8 November 2018
ASEAN Morning Bytes

General market tone: Risk-on. 

Global markets may rally as investors took the results of the US mid-term election to be positive after Trump’s apparent openness to deal with the Democrats to get legislation passed

International theme: Risk sentiment restored for now with focus turning to the Fed

  • A split in Congress with Democrats taking the House and Republicans retaining the Senate was what the market had ordered, sparking a rebound in equities. US Treasury yields slipped as expectations for a slowdown in stimulus is seen to benefit the bond market, although focus now turns to the Fed meeting later in the session.
Taiwan trade growth continues to slow

Taiwan's electronic exports grew only mildly in October, but worth noting that integrated circuit imports grew by more than 25%. Overall, we're not very optimistic about Taiwan trade in the coming quarters as we believe the tit-for-tat trade war is only going to escalate

Exports of electronics grew by only 1%

Exports of electronic parts grew by only 1% year on year in October, of which integrated circuits grew at a mere 1.6%YoY. 

Even though this is slightly better than the previous two months (0.4%YoY in August and -0.5%YoY in September), the numbers show that Taiwan's biggest export item is suffering from low demand. It is possible this could be the result of lower demand for new smartphones and the looming sentiment from the escalating trade war.

But imports data sends mixed signals

The highlights from import data show that crude oil rose by 95.1%YoY, and integrated circuits rose by 25.4%YoY. But we want to focus on the strong growth of integrated circuit imports that sends a conflicting signal versus the exports.

The strong growth of integrated circuit imports tells us that Taiwan's manufacturers could be storing inventories of electronic parts for the winter holiday orders. But from the export data, we doubt demand would be strong enough to absorb all the inventories.

USDTWD has touched 31.00

USDTWD has touched 31.00 - which was our year-end forecast, but the currency pair has retreated to 30.757, at the time of writing this note. 

Historical data shows a weaker Taiwanese dollar is linked to weaker export growth and we expect the same for the coming quarters. We maintain our forecast of USDTWD at 31.00 and 32.00 by the end of 2018 and the end of 2019. But we're not very optimistic about Taiwanese exports as the China-US trade war escalates.

China: Foreign reserves show no outflow panic

Foreign exchange reserves dropped by $34 billion in October, the largest drop in 2018 so far, though still small compared to 2015. This means there was no capital outflow panic even as the yuan approached 7.0 against the dollar. We expect USD/CNY and USD/CNH to cross the 7-handle anytime between now and the end of 2018, moving slowly to 7.30 by the end of 2019

No panic

China foreign exchange reserves fell to $3.053 trillion from $3.087 trillion in October. Though the drop was the largest on a monthly basis in 2018, it was still small compared to monthly drops in 2015 (in excess of $100 billion in a month).

This implies that there is no capital outflow panic in China even as USD/CNY approached 7.0, and depreciated 1.56% in the month. The yuan's weakest closing level against the dollar was 6.9757 on 31 October.

The USD/CNY 7.0 handle is not to be feared

The data confirms our view that the USD/CNY 7.0 handle is a mere round number, not a psychological barrier, as the currency pair has approached this level a number of times.  

We expect that USD/CNY and USD/CNH will cross 7.0 anytime between now and the end of 2018. And the chances of such would be high if the sideline meeting of President Xi and President Trump at the G20 shows no progress in delaying the proposed increase in tariffs on $200 billion of Chinese goods from 10% to 25% on the first day of 2019. 

The yuan will depreciate slowly after crossing 7.0

After crossing 7.0, the currency pair could pull back slightly but the yuan would then continue to depreciate further.

We expect USD/CNY and USD/CNH to reach 7.3 by the end of 2019.

Philippines: Trade deficit swells to widest this year

Imports continue to surge while exports underperform, yielding the widest trade gap year to date and keeping the current account in the red

Imports sustain double-digit expansion, up by 26.1% while exports contract by 2.6%

Philippine imports for September grew by a whopping 26.1% while exports remained in the doldrums, falling by 2.6%. Capital equipment, raw materials and the oil bill powered overall import growth, translating to annual growth rates of 16.4%, 15.9%, and 23.4% respectively. Positive demand was seen across all import subsectors with consumer goods posting a 22.2% increase in September alone despite the 10.3% contraction in passenger car imports. 

On outbound shipments, electronics exports, which account for more than half of the entire export bill (58.6% of the total), grew by 4.2% but were unable to offset the 10.9% drop in all other exports.

Imports sustain growth while exports underperform despite weaker peso

The trade deficit in September of $3.93 billion indicates that the current account will likely remain in the red. Capital imports and raw material growth are not expected to slow down in the near term as imports feed the burgeoning economy. Raw materials used for construction (iron, steel, metals, non-ferrous metals) posted 42.4% growth in September, reflecting the aggressive building plans of the private sector and government alike. The nine-month 2018 trade deficit reached $29.91 billion, 70.5% wider than the deficit of $17.54 bn in the same nine-month period of 2017.

Despite protracted weakness in the Philippine peso, exports continue to underperform, posting a 2% contraction YTD after a 2.6% fall in September. In turn, the weaker currency may have contributed to imported inflation, with more expensive import costs being passed on to the consumer.

Robust import growth reflects a healthy and burgeoning economy moving into a higher growth path but exports remain the missing link to the new Philippine growth story. Going forward, the current account will likely remain in deficit with the Philippine peso looking to structural flows such as remittances ahead of the holiday season and the capital and financial account for support.

Reading time around about 6 minutes

Good MornING Asia - 8 November 2018

Risk-on is back after the relatively positive election US midterm results. The focus now shifts to the Fed with Powell and company still being seen to be hawkish. The Fed chair will conduct a press conference after the two-day meeting as he looks to improve communication of the FOMC’s guidance. 

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