Sacha Tihanyi
Senior Currency Strategist
+852 2861-4770
[email protected]
Scotia Asian FX Update
Thursday, November 13, 2014
• RBI likely to remain concerned about lack correlation between CPI and inflation expectations.
• Indian industrial production picks back up on the back of capital goods production.
• Bank of Korea unanimously decides to keep rates on hold, maintaining a dovish bias.
• JPY focus in BoK policy statement increases, however without any outright bias relevant for the official policy stance.
Disinflationary trends continued as expected in India, as the October CPI fell more than expected to 5.5% Y/Y, from 6.5% Y/Y, thanks
to lower food and fuel costs. The now less important WPI measure
will be released tomorrow, but is expected to show equivalent disinflationary tendencies as wholesale prices are now sitting between
the 2% - 3% range, the lowest level since the ‘great recession’. This
actually brings up an interesting contrast between the RBI’s decision to move to a CPI-guided policy regime and the evolution in
WPI, CPI and consumer inflation expectations. The decision was
justified on the back of the assumption that WPI did not properly
reflect the actual rate of inflation faced by consumers, and indeed,
CPI has obviously persisted at much higher levels than WPI since
the index was published. However, and reiterating our message in
yesterday’s note, the divergence now between inflation expectations and the CPI trend suggests that perhaps even CPI isn’t the
best measure of price pressure facing the consumer. All of this suggests at least that the disinflationary trend currently in play, while
much welcomed, is perhaps not enough to make the RBI feel comfortable in easing policy over the coming (near term) months. It
would at least be more comforting to see inflation expectations
begin to come down, though this may require CPI inflation to persist at lower levels for another six months or so.
India Inflation vs. Expectations
Headline CPI %Y/Y
Inflation Expectation of Households: 1-Year Ahead
Inflation Expectations Survey of Households: Current
Headline WPI %Y/Y
Source: EMED, Scotia FX Strategy
Industrial production data was constructive, rising 2.5% Y/Y, thanks to a rebound in the manufacturing sector. While consumer
durables contraction eased further, it was the rebound in capital goods production that was a key driver which is encouraging as
this has been a sector unable to maintain a growth trajectory. We continue to like INR vs. IDR on the back the high yield (to volatility) nature of INR, and the impressive reform momentum of the government. The pair is moving back towards the 200 level, a
break of which would be technically encouraging for bulls on the pair such as us. The next major volatility catalyst is likely to be
the fuel subsidy reform announcement from Indonesia, which may or may not be favourably absorbed by the market depending
on its scope.
USDKRW• The Bank of Korea held rates which was the bias of expectation. The statement contained the same risk views on the
global economy as the previous statement, but deemphasized the risks stemming from the Fed’s policy to ‘changes in the monetary policies of major countries’, perhaps hinting at the ECB and particularly Bank of Japan’s policy steps. The domestic economy’s external outlook was unchanged as exports have been obviously sustained, though domestic demand indications seem a
bit more uneven and economic sentiment remains sluggish. The outlook on inflation was stable after the downgrade in the previous statement. There was a much larger focus on the KRW’s behaviour vs. the yen, where the BoK noted the won’s significant
appreciation versus JPY, though there was no bias in the statement regarding the yen vis-à-vis BoK policy as the context remained more factual rather than normative. Bank of Korea governor Lee in his subsequent press conference noted risks to
household debt and risks to financial stability, and gave the impression that the preference would be to wait and see the impact
of rate increases thus far this year. Indeed he outwardly stated that he can’t tell the direction for future policy on rates, giving
the impression that it will be contingent on developments in the inflation / growth balance.
We view the bias of risk to be for additional cuts (though we do not currently forecast this as a base case) given the pressure
from the government on the BoK and the global disinflationary pressures that will weigh on the central bank’s inflation forecasts. Until the BoK sounds a more neutral tone and domestic demand picks up enough for the government to feel more comfortable, this will remain the rates bias.
Global FX Strategy
Thursday, November 13, 2014
Camilla Sutton CFA, CMT
Chief Currency Strategist
Eric Theoret CFA, CMT
Currency Strategist
[email protected]
[email protected]
Eduardo Suarez
Senior Currency Strategist
[email protected]
Sacha Tihanyi
Senior Currency Strategist
[email protected]
Should you wish to be added to anyone of our three distribution lists, please reach out to one of the above authors.
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