2 July 2018
Indonesia: A surprise 50 basis point rate hike

Bank Indonesia (BI) is aggressively promoting stability with a surprise 50 basis point rate hike. The move, together with a continued aggressive hawkish stance, will moderate the currency's weakness

Precipitous slide of IDR required a more aggressive BI response

Bank Indonesia, under the leadership of the new BI Governor Perry Warjiyo, responded decisively to the urgency of the situation. BI has acted pre-emptively to stabilise Indonesia’s financial markets in general and the Indonesian rupiah in particular. IDR has fallen by as much as 4.4% from the highs posted early this month following an out of cycle policy rate hike in late May. BI responded to the recent IDR slide with a surprise 50 basis point rate hike today. The market considers the surprise move akin to the aggressiveness that the Central Bank of Turkey demonstrated early this month to successfully stabilise the country’s currency.

BI’s move is not surprising and reflects the aggressiveness that the bank governor demonstrated in late May when, in his first action as governor not only called for an emergency policy rate meeting just two weeks after the normal monthly BI meeting but also followed through with a 25 basis point hike.

In the past two months, BI has raised policy rates by 100 basis points, which reverses the easing from September 2016 to September 2017, in a bid to pro-actively address risks from developments in the global economic environment. There are still around 100 basis points of policy rate easing still in the system from the easing cycle of January 2016 to September 2017.  We expect BI to remain vigilant and to act pre-emptively to risks. We believe that the surprise 50 basis point hike together with other BI actions will help moderate IDR’s weakness and allow the financial system to adjust to the challenges of the new global economic environment.

Thailand: Current account surplus narrows in May

We don’t think the recent revision of our end-2018 USD/THB forecast to 33.8 from 32.3 is the last revision. We are looking for a further downgrade as we assess the impact on Asian currencies of an all-out trade war

A surprise narrowing of the current account surplus

We thought that the sharp positive swing in Thailand’s customs-basis trade balance to a $1.2 billion surplus in May from a deficit of similar size in April meant the current account was in for a wider surplus in the last month. But the balance of payments data for May revealed just the opposite; a narrower current surplus of $958 million compared to the $1.4 billion surplus in April. The consensus forecast was for a surplus of $1.5 billion.

This puts the cumulative current surplus in the first five months of the year at $19.4 billion, which is $782 million wider on the year. The contrast with the $3.8 billion narrowing in the trade balance over the same period reveals that services trade continued to perform well this year, thanks to the tourism sector, with a 14% year on year surge in international visitors in the first four months of 2018.

Why we’re revising our yuan forecast down again

We are revising our USD/CNY forecast to 7.0 by the end of 2018. But there's no panic in the market and we don't expect a repeat of August 2015

Policies could attract foreign investments, reduce outflow worries

Our previous argument for a slight yuan depreciation was based on the concern that a weaker yuan could lead to massive capital outflows, which would then push the yuan down even further, resulting in a vicious cycle. 

But new policies to open up the market for foreign investments reduce the risk of outflows. These policies could also help to offset any outflows that do occur as a result of the weaker yuan. 

New policies cover a whole range of sectors including agriculture, rare earth, automobiles, shipbuilding, aviation, railway, shipping services, surveying and financial services. The scope is not only larger than expected, it targets sectors affected by tariffs. Foreign companies facing tariff risks could move production to China to avoid tariff hurdles. 

These measures, together with potential inflows from more A-share inclusion into MSCI and China Depository Receipts (CDR) in 2H18, have led us to reassess our outlook for capital outflows. We were overly pessimistic.

Reading time around about 4 minutes

Good MornING Asia - 2 July 2018

The euro is swinging around on the spat between German Chancellor Angela Merkel's CDU party and their Bavarian CSU coalition partners - a weaker euro typically means weaker Asian FX. We are revising our USD/CNY forecast to 7.0 by the end of 2018 

In this bundle