GLOBAL FX STRATEGY | ASIAN FX UPDATE Friday, November 6, 2020

November FOMC Meeting FOLLOW US ON TWITTER @SCOTIABANKFX Qi Gao • The Fed votes unanimously to maintain the target range for the fed funds rate at FX Strategist (Asia) a record low of 0-0.25%, signaling its readiness to act if needed to support the +65 6305 8396 economy under threat from the coronavirus pandemic [email protected] • Fed Chairman Jerome Powell says that top Fed officials have an extensive discussion about options for modifying the asset-purchase program, which suggests the US central bank will likely expand its bond buying efforts to boost the economy by lowering longer-term borrowing rates • It will boost EM Asian currencies with the dollar set to weaken further broadly; We maintain our short dollar positions against four EM Asian currencies and Maturity Distribution of UST Securities Held by would like to sell USD/IDR now with a target of 13,500 The Fed (Till 28 October 2020)

Asia Overview - EM Asian currencies advanced versus the dollar during Thursday’s Asian session. The SGD gained 0.6%, while the JPY jumped 1.0% amid a steady 10Y UST yield.

The CNY and CNH gained 0.7% and 0.3% respectively. USD/CNH will likely trade lower to the 6.50 level when US election-related unrest fades away. Reuters cited policy sources as saying on Friday that China’s policymakers are close to setting an average annual economic growth target of around 5% for the next five years, at the lower end of ranges previously considered as global risks cloud the outlook. Foreign investors bought at least CNY 55.17bn of Chinese bonds in October, pushing the total amount of bonds held by foreigners to CNY 3,036.5bn. The PBoC will roll over CNY 400bn of MLF loans due Thursday on 16 November, with the size depending on market demand. The KRW strengthened 0.8%. USD/KRW is likely to head for the 1,120 level in the weeks ahead. South Korea's current account surplus hit a two-year Source: Bloomberg & Scotiabank FICC Strategy high of USD 10.21bn in September. The TWD pared some of its early gains and closed up 0.4%. USD/TWD is likely to trade between 28.5 and 29.0 in the near term. Taiwan considers increasing the amount raised through government bond sales in Maturity Distribution of UST Securities Bought 2021 to fund a special budget for projects. Taiwan’s CPI inflation rose to -0.24% yoy by The Fed during 18 Mar 2020 to 28 Oct 2020 in October from -0.58% the prior month. The CBC has suggested the FSC’s Securities and Futures Bureau to properly manage foreign investors’ investment in inverse ETFs linked to Taiwan stocks.

The INR rallied 0.5%. USD/INR is likely to retreat further towards the 74 level. India’s Prime Minister Narendra Modi on Thursday invited global funds and businesses to invest in India, pitching the nation as a safe and stable destination. The RBI plans to buy INR 100bn of government bonds and sell an equivalent amount of Treasury bills through Operation Twist on 12 November. The RBI on Thursday came out with a Co- Lending Model (CLM) scheme under which banks can provide loans along with NBFCs to priority sector borrowers based on a prior agreement. The RBI bought INR 100bn of state bonds as planned on Thursday. The IDR gained 1.3%. USD/IDR will likely slide towards the 14,000 level in the weeks ahead. Indonesia’s economy contracted 3.49% yoy in the third quarter, plunging it into the first recession since the archipelago was mired in the Asian financial crisis more than 20 years ago. The MYR Source: Bloomberg & Scotiabank FICC Strategy increased 0.4%. USD/MYR will likely hover around 4.15 at this stage, susceptible to domestic political climate. ’s revenue is expected to drop 20% at a time when it needs contingency allocations to boost the economy and fight the pandemic, S&P500 Share Index, 10Y UST Yield & DXY Index according to Prime Minister . The PHP rose about 0.2%. USD/PHP will likely trade lower towards the 48.0 mark. Philippine consumer prices rose 2.5% yoy in October after increasing 2.3% in September. BSP Governor Benjamin Diokno on Thursday reiterated readiness to deploy all available measures in the central bank’s toolkit. The THB increased 0.8%. USD/THB will likely trade towards 30.5 after falling below the psychological 31.0 level. Thailand’s CPI inflation rose to -0.50% yoy in October from -0.70% a month ago, matching market expectations. Thai pro- democracy protesters plan to hold a fresh rally on 8 November.

All regional equity indices resided in the green on Thursday. China’s SHCOMP index rose 1.30% amid USD 765.7mn of equity inflows, while India’s NIFTY50 index climbed 1.78%. South Korea’s KOSPI index gained 2.40% with foreign investors

Source: Bloomberg & Scotiabank FICC Strategy

1 GLOBAL FX STRATEGY | ASIAN FX UPDATE Friday, November 6, 2020

purchasing a net USD 1.25bn of Korean shares. In the meantime, Taiwan’s TWSE index advanced 0.40% as global funds added to their holdings in local main board shares by USD 535.6mn on Thursday. Malaysia’s KLCI index and Indonesia’s JCI index closed up 2.52% and 3.04% respectively. Thailand’s SET index ended 3.43% higher despite USD 3.9mn of equity outflows.

EM Asia • The Fed voted unanimously on Thursday to maintain the target range for the fed funds rate at a record low of 0-0.25%, signaling its readiness to act if needed to support the economy under threat from the coronavirus pandemic. In addition, US monetary policymakers made no change to monthly bond purchases on Thursday.

Fed Chairman Jerome Powell said at a virtual news conference that the pace of economic improvement has moderated in recent months and the US central bank strongly committed to achieving its dual mandate of maximum employment and price stability. At the meeting, top Fed officials had an extensive discussion about options for modifying the asset-purchase program according to Powell. In our view, it suggests the Fed will likely expand its bond buying efforts to boost the economy by lowering longer-term borrowing rates. At least, it could escalate market expectations for that.

Earlier, the September FOMC minutes showed top Fed officials could discuss asset-purchase program in future meetings, which indicates 1) the US central bank will likely purchase more than a net USD 120bn of USTs and agency MBS per month next year, as it has been purchasing a net USD 80bn a month in Treasurys and a net USD 40bn a month in mortgages since mid-June, and/or 2) the Fed could lengthen the durations of its bonds holdings, i.e. shifting its Treasury purchases to longer-dated securities. Currently, it is buying a wider range of short-, intermediate- and long-term securities.

In addition, some other major central banks have expanded their bond purchase programmes recently or plan to do so before long. • Earlier Thursday, the BoE agreed to another GBP 150bn of UK government bond purchases, taking the overall size of its Asset Purchase Facility (APF) to GBP 895bn. • The RBA on Tuesday cut its official cash rate to 0.10% and announced a AUD 100bn quantitative-easing program to shore up the economic recovery. • The ECB last Thursday kept its deposit rate at -0.50% and held its emergency bond-buying plan (PEPP) at EUR 1.35tn in its latest policy announcement, but said it intends to scale up its support of the eurozone’s economy in December with a package that could include EUR 500bn of new bond purchases till the end of 2021 and cheaper TLTRO loans for banks.

On 27 August this year, the Fed unanimously approved a major shift in its monetary policy framework, saying that its policy decision will be informed by "shortfalls" of employment from its maximum level rather than by "deviations" from that level. It suggests the US central bank will not gear up to raise benchmark interest rates to cool off the labor market when unemployment rate falls to low levels. The Fed has also shifted its inflation approach, aiming to average 2% inflation over time rather than as an absolute goal. Chairman Powell said "following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time."

It will erode the dollar’s real yields with the Fed purchasing more longer-dated Treasurys while accepting higher inflation, weighing on the DXY Index in general going forward. In addition, more drugmakers are expected to report positive data on their coronavirus vaccine trials in the weeks ahead, which will spark risk appetite once the US presidential election is settled.

We maintain our short USD positions against the CNH, INR, KRW and SGD with external liquidity conditions going to be more accommodative, and expect EM Asian currencies to extend their gains into Q1 2021. We would like to sell USD/IDR at 14,250 (1M NDF implied) now, with a target of 13,500 and a stop of 14,750.

DXY Index vs. 10Y UST-Bund Real Yield Spread Global Coronavirus Vaccine Tracker

Source: Bloomberg & Scotiabank FICC Strategy Source: The New York Times

2 GLOBAL FX STRATEGY | ASIAN FX UPDATE Friday, November 6, 2020

CONTACTS - GLOBAL FX STRATEGY Shaun Osborne Qi Gao, FRM Chief FX Strategist FX Strategist (Asia) T +1 416 945 4538 T +65 6305 8396 [email protected] [email protected]

Juan Manuel Herrera FX Strategist (G10) T +1 416 866 6781 [email protected]

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