the dollar-selling intervention could drain HKD liquidity from the banking system at the same time, we could see a shrinking aggregate balance and rising HKD Hibor as well as the front-end HKD IRS curves.
In addition, USD/CNY fixing and spot could finally return to a crawling-peg regime such as the SGD NEER band after market fears over sharp falls in the yuan subsides. If the PBoC decides to maintain the yuan FX rate for a longer period at the expense of continuing falls in its FX reserves, the depreciating pressure accumulated may lead to another one-off correction in dollar/yuan FX rate unless we see a strong recovery in the nation's economy.
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