mizuho dealer s eyemizuho bank | mizuho dealer’s eye january 31, 2014 2 tapering to the tune of...

Mizuho Dealer’s Eye February 2014

U.S. Dollar .................................................................... 1 Euro .............................................................................. 7 Canadian Dollar ......................................................... 12 British Pound .............................................................. 14 Singapore Dollar ........................................................ 18 Thai Baht .................................................................... 21 Malaysian Ringgit ...................................................... 24 Indonesian Rupiah ..................................................... 27

Philippine Peso ........................................................... 30 Korean Won ............................................................... 36 New Taiwan Dollar .................................................... 40 Hong Kong Dollar ...................................................... 45 Chinese Yuan ............................................................. 49 Australian Dollar ........................................................ 55 India Rupee ................................................................ 59

Mizuho Bank, Ltd.

Forex Division

Mizuho Bank | Mizuho Dealer’s Eye

January 31, 2014 1

Daisuke Karakama, Kenta Tadaide, Yuki Yamazaki, Market Economists, Forex Division

U.S. Dollar – February 2014

1. Review of the Previous Month

The dollar/yen pair weakened in January.

After opening the month at the lower-105 yen mark, the pair temporarily hit a monthly high of

105.45 yen as yields on 10-year U.S. government bonds moved firmly. It then dropped to the mid-104

yen level, though, as the NY Dow Jones moved bearishly after the markets reacted badly to the poor

performance of the Chinese Manufacturing PMI for December. The next day saw the pair falling to

around 104 yen as market participants began selling Asian stocks. It then dropped below 104 yen on

January 6 on the back of falling U.S. interest rates and a bearish Dow Jones. However, dollar buying

picked up on January 7 after the U.S. trade deficit for November unexpectedly shrank. As a result, the

currency pair rallied to the upper-104 yen mark. As dollar buying continued towards January 8, the

dollar regained the lower-105 yen level against its Japanese counterpart, with the pair also boosted by

the firm movements of the Nikkei Average. This level saw selling for profit taking, though, so the pair

weakened and traded with a heavy topside at the upper-104 yen mark. It strengthened to the 105 yen

level on January 9 on the back of firm European stock movements. In his press conference after the

ECB Governing Council meeting, though, ECB President Mario Draghi indicated that low interest

rates would be maintained for a long time. The euro/yen pair edged lower and the dollar/yen pair was

also dragged to the upper-104 yen level. January 10 saw the release of the much-anticipated U.S.

employment figures for December. The results fell significantly below expectations and the markets

reacted by selling the greenback, with the currency pair crashing to the upper-103 yen mark as a result.

January 13 saw more dollar selling on the back of the previous weekend’s terrible employment

news. With U.S. interest rates falling and the Dow Jones also sliding, the pair dropped further to hit the

upper-102 yen mark. It then rallied to the upper-103 yen level on January 14, though, due to dollar

buying by Japanese importers, with the greenback also being bought in the wake of the favorable

results of the U.S. retail sales data for December. Dollar buying ramped up on January 15 following an

upswing in the U.S. Producer Price Index (PPI) for December, so the pair gained to the upper-104 yen

mark. It then rose to just below 105 yen on January 16 due to: the firm movements of the Nikkei

Average; and Australian-dollar selling/U.S.-dollar buying after the markets reacted badly to a

substantial slump in the Australian employment data for December. However, the Dow Jones then

turned bearish, while U.S. interest rates also fell on the back of the results of the U.S. CPI data for

December. As a result, the currency pair moved with a heavy topside at the lower-104 yen mark.

The dollar gained across the board on January 21 due to: the firm movements of the Nikkei

Average; and reports in a U.S. newspaper that, if all went well, the FOMC was set to announce further


January 31, 2014 2

tapering to the tune of $10 billion when it met on January 28–29. During this time, the currency pair

gained to the upper-104 yen level. The Bank of Japan’s Monetary Policy Committee (MPC) met on

January 22. As expected, it decided to maintain the status quo. Some observers had expected further

easing, though, so they reacted by selling the dollar in disappointment, with the pair temporarily

breaking below 104 yen as a result. It soon recovered to the lower-104 yen mark, though, due to buying

from Japanese importers. It then hit the upper-104 yen level on January 23 in tandem with a bullish

Nikkei Average. However, the markets switched into risk-off mode after the preliminary China HSBC

Manufacturing PMI data for January dropped below 50 for the first time in six months. As the cross

yen came under selling pressure, the dollar/yen pair fell back to around 104 yen. The Argentine peso

then suffered sharp losses after the Argentine authorities allowed it to weaken. This led to a sell-off of

emerging-economy currencies and a rise in risk aversion. As yen buying increased, the dollar/yen pair

dropped below 103 yen. It then fell temporarily to a monthly low of 101.77 yen on January 27 while

activating stop losses. As concerns about emerging economies eased off towards the month’s end, the

pair rallied to the upper-102 yen mark and moved firmly thereafter.

96

98

100

102

104

106

13/10 13/11 13/12 14/01

（USD) USD/JPY

2. Outlook for This Month:

Emerging economy concerns and real-demand yen selling

Expected Ranges Against the yen: JPY101.00–105.00

The dollar/yen pair is expected to float up and down throughout February.

Since entering 2014, the pair has weakened on the back of two shocks: the “U.S. employment data

shock” and the “Argentine shock.” An optimistic mood has been spreading since November 2013,

though, with the dollar appreciating one-sidedly from 98 yen to 105 yen, so perhaps a little adjustment

is only natural. Though the pair fell, the most noticeable thing was how it was supported by buying


January 31, 2014 3

from Japanese importers when it broke below 102 yen, thus avoiding a dip below 100 yen. Concerns

about the emerging economies have flared up since the Argentine shock. The central banks of Turkey

and South Africa hiked interest rates to protect their currencies, but this has failed to calm market jitters

and things could remain tense in February. However, Japan is now struggling with a large trade deficit,

having recorded a record-high deficit in 2013, so the yen will face strong selling pressure on the supply

and demand front. Furthermore, at the January FOMC meeting, the FRB decided to reduce the scale of

its asset purchases once again and now seems to be steadily edging down the path towards a

normalization of monetary policy. Under these circumstances, the dollar/yen pair will probably float

around the lower-100 yen mark in February.

The trigger for growing concerns about emerging economies was the sharp fall in the value of the

Argentine peso after the Argentine authorities indicated they were prepared to tolerate peso

depreciation. However, Argentina defaulted in 2001 and has since been locked out of international

financial markets, so the Argentine shock is unlikely to spill over directly into other countries.

Nonetheless, since the Argentine shock, market participants have been lifting funds from emerging

markets and other countries with current account deficits and high inflation. Markets in the emerging

economies have been moving bearishly since the FRB touched on the possibility of QE tapering in

May 2013, so if negative news emerges from one or two of these countries, it could well lead to a flight

away from all emerging-economy assets. This trend is likely to be of a temporary nature and the

markets will gradually regain composure as time passes, but for now, with concerns about a Chinese

economic slowdown also bubbling away, skittish trading looks set to continue for the time being.

At the FOMC meeting on January 28–29, the FRB decided to taper its asset purchases by $10

billion to $65 billion a month (U.S. treasuries - $35 billion; MBS - $30 billion). In the accompanying

statement, the FOMC stated that “it likely will be appropriate to maintain the current target range for

the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent,

especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.”

This was much as the markets had been expecting. Though the FOMC meeting took place against a

backdrop of instability in the emerging economies and plummeting currencies/stocks, its

accompanying statement made no mention of the situation in the emerging economies. It seems the

FRB is prepared to tolerate current levels of market turbulence as it continues to edge calmly towards a

normalization of monetary policy. A market consensus has been growing that the FRB will continue to

taper its asset purchases by $10 billion from hereon, so the recent announcement did not change the

market forecast for a mid-2015 commencement of interest rate rises. As risk aversion spreads across

the globe, yields on 10-year U.S. government bonds are trending downwards, but they will start rising

again once things calm down and this will probably act to bolster the dollar/yen pair.

Based on the aforementioned circumstances, the dollar/yen pair is likely to hover up and down in

February. More time will be needed before concerns about the emerging economies cool off. As global

stocks weaken, U.S. interest rates will probably face downwards pressure. However, when the pair hits

lows, it will likely face buying demand from Japanese importers, so it is expected to trade firmly in a


January 31, 2014 4

range between 101–105 yen.


January 31, 2014 5

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the dollar (8 bulls: 100.00–106.00, Core: 101.00–105.25)

Fujisaki

101.00

–

106.00

The yen is expected to slide on the back of Japan’s large trade deficit and widening Japanese/U.S. interest-rate

differentials. Concerns remain about some emerging economies, so the markets are expected to switch into

risk-off mode for a time. As a result, the yen’s slide is likely to be slow-paced.

Kato

101.00

–

106.00

The dollar/yen pair will move in an adjustive range in February. This will be the main trend, not dollar

bullishness. Buoyant global stock markets may also face some adjustment and the currency pair’s topside is likely

to be capped by yen buying in the cross-yen markets.

Noda

100.00

–

105.00

Though market participants are keeping a close eye in the movements of emerging-market currencies, at this

moment in time there is no talk of the Argentine crisis spilling over into other countries. February will see the

release of settlement results, but the yen is expected to gradually start edging down again in line with the

fundamentals.

Yano

101.00

–

105.00

The U.S. has recently posted a number of bearish economic indicators, as evinced by the December employment

data, but this is mainly due to the impact of the cold weather. Once this particular factor is out of the way, the

economic recovery will continue. Japanese and U.S. monetary policies also suggest that interest-rate differentials

will widen from hereon. “Fundamentals” and “interest-rate differentials” will both boost the dollar/yen pair, so

February is also likely to see yen depreciation.

Takada

100.00

–

105.50

The dollar/yen pair’s topside will probably be tested in February on the back of the strong U.S. economic recovery

and steady QE tapering. Stocks will undergo some adjustment in the wake of uncertainty about emerging markets,

so some temporary yen buy-backs are likely, but the pair’s room on the downside will be capped.

Toriba

101.50

–

105.50

Ongoing QE tapering and bearish stock markets will see the dollar/yen pair moving with a heavy topside, though

its room on the downside will also be capped. The pair will also be supported by funds flowing back to developed

countries from emerging economies, so the pair’s movements will form a dip in February. The beginning of the

month will see the release of several jobs-related indicators, such as the employment data and the unemployment

rate, so market participants should pay attention to these results.

Shimoyama

101.00

–

105.00

Market participants should be wary of the risk-off mood emanating from emerging economies, but each country is

developing policy responses, so risk appetite is set to gradually recovery from here on. The dollar/yen pair will

also be boosted by fundamentals such as Japan’s trade deficit, so it is expected to make gains in February.

Inoue

101.00

–

105.00

Risk aversion has swept the markets on the back of the problems in Argentina, Turkey and elsewhere. However,

the impact on global markets will be limited and market concerns will gradually ease off. The dollar/yen pair is

likely to strengthen due to: dollar buying as the U.S. economic recovery kicks off again; and dollar buying by

Japanese importers.


January 31, 2014 6

Bearish on the dollar (4 bears: 98.00–104.50, Core: 99.25–103.75)

Nishijima

98.50

–

103.50

Concerns about the emerging economies and a Chinese economic slowdown continue to smolder away. Under

these circumstances, the markets will see more risk-aversive yen buying. If the U.S. employment data and the

debate about raising the debt ceiling are seen as negative factors, the dollar/yen pair is likely to undergo some

further adjustment.

Yamashita

98.00

–

103.50

It will take time before concerns about emerging markets are assuaged, despite the best efforts of central banks. As

the Chinese economic slowdown intensifies, stock markets are likely to slide across the globe. There seems to be a

dearth of new factors on the Japanese side too, so the dollar/yen pair looks set to trade with a heavy topside.

Sato

100.00

–

104.00

The financial markets will continue to be rattled by events in China and elsewhere. Japanese firms are also

expected to repatriate funds towards the end of the fiscal year, so the dollar/yen pair is likely to trade with a heavy

topside.

Omi

100.50

–

104.50

Dollar buying will pick up again as the risk-off mood recedes, but there is a lack of factors capable of pushing the

dollar higher. As a result, the greenback will be sold-back when it hits highs at the 104 yen level.

(As of January 31)


January 31, 2014 7

Daisuke Karakama, Masakatsu Fukaya, Yuki Yamazaki, Market Economists, Forex Division

Euro – February 2014


In January, the euro/dollar pair dropped back from its end-of-year high around $1.38 to float in a range

between $1.35–1.37.

After opening the month at the upper-$1.37 mark, the pair plummeted to around $1.36 due to:

dollar buying on the back of high U.S. interest rates; and an unwinding of the positions built up at the

end of 2013. Despite a downswing in the U.S. Non-Manufacturing ISM Report on Business for

December (released January 6) and firm European stock movements, the pair fell further to hit the

mid-$1.35 level. This was down to dollar buying as the markets reacted warmly to: the significant

upswing in the U.S. November trade balance (released January 7); the December U.S. ADP

employment statistics (January 8); and the release of the FOMC minutes. During this time, the single

currency also fell to around 142 yen against its Japanese counterpart. With the ECB Governing Council

meeting looming, the euro/dollar pair rallied to the lower-$1.36 level on January 9, but it dropped back

to the lower-$1.35 mark after ECB President Mario Draghi spoke emphatically about forward guidance

in his press conference after the meeting. The dollar then fell sharply on January 10, though, after the

U.S. employment data for December fell significantly below market expectations. The euro bounced

back to the upper-$1.36 level against the greenback and the lower-143 yen mark against the Japanese

unit.

The trend continued into the next week and the euro/dollar pair strengthened to around $1.37 on

January 14. The euro/yen pair then rose to the lower-142 yen mark on the back of yen bearishness.

This also provided a boost to the euro/dollar pair, which continued trading firmly at the upper-$1.36

mark. However, this trend reversed on January 15. Speculation over further easing by the ECB

increased after Germany’s GDP growth rate for 2013 swung downwards. The dollar was bought during

this time on the back of some buoyant U.S. indicators. As a result, the euro/dollar pair dropped to the

lower-$1.35 level on January 17, with the euro/yen pair also falling to the lower-141 yen mark.

Amid a dearth of new factors, on January 20 the euro temporarily hit monthly lows of $1.3508 and

140.33 yen against the U.S. and Japanese units. The euro/dollar pair continued to trade with heavy

topside around the mid-$1.35 mark thereafter. It then shot up to the mid-$1.36 level, though, when euro

buying intensified after the markets reacted warmly to a (preliminary) eurozone PMI for January

(released January 23) hitting its highest level for 32 months. The pair temporarily hit a monthly high of

$1.3740 towards January 24 as dollar selling accelerated on the back of falling U.S. interest rates.

Emerging markets were rocked towards January 29 when the Argentine peso crashed. The shockwaves


January 31, 2014 8

subsided for a time when Turkey’s central bank hiked interest rates sharply, but risk aversion remained

strong and the euro was sold as a result, with the euro/dollar pair dragged to the lower-$1.36 mark by a

bearish euro/yen pair. Moves away from the single currency intensified on January 30 after the markets

reacted badly to the poor results of the German CPI data for January, with the euro/dollar pair

weakening to the mid-$1.35 level. This trend continued thereafter and the pair remained at this level

towards January 31.

130

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134

136

138

140

142

144

146

1.33

1.34

1.35

1.36

1.37

1.38

1.39

13/10 13/11 13/12 14/01

（JPY)（USD) EUR/USD EUR/JPY


The ECB Governing Council meeting

Expected Ranges Against the US$: US$1.3400–1.3800

Against the yen: JPY137.00–144.00

The euro is expected to move bearishly in February.

The euro/dollar pair traded with a heavy topside when it gained to around $1.38. With

U.S./European interest-rate differentials also widening, the pair was substantially adjusted down to the

$1.36 mark entering 2014. Dollar buying then eased off, though, as the December U.S. employment

data swung downwards and U.S. interest rates peaked out. As a result, the pair is now trading without a

clear sense of direction. As expected, the ECB Governing Council decided to maintain the status quo

when it met on January 9, but in his press conference after the meeting, ECB President Mario Draghi

strengthened his forward guidance by saying that “we firmly reiterate our forward guidance that we

continue to expect the key ECB interest rates to remain at present or lower levels for an extended

period of time.”

Under these circumstances, February may well see some changes. A lot will depend on the results

of the ECB Governing Council meeting scheduled for February 6. With regards to the outlook for ECB


January 31, 2014 9

monetary policy, since the end of the year we have been saying that “it wouldn’t be at all strange if

something happens at some point.” It is growing more likely, though, that the ECB will need to

implement some further easing. Draghi spoke about the triggers for ECB action, one being “an

unwarranted tightening of the short-term money markets” and the other “a worsening of our

medium-term outlook for inflation.” With regards to the former, the situation has certainly worsened

since the last meeting on January 9. At that time, the Euro Overnight Index Average (EONIA) stood at

0.16%. On January 16, it topped the ECB’s benchmark rate (0.25%) and rose close to 0.30%. It then hit

0.35% on January 20. It has since dropped to around 0.18% due to an injection of funds after the ECB

carried out a 1-week refinancing operation on January 21. Nonetheless, it remains 2bp above its level

at the time of the last meeting and is now 10bp higher compared to its average level up until last

summer when concerns of rising interest rates began sweeping the markets.

If this rise reflects a decline in excessive liquidity because banks are making early repayments of

the funds borrowed under the Long Term Refinancing Operation (LTRO), then EONIA will face more

upwards pressure from hereon as repayments continue. This is something the ECB will need to keep a

close eye on. Turning to inflation, though, and the eurozone CPI data for December revealed that core

inflation had only risen by 0.7% year-on-year, a record low. However, some say this is down to

technical factors, so it is too early to conclusively say the mid-term outlook is worsening.

Under the aforementioned circumstances, if the ECB does make a move, it probably has three

choices at this moment in time, namely (1) a strengthening of forward guidance, (2) policy rate cuts

(possibly to negative territories) or (3) a Long Term Refinancing Operation (LTRO). Judging from

recent statements by ECB officials, though, the ECB is likely to try strengthening forward guidance

first of all. The ECB seems quite cautious with regards to the idea of another LTRO. Even if one is

implemented, it will probably be directed towards lending to the private sector only and will likely be

introduced in the latter half of the year, after the results of the stress tests are released.

At the same time, the euro has been adjusted down to $1.36, while some data is pointing to an

economic recovery within the eurozone, so the ECB is likely to postpone any further easing for now.

Even if this is the case, though, the ECB meeting will probably strike a dovish tone, just like it did in

January. As a result, the markets will continue to speculate over further easing, and this will act to push

the euro lower.

The euro/dollar pair could be bolstered if the greenback moves with a heavy topside on the back of

uncertainty about the U.S. economy. It might also receive a fillip from a healthy supply and demand

environment (the eurozone current account surplus is now at record highs, while funds will flow back

into the zone in advance of the stress tests). The supply and demand situation seems particularly tilted

towards euro buying and this could help market participants feel more relaxed about purchasing the

single currency. This will help underpin the unit’s downside.

In light of the above, the euro/dollar pair is likely to float up and down in February while gradually

edging lower. However, if the ECB takes an aggressive easing stance by cutting interest rates and so on,

the single currency may well drop even further, so caution will be necessary.


January 31, 2014 10

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the euro (5 bulls: 1.3400–1.4000, Core: 1.3500–1.3900)

Fujisaki

1.3400

–

1.4000

The euro is expected to move firmly on the back of a ballooning current account surplus and expectations for fund

repatriations into the eurozone. If emerging-economy currencies fall further, expectations for fund repatriations

could grow even stronger. There are still concerns about the economic situation in southern Europe and the quality

of the assets held by Europe’s financial institutions, but these will be offset by the healthy supply and demand

situation.

Yamashita

1.3500

–

1.3900

The German economy remains strong, so the euro will probably be sought as concerns about emerging economies

grow stronger. Furthermore, Sabine Lautenschläger, the hawkish vice president of the Bundesbank, has joined the

ECB’s executive board. She could challenge the strong easing stance of some of the ECB’s more dovish

members. All in all, the euro is expected to move firmly in February.

Sato

1.3500

–

1.4000

The euro will trade firmly on the back of the eurozone’s ballooning trade surplus. If the situation remains unstable

in the emerging economies, funds will probably flow back into the eurozone. This is also likely to bolster the

single currency.

Nishijima

1.3500

–

1.3900

The euro will be bought for a time as risk aversion increases due to the unstable situation in the emerging

economies. The economies of Germany and other European nations are currently swinging upwards, so the single

currency will continue to trade firmly.

Inoue

1.3600

–

1.3900

The ECB Governing Council strengthened its forward guidance when it met in January, but the impact on the

currency markets was negligible. With the eurozone maintaining a trade surplus for about a year now, the euro is

likely to continue moving firmly due to supply and demand factors.

Bearish on the euro (7 bears: 1.3200–1.3800, Core: 1.3300–1.3780)

Kato

1.3300

–

1.3800

The negative impact of euro appreciation is gradually starting to make itself felt on the eurozone’s economy.

Funds are being repatriated into the eurozone in advance of the stress tests, but when this trend cools off, the

markets will probably react by selling the single currency.

Noda

1.3300

–

1.3800

The end of 2013 saw a round of fund repatriations, with the euro rising as a result. However, this trend will cool

off in February. Concerns about the situation in the emerging economies will also see a slight increase in risk

aversion, so the euro will face downwards pressure this month.

Yano

1.3400

–

1.3800

At its January meeting, the ECB Governing Council discussed a continuation of forward guidance and the

possibility of further easing. On the other hand, the U.S. has commenced tapering and the next policy change

looks set to be an interest rate hike. The divergence in these policy stances is likely to weigh down the euro’s

topside.

Takada

1.3200

–

1.3800

The euro will trade with a heavy topside on the back of QE tapering in the U.S. If the markets focus on the

eurozone’s moribund economic indicators, this could lead to a euro sell off, with the single currency crashing, so

caution will be necessary.

Omi

1.3400

–

1.3700

The euro/dollar pair is probably no longer attractive to buyers as the pound is making gains and the dollar/yen

pair’s topside is growing heavier. The pair will continue to trend downwards and its downside will edge lower.

Toriba

1.3300

–

1.3800

The euro is moving firmly at the moment on the back of: the eurozone’s healthy trade surplus; and fund

repatriations by financial institutions in advance of the stress tests. However, Europe’s fundamentals show no

signs of any overarching recovery, while the gap between ECB and FRB monetary policies remains large. The

euro’s room on the topside will remain capped.

Shimoyama 1.3400 The ECB has reiterated its intentions to remain on the easing path. At the same time, though funds have been


January 31, 2014 11

–

1.3800

flowing back into the eurozone in advance of the bank stress tests, this trend is cooling down. As a result, the euro

is likely to face downwards pressure this month. With the dollar also expected to strengthen, the discrepancy

between the two currencies will see the euro/dollar pair trending downwards.

(As of January 31)


January 31, 2014 12

Katsuhiko Takahashi, Americas Treasury Division

Canadian Dollar – February 2014


The beginning of the month was marked by an unwinding of the trends that occurred in the latter half

of 2013, with European currencies like the euro, pound and Swiss franc all being sold off. During this

time, commodity currencies like the Canadian and Australian dollars were bought back, with the U.S.

dollar/Canadian dollar pair gaining to the mid-C$1.06 mark. The greenback was then bought against

the major currencies after the U.S. November trade deficit shrunk by more than expected. With Canada

also posting a larger-than-expected trade deficit and the Canadian Ivey Purchasing Managers Index

dropping to its lowest level since 2009, the U.S. unit was bought and the Canadian unit sold. The

Canadian dollar was also hit by the ongoing slump in crude oil prices. All of this saw the currency pair

gaining to the mid-C$1.07 mark. Thereafter, the much-anticipated U.S. December employment data

turned out to be significantly down on market expectations. However, Canada’s December

employment data (released on the same day) also posted a substantial fall in the number of people in

work, while the unemployment rate rose sharply from 6.9% to 7.2%. As a result, though the greenback

was sold across the board at this time, it actually gained on its Canadian counterpart, with the currency

pair rising to the lower-C$1.09 level.

The loonie was bought back mid-January, with the pair dropping down to around C$1.0850.

However, it slide was halted and it bounced back to C$1.0989 after Bank of Canada governor Stephen

Poloz commented that low inflation was the bank’s largest concern and there remained uncertainty

about the U.S. economic recovery.

U.S. long-term interest rates rose in the latter half of the month after some news agencies reported

that the next FOMC meeting would announce a further reduction in the amount of asset purchases. The

U.S. dollar strengthened as a result, with the currency pair hitting C$1.10. The January 22 Bank of

Canada Monetary Policy Committee (MPC) meeting decided to keep the policy rate fixed. The

accompanying statement said the direction of monetary policy from here on would be decided by the

data, but it also lowered its outlook for inflation in 2014. This served to rouse market speculation about

interest rate cuts. The Canadian dollar saw more selling in the wake of the statement, with the currency

pair jumping from close to C$1.0970 to around C$1.1090. As concerns about the emerging economies

increased thereafter, yields on U.S. treasuries fell and the Canadian unit was bought back for a time.

However, the FOMC then decided to implement more QE tapering, so the Canadian dollar came under

pressure from the difference between U.S. and Canadian monetary policies. As a result, the pair

temporarily hit C$1.1199, its highest level in 54 months, to finish the month trading at highs.


January 31, 2014 13

90

92

94

96

98

100

1.02

1.04

1.06

1.08

1.1

1.12

13/10 13/11 13/12 14/01

（JPY)（CAD) USD/CAD CAD/JPY


U.S./Canadian interest-rate differentials; and the movements of emerging-economy currencies

Expected Ranges Against the US$: C$1.0800–1.1670


The U.S. has commenced QE tapering. If the U.S. economy recovers, speculation may well grow about

an early interest rate hike. This speculation is likely to lead to U.S.-dollar buying in the currency

markets. At the same time, the markets are growing more sensitive to the release of bearish Canadian

economic indicators, so Canadian interest rates may well come under downwards pressure. Shrinking

U.S./Canadian interest rate differentials are becoming a factor pushing the Canadian unit down against

its U.S. counterpart. However, inflation in the U.S. is moving stably at low levels. Furthermore, the

FRB is usually quite cautious about the idea of an interest rate hike, so the FRB’s low-interest policy

looks set to continue for now. On the other hand, the Canadian unit’s weakness is helping exports and

is also leading to inflationary pressure within Canada, so this shrinkage of U.S./Canadian interest rate

differentials will gradually ease off. Canada’s economy is strongly dependent on the U.S. economy, so

the U.S. economic recovery will act to support the loonie in the long term. However, the markets will

remain fixated on the movements of emerging-economy currencies. The Canadian dollar does not have

any particular correlation with these movements. Nonetheless, until the markets regain composure,

interest rate movements and economic trends are unlikely to have much of an impact on the U.S.

dollar/Canadian dollar pair.


January 31, 2014 14

Kenji Nakajima, Europe Treasury Division

British Pound – February 2014


The pound swayed up and down in January, but on the whole it traded flatly against the dollar and fell

against the yen.

The beginning of the month was marked by concerns of an economic slowdown in China following

the bearish results of a Chinese manufacturing indicator. With export-related stocks and so on sliding

across Europe, the euro edged lower and the pound was also pulled downwards. Due to UK’s own

independent factors, such as a worse-than-expected Manufacturing PMI for December (market

expectations – 58.4; result – 57.3), the pound/dollar pair dropped from around $1.66 to around $1.64

towards January 3. During this time, the pound/yen pair fell from the upper-174 yen mark to around

171 yen.

The second week saw the yen strengthening on January 6 as risk tolerance levels declined when:

the Nikkei Average plunged temporarily by over 400 yen; and the China HSBC/Markit Services PMI

for December weakened on the previous month. The dollar/yen pair fell from around 105 yen to the

lower-104 yen mark, with sterling subsequently falling to the mid-170 yen mark and the mid-$1.63

level against its Japanese and U.S. counterparts, respectively. However, stocks then stopped sliding and

the dollar/yen pair was bought back to the upper-104 yen mark. As a result, the pound/yen pair was

dragged up to around 172 yen, while the pound/dollar pair also rallied to the lower-$1.64 level. The

dollar was sold again thereafter when the U.S. Non-Manufacturing ISM Report on Business for

December fell below expectations, with the report’s New Orders Index dropping to its lowest level

since May 2009. U.S. stock markets fell and the yen was bought, with the dollar/yen pair sliding to

around 104 yen. The pound/yen pair also dropped back to the mid-170 yen mark at this time. Hopes for

a global economic recovery grew on January 8 following the previous day’s U.S. exports growth and

improvements in the German jobs market. As Japanese stocks moved firmly, the dollar/yen pair gained

to around 105 yen and the pound/yen pair followed suit by rising to the mid-172 yen mark. The

euro/pound pair dropped from around GBP0.83 to the lower-GBP0.82 mark (euro bearishness/pound

bullishness) towards January 9, the date of the ECB Governing Council meeting. This slide was down

to the different levels of business confidence in the eurozone and the UK together with a divergence in

the monetary policies of the two areas (the pound was marked by strong expectations for an early

interest rate hike, while the euro continued to face speculation over further easing). This saw the pound

gaining to around $1.65 against the greenback. The pound/yen pair was also dragged higher to hit the

lower-173 yen mark on January 9. The UK November Industrial and Manufacturing Production figures

were released on January 10. The figures dropped below market forecasts and sterling reacted by


January 31, 2014 15

dipping to around $1.64 against the dollar and the lower-172 yen mark against the Japanese unit. The

U.S. employment data for December was then released. The unemployment rate had dropped to 6.7%,

its lowest level since October 2008, and this saw the pound/dollar pair temporarily dropping to the

upper-$1.63 mark. However, nonfarm payrolls only grew by 74,000, the lowest gain since January

2011. As a result, the pound/dollar pair strengthened to around $1.65. As risk tolerance levels declined,

the yen was bought and the pound/yen pair temporarily slid to the lower-171 yen level. However, it

was then pulled back to the mid-172 yen mark by a bullish pound/dollar pair.

The yen market saw more adjustment on January 13 as risk tolerance levels continued falling on the

back of significantly-worse-than-expected U.S. nonfarm payroll results for December released on

January 10. As the dollar/yen pair dropped from around 104 yen to the upper-102 yen mark, the

pound/yen pair also weakened to the mid-168 yen level. The pound/dollar pair was pulled down by the

pound/yen pair’s slide to hit the mid-$1.63 mark. The dollar/yen pair then strengthened to around 104

yen on January 14 due to: real-demand dollar buying; and the firm results of the U.S. retail sales data

for December. During this time, the pound/yen pair also bounced back to the mid-171 yen mark. The

UK then released its CPI data for December. Inflation was up 2.0% year-on-year. This was below the

Bank of England’s target and expectations grew that inflation would remain capped going forward. As

anticipation for an early rate hike receded, the pound/dollar pair moved somewhat bearishly for a time,

though it soon rallied to the mid-$1.64 mark on the back of the firm movements of the pound/yen pair.

On January 15, the pound/dollar pair dropped back to the lower-$1.63 level in the wake of the buoyant

results of the NY FRB Manufacturing Index for January. The markets received a surprise on January

16 when the U.S. January Insured Unemployment Rate topped 3 million. The dollar/yen pair reacted

by dropping from the upper to the lower-104 yen mark. During this time, the pound/yen pair also fell to

the mid-170 yen level. The UK retail sales figures for December were posted on January 17. They

significantly outperformed market expectations and this saw the pound/dollar pair gaining to the

mid-$1.64 mark, while the pound/yen pair also rallied to the upper-171 yen mark.

The ILO UK unemployment rate for September–November was released on January 22. The rate

had fallen to 7.1%, below market expectations for 7.3%. This was close to the 7.0% target that the

BoE’s forward guidance said would trigger discussions about an interest rate hike. Sterling

strengthened across the board and the pound/dollar pair also gained to the upper-$1.65 mark. January

23 saw the release of the better-than-expected results of the January French Manufacturing and

Services PMIs and the January German Manufacturing PMI (all three were preliminary results). As a

result, the euro/dollar pair rose from the mid-$1.35 level to the mid-$1.36 mark. The pound/dollar pair

was also dragged higher to hit the lower-$1.66 mark. In an interview in a UK newspaper on January 24,

Martin Weale, a member of the BoE’s Monetary Policy Committee (MPC), said he did not agree with

the idea of lowering the 7% unemployment rate threshold contained in the BoE’s forward guidance.

The pound/dollar pair reacted by hitting the upper-$1.66 level. However, BoE Governor Mark Carney

then stated at the World Economic Forum in Davos that there was no pressing need for a rate hike, so

the pair dropped back below $1.65. The pound/yen pair opened the week at the lower-171 yen mark


January 31, 2014 16

and maintained its upwards momentum to hit the mid-173 yen level on January 23. China and the U.S.

then released some bearish economic indicators, though. At the same time, after Argentina’s foreign

currency reserves plummeted, the country’s central bank decided to stop intervening to buy the peso.

As a result, the peso was sold off sharply, soon followed by the currencies of other emerging

economies. Naturally, investor risk tolerance levels took a nosedive. As stocks fell across the globe, the

yen was bought, and with BoE Governor Mark Carney pouring cold water on expectations for an early

BoE rate hike, the pound/yen pair broke below 169 yen towards January 24.

On January 27, it was revealed that China Credit Trust, a Chinese trust fund, had reached an

agreement with investors after previously having difficulties meeting repayments on a high-yield trust

product. It now seemed the Chinese shadow banking sector would avoid a default, so the risk-evasive

yen buying seen at the end of the previous week now cooled off. On January 28, the Turkish central

bank convened an emergency monetary policy committee meeting. It declared it would take whatever

measures were needed to stabilize prices. The Turkish lira had plunged to record lows against the

dollar, but it now rallied somewhat. This also contributed to yen selling, with the pound/yen pair

rallying to the mid-170 yen level. The pound/dollar pair was also dragged higher to hit the upper-$1.65

mark. The UK GDP data for October–December was released on January 28. GDP was up 0.7% on the

previous quarter. This was essentially in accord with market expectations for a 2.8% q-o-q rise. The

pound/dollar pair had weakened for a time from the lower-$1.66 mark to the lower-$1.65 level. This

was due to a bout of selling to lock-in profits now a number of economic indicators had been released.

With growth up for the fourth successive quarter, though, the GDP data seemed to confirm the UK

economy’s ongoing recovery, so the pair soon bounced back. It then moved in a range around the

upper-$1.65 mark. At the emergency MPC meeting on January 28, Turkey’s central bank had reached

a decision to hike all its main policy rates sharply. As a result, risk appetite increased on January 29

and the pound/yen pair gained to the mid-171 yen level. However, the Turkish lira and other

emerging-economy currencies were sold off again, so the pound/yen pair weakened on the back of risk

aversion. South Africa’s central bank also hiked policy rates thereafter, but the size of the hike was

seen as insufficient, so risk-aversive movements continued. Many European banks have invested funds

into the emerging economies, which partly explains why the euro and pound was sold during this time.

BoE Governor Mark Carney then reiterated that a stronger economic recovery was needed before the

BoE implemented monetary tightening. He also said an interest rate hike was not on the cards in the

near future. As a result, the pound/yen pair dropped to the lower-168 yen mark towards January 30,

while the pound/dollar pair also weakened to the mid-$1.64 level.


January 31, 2014 17

154

156

158

160

162

164

166

168

170

172

174

176

1.58

1.6

1.62

1.64

1.66

1.68

1.7

13/10 13/11 13/12 14/01

（JPY)（USD) USD/GBP GBP/JPY


The possibility that forward guidance will be strengthened; the inflation outlook; and concerns about emerging economies

Expected Ranges Against the US$: US$1.6200–1.6700


The pound is expected to trade with a heavy topside in February. The UK’s (ILO) unemployment rate

has plummeted, while the 2013 GDP growth rate hit a six-year high (up 1.9%) and the economy seems

to be recovering steadily. The UK is also likely to post some firm economic indicators this month, too.

However, prices are moving stably, while BoE Governor Mark Carney and other top BoE figures have

clearly expressed caution about the idea of an early interest rate hike, so market expectations for such a

hike are being capped accordingly. The February 6 BoE Monetary Policy Committee (MPC) is likely

to strengthen forward guidance, while the Quarterly Inflation Report (released February 12) is also

expected to downgrade the inflation outlook. As a result, even if the UK does post some robust

economic indicators this month, any pound appreciation will be limited in nature. Furthermore, the

Turkish lira and South African rand remain unstable, despite last month’s emergency MPC meetings

and the unexpected interest rate hikes, so there are still concerns about the emerging economies. Many

European banks have invested funds into these economies, so investors may well adopt risk-aversive

stances with regards to European currencies. Under these circumstances, the pound is likely to trade

with a heavy topside in February.


January 31, 2014 18

Tomohiro Yamaguchi, Singapore Treasury Department

Singapore Dollar – February 2014


The Singapore dollar moved bearishly in January on the back of continued speculation over U.S.

quantitative easing as well as the worsening outlook for the Chinese economy.

The FRB finally decided to implement QE tapering mid-December. The Singapore unit

subsequently weakened against its U.S. counterpart in the latter half of December. When the RMB

began rising towards the end of the year, though, the Singapore dollar was also dragged higher to

approach the New Year trading at the lower-S$1.26 mark against the greenback. On January 2, though,

Singapore posted some worse-than-expected GDP figures for October–December, with GDP falling an

annualized 2.7% from the previous quarter. With China’s Manufacturing PMI for December also

dropping below forecasts, the mood from the end of the year suddenly darkened, with the Singapore

dollar sliding as a result. On January 7, the unit broke below its recent low against the U.S. dollar to hit

S$1.27 for the first time since September last year. It then fell to close to the mid-S$1.27 level on the

back of: the buoyant results of the December U.S. ADP employment statistics, released on January 8;

and high hopes with regards to the U.S. employment data, due for release on January 10. The actual

employment results confounded these hopes, though, with nonfarm payrolls increasing at their lowest

rate for around three years. This saw the greenback moving bearishly across the board, with the

Singapore dollar also shooting back up to the lower-S$1.26 mark.

As the markets began to take in the previous week’s shocking U.S. employment data, speculation

grew that the results would not affect the schedule for QE tapering. This saw the U.S. unit bouncing

back and the Singapore dollar weakening again. The same week saw the release of a number of U.S.

economic indicators, some good and some bad. However, the U.S. did post some robust retail sales

data for November and a healthy January Philadelphia FRB Manufacturing Index. This stoked

speculation that the GDP data for October–December would be revised upwards when it was released

at the end of the month.

In the week beginning January 20, Asian currencies continued moving bearishly against the dollar

on the back of speculation that the FOMC would implement some more QE tapering. Even Singapore,

with its comparatively healthy fundamentals, saw its currency adjusted downwards on successive days.

The China HSBC Manufacturing PMI data for January (released on January 23) then dropped below

50 (the key level for determining whether the economy is expanding or contracting) for the first time in

six months. The evening of January 23 also saw an Argentine peso crash after Argentina’s central bank

decided to stop intervening to buy the unit. As risk aversion intensified, the Singapore dollar dropped

to the lower-S$1.28 mark, its lowest level since August 2013.


January 31, 2014 19

Concerns about emerging economies eased off the following week and the markets slipped into

wait-and-see mode in advance of the FOMC meeting. During this time, the Singapore dollar returned

to the lower-S$1.27 mark. At the much-anticipated meeting on January 29, the FOMC announced

some further QE tapering. This was in line with expectations, but with long-term U.S. dollar interest

rates dropping down to levels last seen in November, the Singapore unit was not sold like it had been

directly after the December FOMC meeting. However, Turkey, South Africa and emerging markets in

South and Central America began struggling once again, so risk aversion remained in place. Under

these circumstances, the Singapore dollar moved with a lack of direction to trade in a range around

S$1.27 in advance of the Chinese New Year holidays.

77

78

79

80

81

82

83

84

1.23

1.24

1.25

1.26

1.27

1.28

1.29

13/10 13/11 13/12 14/01

（JPY)（SGD) USD/SGD SGD/JPY


The Singapore unit will continue to trade bearishly against the U.S. dollar, though it could move firmly against other Asian currencies

Expected Ranges Against the US$: S$1.2600–1.2900


The Singapore unit will continue to move bearishly in February on the back of the U.S. economic

recovery and the instability in the emerging markets. However, its room on the downside will probably

be capped.

Singapore’s sound fundamentals make the Singapore unit more attractive than other Asian

currencies, yet it still weakened last month due to position unwinding. Observers had estimated that the

Singapore dollar’s nominal effective exchange rate (NEER) was moving at the top of the Monetary


January 31, 2014 20

Authority of Singapore’s policy band, but it seems the NEER dropped back closer to the policy band’s

central value at the end of January. This is turn suggests that market participants have now unwound

their positions to a certain extent. The beginning of February will be marked by a lack of movement

due to the Chinese New Year holidays. As a result, the Singapore unit is likely to kick off the month

fluctuating gently around its end-of-January levels. After that, though, it will probably move bearishly

against the greenback due to: U.S. dollar bullishness on the back of QE tapering; and instability in the

emerging economies after some emerging-market currencies suffered sharp falls. However, once a

round of position adjustments is out of the way, the Singapore dollar will once again be regarded as a

stable currency, so it may start trading firmly again, especially against other Asian currencies.

Singapore’s December CPI data only rose 1.5% year-on-year, its lowest growth in eight months.

The main reason for this fall, though, was a dip in the price of vehicle Certificates of Entitlement

(COEs). Inflationary pressures remain strong due to a tight labor market, so the recent CPI slide is

unlikely to prompt the MAS to change its policy of guiding the Singapore unit higher. Based on the

aforementioned circumstances, the Singapore dollar’s downside will probably be capped in February.

Singapore economic indicators to watch out for this month include the January export statistics

(February 17), the final October–December GDP data (February 21) and the January CPI data

(February 24).


January 31, 2014 21

Hiroshi Seki, Bangkok Treasury Department

Thai Baht – February 2014


The baht hit a four-year low in January.

The dollar/baht pair kicked off the month trading at Bt32.82 on January 2. At the beginning of the

year, Suthep Thaugsuban, the leader of the anti-government protesters, announced a series of

large-scale demonstrations in Bangkok, beginning on January 13. As a result, the Thai SET Index

plummeted and the pair shot up at the start of trading. As political instability continued, the markets

then switched into risk-off mode on January 6 after the China HSBC Services PMI for December fell

sharply on the previous month. All of this saw the pair rising to Bt33.15 whilst activating stop losses.

This was its highest level since February 2010. There was some adjustment thereafter, but concerns

about the upcoming demonstrations saw the pair moving firmly at the Bt33 mark.

On January 10, the U.S. released some worse-than-expected employment data for December. The

greenback was sold and the currency pair dropped to the Bt32 mark. Though the anti-government

protestors blocked off a major Bangkok intersection on January 13, the markets were relieved things

did not turn violent, so overseas investors moved to buy back Thai stocks. As this trend continued,

intermittent dollar selling by a major exporter saw the pair plunging to Bt32.70 on January 14. Prime

Minister Yingluck Shinawatra then affirmed that the general election would not be postponed and

would go ahead as planned on February 2. This saw the pair recovering temporarily to Bt32.90.

Exporters continued to sell the dollar, though, while the baht was also bought back due to falling U.S.

long-term interest rates. As a result, the pair hit a monthly low of Bt32.66 on January 17.

However, the baht slid downwards again after several people were injured on January 17 and

January 19 when bullets were fired at anti-government demonstrators. The Thai government declared a

state of emergency on January 21. This saw the currency pair rallying to the Bt33 level on January 22.

The Bank of Thailand’s Monetary Policy Committee (MPC) then met and defied expectations for an

interest rate cut by keeping policy rates fixed. The Thai unit was bought back and the pair dropped

once again to Bt32.80. Towards the end of the month, though, the markets switched decisively into

risk-off mode amid a crash in the value of the Argentine peso and concerns of a Chinese economic

slowdown. All of this meant the currency pair continued to move in narrow range of Bt32.80–90 in

advance of the FOMC meeting.

On January 28, Prime Minister Yingluck Shinawatra reiterated that the general election would go

ahead as planned on February 2. As political tensions boiled up, the dollar/baht pair strengthened

temporarily to around Bt32.95. As expected, the January 29 FOMC meeting decided to taper asset

purchases to the tune of $10 billion a month. Falling U.S. stocks and risk aversion saw the currency


January 31, 2014 22

pair gaining to the Bt33 mark for a time.

3.05

3.1

3.15

3.2

3.25

30.5

31

31.5

32

32.5

33

33.5

13/10 13/11 13/12 14/01

（JPY)（THB) USD/THB THB/JPY


Domestic political turmoil due to the general election; and QE tapering Expected Ranges Against the US$: BT32.00–33.70


The dollar/baht pair will continue to move firmly in February on the back of the ongoing

anti-government protests in Thailand.

In the wake of a series of explosions and so on, the Thai government has declared a state of

emergency in Bangkok and the surrounding provinces for the first time since 2010. Under this

declaration, the rights and freedoms of Bangkok’s citizen will be curtailed. There is a risk this could

lead to a slump in consumer spending and maybe even to a decline in economic activity. Thailand’s

image in the eyes of the world will also deteriorate. Some countries will issue travel warnings, while a

number of events scheduled to be held on Thailand will probably be postponed or cancelled. With

homebuilders delaying new projects due to the political turmoil and a number of business meetings

being cancelled, there are also concerns about a slide in direct investment. If the government

implements a curfew, then the timing of this curfew could well act to restrain consumer activity. If this

happens, the impact on the economy will be quite substantial. This impact will start to make itself felt

from here on, with the public and private sectors already starting to downgrade their growth forecasts

for 2014.

The Thai Constitutional Court had declared that the February 2 general election could be postponed

and a new date fixed through talks between the prime minister and the election administration


January 31, 2014 23

commission. As a result, Prime Minister Yingluck Shinawatra discussed the issue with the commission.

At one point it seemed the election might be postponed, but in the end it was decided to stick to the

February 2 date. Citing the security situation, the electoral authorities had called for a postponement,

but the government side rebuffed this suggestion. During the negotiations, anti-government factions

protested outside the meeting venue. Shots were fired and two of the protesters were injured. In the

wake of the decision not to postpone the election, Suthep Thaugsuban, the leader of the anti-Thaksin

faction, declared he would do whatever it took to stop the election going ahead. Demonstrations look

set to heat up as the election approaches. Even if the election does go ahead, there are also no signs of

the government and the protesters then reaching a compromise aimed at defusing the situation. As a

result, the domestic situation is growing more uncertain by the day.

Most observers were expecting the January 22 MPC meeting to implement a 0.25% rate cut to

prevent an economic downturn, but the MPC decided not to cut rates on the grounds that current

monetary policy was accommodative enough already. Three of the seven members had called for a

0.25% cut, but the other four had voted to maintain the status quo.

In his statement after the meeting, BoT Governor Prasarn Trairatvorakul explained the reasoning

behind the MPC’s decision. He said that although economic growth had suffered as a result of the

political turmoil that began in October 2013, current policy rate levels were supporting the economic

recovery. Furthermore, the government had only just implemented a state of emergency, so it was

difficult to predict how the political situation would develop from here on. With the reaction of the

markets also hard to gauge, he continued, it was difficult to predict what impact a rate cut would have.

It seems the MPC was also worried that if it did implement a rate cut, this would make it difficult to

implement a further cut if the turmoil was still ongoing at the time of the next meeting. At any rate,

though Prasarn decided not to cut rates for the time being, the reaction of the markets was muted, so it

seems market participants are factoring in to a certain degree a rate cut to be announced at the next

MPC meeting on March 12.

The U.S. announced QE tapering in December, meanwhile, and it now looks like the FOMC will be

discussing further cuts in asset purchases each time it meets from here on. Though the December U.S.

employment data fell significantly below expectations, the January 29 meeting nonetheless cut the

amount of purchases for the second successive month. The dollar/baht pair will be supported by

expectations for a Thai rate cut and strong ongoing demand for the greenback due to the monetary

policy shift in the U.S. The U.S. economy is slowly but steadily growing again, so the baht is unlikely

to be pulled higher by dollar-related factors in the near future. As long as the political situation in

Thailand remains tense, the currency pair thus looks set to swing upwards.


January 31, 2014 24

Takashi Miyachi, Singapore Treasury Department

Malaysian Ringgit – February 2014


The Malaysian ringgit strengthened to around MYR3.25 from the beginning to the middle of January

on the back of dollar selling and the release of some buoyant Malaysian economic indicators. However,

it was then dragged lower as emerging-economy and Asian currencies were sold off across the board.

It hit the upper-MYR3.34 mark towards the end of the month, its lowest level since May 2010.

The ringgit opened January at the upper-MYR3.27 level against the dollar. Asian currencies then

moved bearishly on the back of the weak results of the Chinese Manufacturing PMI for December

(released January 1) and the China HSBC Manufacturing PMI data for December (released January 2).

The ringgit was also pulled down to the lower-MYR3.30 mark on January 3. As Asian currencies then

edged back upwards, the Malaysian unit moved firmly at the mid-MYR3.28 mark. Malaysia’s

November trade balance was released on January 8. At 9.72 billion ringgit, the surplus was higher than

expected. The Malaysian unit was subsequently bought to the lower-MYR3.27 level. The ringgit rose

further on January 9 following the bullish results of Malaysia’s industrial production data for

November, with the data outperforming market expectations by rising 4.4% on the previous year.

Asian currencies began trending upwards again on January 10 in advance of the release of December’s

U.S. employment data, with the ringgit also breaking below MYR3.27 to hit the mid-MYR3.26 mark.

At the beginning of the next week, on January 13, the dollar began falling on the back of the

worse-than-expected results of the U.S. December employment data, released during overseas trading

time the previous week. The dollar was sold for a time and the ringgit was bought to a monthly high of

just around MYR3.25, though dollar selling was short-lived in the end. The greenback was bought

from mid-January onwards after: the U.S. released some robust economic indicators; and the World

Bank upgraded its outlook for the global economy. As a result, the Malaysian unit edged down to the

upper-MYR3.29 level. Emerging-economy and Asian currencies continued to move bearishly from

January 20 onwards. The ringgit broke through the key MYR3.30 mark on January 20 and continued

falling on the back of concerns about an intervention by Bank Negara Malaysia, Malaysia’s central

bank. By January 27, it had dropped to the upper-MYR3.34 level. Towards the month’s end, the ringgit

was dragged below MYR3.32 for a time on the back of the turbulent movements of the Turkish lira

and other emerging-economy currencies, though it then moved bearishly again to hit the

upper-MYR3.34 level. Bank Negara Malaysia’s Monetary Policy Committee (MPC) met on January

29. Though the accompanying statement was somewhat hawkish, the MPC decided to keep policy

rates unchanged, so the impact on the markets was limited.


January 31, 2014 25

30

30.5

31

31.5

32

32.5

33

3.1

3.15

3.2

3.25

3.3

3.35

3.4

13/10 13/11 13/12 14/01

（JPY)（MYR) USD/MYR MYR/JPY


U.S. interest rate trends; and the movements of emerging-economy currencies

Expected Ranges Against the US$: MYR3.30–3.40


In February, the ringgit is expected to trade with a slightly heavy topside on the whole. The dollar

remains susceptible to buying pressure due to the FRB’s ongoing QE tapering. Under these

circumstances, emerging-economy and Asian currencies are also likely to remain susceptible to bearish

movements. It is not hard to imagine the Malaysian unit being impacted by these trends, either.

Emerging-economy currencies like the Turkish lira and South African rand are moving particularly

violently, so market participants should pay attention these movements. There are also growing

concerns about China’s economy and financial system. This will also act as a negative factor for the

ringgit.

Turning to Malaysia itself, though, and it seems that industrial production bottomed out last

September. With the global economy also recovering, Malaysian exports are moving firmly and the

trade balance is steadily improving. On the whole, the global economic recovery looks set to continue

for the time being, so Malaysia’s exports and trade surplus are expected to expand further from here on.

This is likely to support ringgit buying.

Furthermore, when the ringgit is sold, fears of a Bank Negara Malaysia intervention will grow

steadily stronger in the markets. This is also likely to prevent a ringgit crash.


January 31, 2014 26

However, Malaysia’s December CPI data (released January 22) finally topped the 3% mark to

reach +3.2% year-on-year. Prices have been rising since the subsidy cuts last year and this is now

starting to impact the core CPI.

Malaysia has a particularly high level of household debt compared to other Asian countries, so

steadily rising inflation is expected to have a negative effect overall. Also, a large proportion of

Malaysian government bonds are in the hands of overseas investors, so if the prices of these bonds

drop due to inflation, this may see funds flowing out of Malaysia again. This in turn could also see the

ringgit trending lower once more.

Based on Malaysia’s fundamentals, the ringgit is likely to swing up and down this month, but

emerging-economy and Asian currencies will continue to be swayed by the FRB’s monetary policy. If

it becomes even clearer that the FRB is intent on normalizing monetary policy, the dollar will face even

more upwards pressure, so on the whole, the ringgit will probably edge lower again this month.


January 31, 2014 27

Satoshi Koizumi, PT. Bank Mizuho Indonesia

Indonesian Rupiah – February 2014


The dollar/rupiah pair opened January trading at the IDR12,200 level. It bounced back to around

IDR12,000 on January 13 in the wake of the January 10 release of the December U.S. employment

data. It moved bearishly thereafter to hit the IDR12,200 mark once again.

The beginning of January saw the release of some fairly buoyant Indonesian economic indicators.

On January 2, Indonesia posted a better-than-expected November trade surplus of $780 million. The

end-of-December foreign currency reserves were also up $2.4 billion on the previous month. However,

the Indonesian unit continued to face strong selling pressure and subsequently weakened to IDR12,285

on January 7. The U.S. posted some worse-than-expected December employment data on January 10.

This was met with dollar selling and the rupiah shot up to a one-month high around IDR12,000 on

January 13. The rupiah was then sold and the dollar/rupiah pair returned to the IDR12,200 level due to:

export settlements and other real-demand factors; some bearish Chinese economic indicators; and

growing investor concerns about emerging markets after the Argentine peso crashed (the country’s

central bank decided to stop intervening to buy the peso). At the Bank Indonesia monetary policy

committee meeting on January 9, the bank’s target rate and the FASBI overnight deposit facility rate

were kept at 7.50% and 5.75%, respectively. This was in line with most forecasts.

Stock and bond markets fluctuated violently in January. The Jakarta Stock Exchange Composite

Index opened the month at the mid-4,200 mark. It was bolstered by buying from overseas investors to

temporarily hit 4,500 points on January 23. It then dropped back to around 4,300 as stock prices fell

across the globe in the wake of the aforementioned peso crash and deteriorating Chinese economic

indicators.


January 31, 2014 28

0.82

0.84

0.86

0.88

0.9

0.92

10650

10950

11250

11550

11850

12150

12450

13/10 13/11 13/12 14/01

（JPY)（IDR) USD/IDR IDR/JPY


The rupiah will continue to trend downwards amid a dearth of buying factors

Expected Ranges Against the US$: IDR12,150–12,500

Against the yen: IDR116.00–123.00

The rupiah is expected to move bearishly in February, too. The unit will continue to face selling

pressure on the back of Indonesia’s current account deficit. With risk aversion flaring up due to

worsening Chinese indicators released in January or global stock market slides, the rupiah is likely to

be sold. The battle between this selling pressure and buying interventions by Bank Indonesia will

continue this month. Against this backdrop, the rupiah is expected to edge lower against the greenback.

Key economic indicators this month include the December trade balance and January inflation rate

(released February 3), the end-of-January foreign currency reserves data (release date not set) and the

Indonesian GDP growth rate for October–December (February 5). The GDP forecast is for growth in

the region of +5.6% on the same period last year. This would represent Indonesia’s lowest rate of

growth since October–December 2009 (+5.62% y-o-y). If the actual figure drops below the forecast,

this will probably be met by rupiah selling, especially considering the growing concerns about

emerging economies.

3. Topics


January 31, 2014 29

The impact on the rupiah due to the ban on exporting unprocessed minerals

On January 12, Indonesia instituted a ban on exports of unprocessed minerals. What impact will this

have on the rupiah?

Exports are still permitted for copper concentrates with a minimum purity of 15%, so the ban is

unlikely to affect the big exporters. Exports of nickel and bauxite are forbidden, though.

According to Bank Indonesia data, exports of nickel and bauxite amounted to around $2.1 billion in

fiscal 2012. This represented 6.7% of total mineral exports (including coal and copper) and 4% of total

exports that year. Coal accounts for around 83% of Indonesia’s total mineral export revenue (as of

fiscal 2012). Next up is copper at around 8%, followed by nickel and bauxite. Based on this data, the

slide in export revenue due to a commencement of the ban will be quite muted, so the short-term

impact on the rupiah will be modest.

Indonesia’s Coordinating Minister for Economic Affairs, Hatta Rajasa, did discuss the impact on

exports. He stated that the ban would dampen exports for a maximum of 2 years, with the Indonesian

economy suffering accordingly. Furthermore, countries heavily reliant on Indonesian mineral exports

(like Japan, which imports over 40% of its nickel from Indonesia) will be cautious about the possibility

of further export restrictions from hereon. They could decide to try reducing their dependence on

mineral imports from Indonesia, so market participants should watch closely to see how things develop

from here on.


January 31, 2014 30

Yasunori Sugiyama, Manila Branch

Philippine Peso – February 2014


Foreign exchange market

In 2014, the U.S. dollar/Philippine peso exchange market opened at PHP 44.35 on Thursday, January

2, roughly at the same level as the closing rate at the end of the previous year. As the U.S. dollar

remained strong, the exchange rate rose to PHP 44.66 to the U.S. dollar by Friday, January 3. In order to

keep the peso from depreciating sharply, the central bank of the Philippines placed offers in the market to

sell the U.S. dollar at the PHP 44.50 and 44.60 level on January 3. However, the central bank did not

actively intervene, and the amount of intervention was kept low. Trading closed for the week at PHP

44.65 to the U.S. dollar on January 3.

The Tokyo market opened on Monday, January 6. Even though the U.S. dollar/Japanese yen exchange

rate remained low, Asian stock markets were weakening and thus Asian currencies were dominantly sold

in the market. Following this trend, peso-selling dominated the U.S. dollar/peso exchange market as well.

Further, even though the central bank of the Philippines placed offers for the peso at the PHP

44.75–44.80 level to slow down the trend, the peso continued depreciating and reached PHP 44.85 to the

U.S. dollar by the afternoon of the same day. The central bank of the Philippines then placed orders to

sell U.S. dollar against peso at the PHP 44.75–44.80 level again on Wednesday, January 8. As the

announcement of the December employment statistics of the U.S. was coming near, there were few

market participants that would actively go against this market intervention by the central bank of the

Philippines by buying the U.S. dollar. As a result, the U.S. dollar/peso exchange rate fell to the PHP

44.60–44.70 level. In the end, trading closed for the week at PHP 44.71 to the U.S. dollar on Friday,

January 10.

The December employment statistics of the U.S. were released in the previous week on Friday,

January 10, revealing that the number of non-agricultural employees was lower than expected. In

response to this, the U.S. dollar/peso exchange market opened at PHP 44.55 on Monday, January 13 with

a weaker U.S. dollar and a stronger peso, compared to PHP 44.71 to the U.S. dollar, the closing rate of

the previous rate. There were few market participants, and there was no active trading, as the Tokyo

market was closed. The U.S. dollar/peso pair thus continued hovering around at the PHP 44.50–44.60

level throughout the day. On Tuesday, January 14, the downtrend for the Japanese yen started to recover,

as the media reported the growing current deficit of Japan, while the Nikkei Average fell remarkably.

Under such conditions, the U.S. dollar/peso exchange market saw the appreciation of the U.S. dollar

partly as a result of short-covering from the previous day. Furthermore, the U.S. dollar continued


January 31, 2014 31

appreciating on Wednesday, January 15. As a result, the peso reached PHP 45.00 to the U.S. dollar. Even

though the media announced that the November amount of OFW remittances remained at the two billion

level for the second consecutive month, the market was not impacted by this news. Although the

exchange rate almost fell below the PHP 45.00 level, the market closed without the exchange rate falling

below the PHP 45.00 level as a result of the offers placed by the central bank of the Philippines. On

Thursday, January 16, however, importers actively bought the U.S. dollar for their mid-month demands

since the opening of the market. The U.S. dollar/peso exchange market opened at PHP 45.10 and jumped

to PHP 45.165. Once the central bank placed offers at PHP 45.15, this trend slowed down. As the central

bank of the Philippines showed an even stronger attitude to intervene in the market on Friday, January 17,

the exchange rate fell to PHP 45.00 to the U.S. dollar, at which trading closed for the week.

On Monday, January 20, the U.S. dollar/peso exchange market opened trading at PHP 45.10 with a

slightly weaker peso compared to the previous week. Even though the October–December quarter GDP

of China was slightly above the expected level, this did not affect the U.S. dollar/peso exchange market.

There were few signs of movement on the day, as the U.S. market was closed. While the U.S. dollar

remained on an uptrend with market participants expecting the FOMC to agree on further tapering of

quantitative monetary easing on January 28 and 29, the U.S. dollar/peso exchange rate rose to reach PHP

45.25 on Tuesday, January 21. On Wednesday, January 22, U.S. dollar-buying and peso-selling

continued, and the exchange rate reached PHP 45.38 to the U.S. dollar. It seems that the central bank of

the Philippines started dollar-selling intervention actively in the market from this point on at the PHP

45.30–45.35 level. In order to lead the peso to appreciate for the opening price, the central bank of the

Philippines intentionally revealed the intervention plan from the market opening. As a result, the U.S.

dollar/peso exchange rate remained within a narrow range of PHP 45.25–45.35 on Thursday, January 23,

as well as on Friday, January 24. In the end, trading closed for the week at PHP 45.31 to the U.S. dollar

on Friday, January 24, and the weekly high was the PHP 45.38 that was observed on January 22. Thanks

to the active market intervention carried out by the central bank of the Philippines, the U.S. dollar/peso

exchange market has not been seriously affected by the sharp depreciation of emerging currencies, such

as that of the Argentinean peso seen on Thursday, January 23 (as of January 27).

Interest rates

The short-term Treasury bill auction held on Monday, January 6 was the first auction held this year. As

a result, the interest rate for 92-day bills was 0.693%, up 0.692% from the rate at the previous auction

(held on November 4), and the interest rate for 364-day bills was 1.079%, up 0.801% from the rate at the

previous auction. The auction for 182-day bills was cancelled, as the subscribers’ yield was above the

annual average yield of a 364-day bill (1.479%), and the issuance was postponed all together. As the

government is not in serious need of capital, the government has been postponing the issuance of

Treasury bills to avoid the appreciation of the interest rate. However, more market participants have been


January 31, 2014 32

expecting yields from short-term peso Treasury bills, as interest rates are expected to rise in the future as

a result of the QE tapering started in the U.S.

The December Consumer Price Index was released on Thursday, January 7, and the result was up

4.1% year-on-year, recording the highest level since January 2012. This is due to the fact that food prices

have appreciated as a result of the damage caused by Typhoon Haiyan (known as “Typhoon Yolanda” in

the Philippines), which hit Visayan Island in November. However, the annual average inflation rate for

2013 was 3.0% year-on-year, remaining at the lower end of the 3.0%–5.0% range—the target range set

out by the central bank of the Philippines.

The interest rates of long-term Philippine bonds have been sharply appreciating since the beginning of

January, and there were rumors about overseas investors selling Philippine bonds. As peso interest rates

are expected to rise in the future, the U.S. dollar/peso swap market shows a premium even for short-term

deals. This immediately solved the issue of the negative interest rates seen for short-term deals. Since

November, the inflation rate has been on an uptrend, even though it has partly been caused by natural

disasters such as the typhoon. Therefore, the policy interest rate (SDA) that has been kept at the same

level for a long period may have to be changed at some point. The central bank of the Philippines has set

out the target inflation rate for 2014 at 3.0%–5.0%, as was the case in the previous year. The policy

interest rate may be raised in the middle of this year, depending on the degree of global economic

recovery, as well as on the depreciation of the peso (as of January 27).

Stock market

In January, the Philippine stock market opened at PHP 5,923.72 on Thursday, January 2. While there

was no particular factor to influence the market, stock prices remained at the same level. However, the

December employment statistics of the U.S. were to be released on January 10, and expectations were

growing for strong figures, fueling fears for the further tapering of quantitative easing. As a result, the

PSEi depreciated on January 9 and 10, reaching its monthly low at PHP 5,842.88 on Friday, January 10.

The December employment statistics of the U.S. were released on January 10, and the number of

non-agricultural employees turned out to be lower than expected. This was seen as a factor to delay

further QE tapering in the emerging stock markets. As a result, the Philippine stock market was

strengthened for a while. Furthermore, on Tuesday, January 21, the IMF revised the estimated growth

rate of the Philippines’ GDP for 2014 upward from the 6.0% announced in October to 6.3%. Positively

responding to this revision, the stock prices exceeded PHP 6,000 and reached 6,191.50 on Friday,

January 24.

However, risk-averse sentiment spread in the stock markets in developed countries in reaction to the

depreciation of the emerging currencies that started with the sharp depreciation of the Argentinean peso

seen on January 23. With such sentiment in the market, Philippine stocks also depreciated remarkably on

Monday, January 27 after the weekend. Trading closed at PHP 6,081.61, weaker by PHP 109 (as of


January 31, 2014 33

January 27).

2.2

2.25

2.3

2.35

2.4

43

43.5

44

44.5

45

45.5

13/10 13/11 13/12 14/01

（JPY)（PHP) USD/PHP PHP/JPY


With the U.S. dollar strengthening and with emerging currencies weakening globally, the U.S. dollar is expected to appreciate against the peso in the U.S. dollar/Philippine peso exchange market. The peso is more likely to depreciate during the first half of the year, as the amount of OFW remittances tends to decrease by 20% compared to its peak time. As the central bank of the Philippines is ready to intervene in the market to protect the peso with a healthy supply & demand balance, the peso is expected to depreciate only slowly in the times ahead.

Expected Ranges Against the US$: PHP 44.00–46.00

Against the yen: JPY 2.20–2.38

In December last year, the FRB started to taper quantitative monetary easing. On Friday, January 10,

the December employment statistics of the U.S. were released, but the figures were not as strong as

expected. As a result, market participants expect the QE tapering to be relatively slow, bringing stability

back to the emerging markets. With regard to currencies, however, the U.S. dollar continued to be strong,

making it likely for the peso to remain on a downtrend until market participants stop expecting the U.S.

dollar interest rates to increase in the future.


January 31, 2014 34

Even though there are persistent concerns about foreign capital flowing out of emerging countries,

there has not been much foreign capital in the Philippines compared to other countries. Furthermore, as is

shown with the news that the Philippines achieved investment grade by Moody’s in October last year, the

Philippines was just about to prosper. Therefore, it would not be necessary to fear further capital outflow

from the Philippines in the times ahead just because QE tapering has begun. The more serious question

would be how much foreign capital the Philippines can receive in the times ahead.

As the current account has maintained a surplus, there has been no serious issue with regard to

financial matters. The inflation rate has been low and stable with a growth rate at around 7%. Thus, the

Philippine peso will never be sold randomly even if it is not bought actively.

Around 10 million people—which is roughly 20% of the labor population of the Philippines—are

engaged in labor in the U.S. and in the Middle East. Remittances from these overseas Filipino workers

(also known as “OFWs”) to the Philippines have been supporting consumption in the Philippines and

playing a leading role in the economic growth of the country. Thanks to OFW remittances, the trade

deficit of the country has been supplemented, turning the current account balance into a surplus and

contributing to the restoration of the international balance of payment of the Philippines. Thus, it would

not be too much to say that the most important export item from the Philippines is its “human resource

power.”

The amount of OFW remittances exceeded USD 2 billion in October, renewing its all-time high. The

total volume traded in transactions involving the peso in the Manila foreign exchange market was USD

15 billion in October. This means that OFW remittances account for 13% of the market size, and this is

the most important price determination factor. OFW remittances are highly seasonal, and the amount

reached its peak in the October–December quarter. It can be said that it is thanks to OFW remittances

that the peso did not have to depreciate significantly while the U.S. dollar was appreciating against

overall emerging currencies globally, with growing expectations for the U.S. to start QE tapering.

Even though the October–December quarter GDP is expected to be slightly weaker due to the damage

caused by Typhoon Haiyan, which hit the Visayan Islands in the central Philippines in November, the

Philippine economy is forecast to maintain its annual growth at around 7.0%. The IMF has also estimated

that the Philippines would be able to achieve a growth of 6.3% in 2014. 70% of the Philippine economy

depends on personal consumption, and personal consumption in the Philippines depends on OFW

remittances. The amount of OFW remittances has been continuing to increase, and domestic

consumption remains rigorous.

As the manufacturing industry is small in the Philippines and as consumer products in the Philippines

are mainly imported, the trade balance of the Philippine is necessarily a deficit. However, OFW

remittances cover the trade deficit as nonrecurring income, keeping the current account balance with a

surplus. This is what is unique about the Philippines compared to India, Indonesia, and Brazil, keeping

the fiscal balance of the country healthy.

From a long-term perspective, the peso is expected to start appreciating again with foreign capital

flowing into the country. From a short-term perspective, however, there will be weaker factors to keep


January 31, 2014 35

the U.S. dollar from appreciating against the peso, as the amount of OFW remittances is expected to start

decreasing by around 20% compared to the peak time from January, due to a seasonal variation. It is thus

expected that the U.S. dollar/peso market will follow the uptrend of the U.S. dollar for the time being.


January 31, 2014 36

Yuki Katsumata, Heekyoung Jung, Seoul Treasury Department

Korean Won – February 2014


In January, the Korean won depreciated significantly in the U.S. dollar/won exchange market. The

trade statistics were released on January 1, and both imports and exports recorded a growth rate higher

than expected. In reaction to this, the exchange rate fell below KRW 1,050 to the U.S. dollar, which used

to be a psychological turning point, and reached KRW 1,048.3 on January 2. However, the U.S. dollar

was bought thereafter, which seems to be market intervention carried out by the Korean monetary

authorities, and the U.S. dollar/won exchange rate returned to the KRW 1,050 level. As a result,

risk-taking positions were unwound, leading stock prices to fall and encouraging won-selling. Thereafter,

won-selling accelerated due to the fact that the Institute for National Security Strategy under the Korean

National Intelligence Service pointed out the possible risk of North Korea staging provocations, as well

as that an U.S. security company mentioned the possibility for the monetary policy committee to lower

the interest rate at earliest at its meeting scheduled for January 9, recommending to take short positions

on the won. On January 7, the U.S. dollar/won exchange rate reached the KRW 1,071 level.

On January 9, the Korean Monetary Policy Committee unanimously decided to maintain the policy

interest rate. As a result, market participants stopped selling the won and started to buy back the won.

Exporting companies also intermittently sold the U.S. dollar, and the U.S. dollar/won exchange rate

returned to the KRW 1,061 level before the announcement of the employment statistics of the U.S. On

January 10, the December employment statistics of the U.S. were released, and the unemployment rate

was 6.7%, significantly stronger than the expected level of 7.0%. However, the number of

non-agricultural employees (the change from the previous month) increased by 74,000, significantly

lower than the expected mean of an increase of 190,000–200,000. In response to this, the U.S. dollar was

sold against overall currencies in the foreign exchange market. The U.S. dollar was also sold in the U.S.

dollar/won exchange market as well, as the exchange rate once reached the mid-KRW 1,050 level.

However, importing companies were buying the U.S. dollar, and the economic indices of the U.S.

released thereafter were strong, which fueled expectation for the continuation of QE tapering (which had

once decreased after the announcement of the employment statistics). As a result, the U.S. dollar/won

exchange rate climbed to the KRW 1,065 level on January 16.

On January 22, the won was sold, and the U.S. dollar/won exchange rate reached the KRW 1,070 level,

with position adjustment in preparation for the Chinese New Year. The October–December quarter real

GDP growth rate was announced on January 23, and the result was up 0.9%, as had been expected (the

annual growth rate was up 2.8%) without impacting the market. The IMF indicated its view that the

growth of Korea will accelerate to 3.7% in 2014 despite downward risks in the Korean economy, but its


January 31, 2014 37

impact in the market was limited, and the won remained on a downtrend. On January 27, the U.S.

dollar/won exchange rate continued rising and approached KRW 1,090 for the first time in around four

months.

9

9.2

9.4

9.6

9.8

10

10.2

1040

1050

1060

1070

1080

1090

13/10 13/11 13/12 14/01

（JPY)（KRW) USD/KRW KRW/JPY


Risks of temporary position adjustment require attention.

Expected Ranges Against the US$: KRW 1,060–1,110

Against the yen: JPY 9.25–9.80 (KRW100)

(KRW 10.20–10.80)

The U.S. dollar/won exchange rate is forecast to approach the KRW 1,100 level in February. The

exchange rate is likely to be at around KRW 1,100 to the U.S. dollar. Comparing the economic growth

rate, consumer price, and the situation in the labor market in Korea and those in other countries that have

recently cut the interest rate, it is still difficult to expect the central bank of Korea to cut the interest rate

at the current moment. However, the sharp appreciation of the won as a result of multiple factors may be

cancelled out rapidly given the risk of growing expectation for the continuation of QE tapering by the

FRB after the announcement of the January employment statistic of the U.S., as well as the risk of a

negative view growing against overall emerging countries when the media reports on the shadow

banking issue in China and the political instability in Thailand. From a technical point of view as well,

won-selling risk is high for the moment, as both the U.S. dollar/won exchange rate and the Japanese

yen/Korean won exchange rate have exceeded the resistance point.


January 31, 2014 38

With regard to the trade balance of Korea, on the other hand, many institutions forecast that it will

remain stable in 2014. Furthermore, as has also been pointed out by the IMF, domestic demand is also

expected to boost this year. Therefore, from the point of view based on actual demand through trade and

capital flows, demand for the won is expected to remain high in the times ahead.

It is also important to pay attention to the fact that according to the report on the foreign exchange

market released by the Bank of Korea the other day, the net amount of domestic-currency forward

(FWD) transactions have exceeded U.S. dollar-buying (won-selling) in the third and fourth quarters.

During these periods, the won appreciated significantly against the U.S. dollar, and it can be deduced that

many exporting companies were hesitant about selling the U.S. dollar. If the U.S. dollar appreciates

against the won to the level around KRW 1,100, those companies are likely to start selling the U.S. dollar,

which can also be a factor to keep the exchange rate low.

For these reasons, the U.S. dollar is expected to appreciate during the first half of the month, while the

trend is likely to reverse in the second half of the month.

3. Topics

Economic Outlook for 2014

Source: Bank of Korea

1. Economic growth

a) The GDP growth rate for 2014 is estimated to be up 3.8% year-on-year (up 3.9% for the first half

of the year and up 3.7% for the second half of the year). (The growth rate for 2013 was up 2.8%.)

The growth rate for 2015 is expected to reach up 4.0%.

b) The strength of the economic recovery is expected to remain, as the improved domestic demand,

such as consumption and investment, is likely to keep the momentum for exports.

c) In terms of the contribution to the GDP growth rate for 2014, domestic demand (1.8% p) and

exports (2.0% p) are roughly at the same level.

d) The Gross Domestic Income (GDI) growth rate (4.8%) is expected to exceed the GDP growth

rate (up 3.8%), as was the case in the previous year, due to the improvement in the trade

environment based on the stability of import unit prices, as a result of, for example, the

depreciation of the international crude oil price.

2. Employment

a) The number of those employed for 2014 is estimated to increase by 430,000. The figure is

expected to increase further by 450,000 for 2015.

b) The unemployment rate is expected to be 3.0%, and the employment rate is expected to be at the

59.9% level (whereas the OECD standard level is 65.2%).


January 31, 2014 39

3. Consumer prices

a) The growth rate of consumer prices (annual average) for 2014 is expected to be up 2.3%

year-on-year.

b) The growth rate of consumer prices excluding agricultural, marine, and petroleum products and

the growth rate of consumer prices excluding food and energy are expected to be up 2.7% and

up 2.4%, respectively.

4. Current account balance

a) The current account surplus for 2014 is expected to be at the USD 55 billion level (USD

26.5 billion for the first half of the year and USD 28.5 billion for the second half of the year).

The current account surplus is expected to be at the USD 45 billion level for 2015

b) The current account surplus as a percentage of GDP is expected to decline from 5.7%–5.8%

in 2013 to 4.1%–4.2% in 2014 and 3.1%–3.2% in 2015.

5. General evaluation

a) In the times ahead, the Korean economy will see an equilibrium of various factors and therefore

will continue growing in a neutral manner, as there will be negative factors, such as

uncertainty in the global monetary market as a result of QE tapering as well as the possible

depreciation of the Japanese yen and risks related to North Korea, while there are also

positive factors such as the accelerated economic recovery in the U.S. and Europe.

b) Overall consumer prices are expected to remain neutral, given the appreciation of agricultural

and marine products and the depreciation of international material prices as a result of the

slowdown in the global economic recovery.


January 31, 2014 40

Junji Tsujino, Taipei Treasury Department

New Taiwan Dollar – February 2014


Even though the NT dollar had already been depreciating in the U.S. dollar/NT dollar exchange

market since the previous year, the NT dollar continued depreciating further in January, due to the fact

that the U.S. dollar rallied while the Korean won was depreciating.

In January, the U.S. dollar/NT dollar exchange market opened at around TWD 29.80 to the U.S. dollar.

While the Chinese yuan continued appreciating, the pressure to buy the NT dollar strengthened slightly at

the beginning of the year. However, the NT dollar depreciated against the U.S. dollar to the TWD 29.90

level on January 2, negatively reacting to the fact that the December HSBC Manufacturing PMI for

China was revised downward. Thereafter, market participants started to sell the Korean won as well,

which led the U.S. dollar/NT dollar exchange rate to approach TWD 30.00 on January 6. The NT dollar

continued depreciating on January 7 and reached TWD 30.10 to the U.S. dollar, following the flow in the

Korean won exchange market. Even though there were some U.S. dollar buybacks after the

announcement of the U.S. economic indices before the release of the employment statistics, there was no

remarkable movement in the NT dollar exchange market.

Toward the middle of the month, the December employment statistics of the U.S. were released on

January 10 with figures significantly lower than the market estimate. In reaction to this, the NT dollar

appreciated and temporarily reached TWD 29.945 to the U.S. dollar in the morning of January 13, after

the weekend. However, this was only a temporary trend, and the exchange rate returned to TWD 30.00 to

the U.S. dollar. NT dollar-selling gradually increased from January 14, as the Korean won continued

depreciating. As a result, the U.S. dollar/NT dollar exchange rate recovered to last week’s level of TWD

30.1 on January 15.

Toward the end of the month, the NT dollar continued depreciating slowly. On January 20, the

October–December quarter GDP of China was announced with a figure stronger than the market estimate.

However, this did not dramatically impact the NT dollar exchange market, and the U.S. dollar/NT dollar

exchange rate continued fluctuating at around TWD 30.10. On January 21, the trend in the Chinese yuan

market was reversed due to concerns about default investment products in China, leading the Chinese

yuan to depreciate. The political uncertainty in Thailand also affected the NT dollar exchange market. As

a result, the NT dollar continued depreciating and approached TWD 30.15 to the U.S. dollar. On January

23, the January Manufacturing PMI of China was announced with a weak figure, in reaction to which the

discount margin narrowed in the currency swap market, and NT dollar-selling continued in the market.

The U.S. dollar/NT dollar exchange rate remained at around TWD 30.20 throughout the day. On January

24, risk-averse sentiment grew in the market due to the instability in the foreign exchange markets in


January 31, 2014 41

emerging countries such as Argentina, as observed during the night of the previous day. Following this

trend, the NT dollar was sold as well, leading the U.S. dollar/NT dollar exchange rate to the TWD

30.20–30.25 level.

Toward the end of the month, risk-averse sentiment strengthened and the NT dollar depreciated further.

On January 27, the U.S. dollar/NT dollar exchange rate immediately exceeded the TWD 30.30 level,

occasionally reaching the upper-TWD 30.30 level. On January 28, the NT dollar depreciated and the

exchange rate once approached TWD 30.40 to the U.S. dollar in the morning. However, investors started

gradually buying back the NT dollar thereafter, thanks to the media report that China avoided the default

of its investment products, and thus the exchange rate returned to the lower-TWD 30.30 level to the U.S.

dollar. On January 29, Turkey raised its interest rate, fueling a sense of relief in the market, although NT

dollar was bought back only to a limited degree. The exchange rate remained at around TWD 30.30 to

the U.S. dollar.

In January, the Japanese yen appreciated in the NT dollar/Japanese yen exchange market, as the NT

dollar was depreciating in the U.S. dollar/NT dollar exchange market, while the depreciation of the

Japanese yen was slowing down in the U.S. dollar/Japanese yen exchange market since the beginning of

the year.

The NT dollar/Japanese yen exchange market opened at the lower-JPY 3.50 level. The Japanese yen

was weakening at the beginning of the month, as can be seen in the fact that the U.S. dollar/Japanese yen

exchange rate exceeded JPY 105. However, the appreciation of the U.S. dollar/Japanese yen exchange

rate started to slow down at around the JPY 105 level thereafter. Following this trend, the NT

dollar/Japanese yen exchange rate returned to the level below the JPY 3.50 level.

Toward the middle of the month, the Japanese yen continued appreciating with the release of the

December employment statistics of the U.S. Immediately after the release of the employment statistics,

the Japanese yen appreciated to temporarily reach the level near JPY 3.43 to the NT dollar. Even though

the trend was reversed and the Japanese yen depreciated thereafter, the NT dollar/Japanese yen exchange

rate remained at the mid-JPY 3.40 level.

Toward the second half of the month, risk-averse sentiment was slightly dominant in the market due to

the fact that currencies depreciated sharply in emerging countries, such as Turkey and Argentina, on

January 23. Under such conditions, the Japanese yen appreciated in the U.S. dollar/Japanese yen

exchange market and the NT dollar depreciated in the U.S. dollar/NT dollar exchange market. As a result,

the Japanese yen appreciated significantly in the NT dollar/Japanese yen exchange market. The Japanese

yen was bought back, and the exchange rate returned to the level near JPY 3.40 to the NT dollar.

Toward the end of the month, the Japanese yen continued appreciating against the NT dollar and once

reached the JPY 3.30 level on January 27, as a result of the fact that the Japanese yen was appreciating in

the U.S. dollar/Japanese yen exchange market. However, the NT dollar/Japanese yen exchange rate

gradually rose again and reached the JPY 3.40 level on January 29.


January 31, 2014 42

3.25

3.3

3.35

3.4

3.45

3.5

3.55

29

29.2

29.4

29.6

29.8

30

30.2

30.4

30.6

13/10 13/11 13/12 14/01

（JPY)（TWD) USD/TWD TWD/JPY


Even though the NT dollar had already been depreciating, the NT dollar is likely to easily follow factors of depreciation. Expected Ranges

Against the US$: NT$ 29.90–30.60


In February, the U.S. dollar/NT dollar exchange market is expected to easily follow factors to lead the

NT dollar to depreciate against the U.S. dollar for a while, while it is not likely to follow factors to lead

the NT dollar to appreciate against the U.S. dollar. However, the depreciation of the NT dollar is

expected to be limited as the U.S. dollar/NT dollar exchange rate is approaching its lowest level (the

TWD 30.60 level) since it recovered from the Lehman Shock (in 2011).

Major economic indices announced in January include the following. Period Result Period Result Period Result

Real GDP (year-on-year, seasonally unadjusted)

October–December 2013

+2.92% July–September 2013

+1.58% April–June 2013

+2.49%

Export value* (year-on-year, converted into USD)

December +1.2% November +3.4% October +0.7%

Export order (year-on-year, converted into USD)



January 31, 2014 43

Industrial production (year-on-year)

December +5.07% November –0.12% October +0.78%

Unemployment rate (seasonally adjusted)

December 4.12% November 4.15% October 4.17%

Consumer Price Index (year-on-year)


(Note: With regard to exports, there was an error in the calculation carried out by the government and

the figures have been revised going back to October 2013.)

Even though the December export value recorded only a small increase, the export value for China

continued growing steadily and recorded year-on-year growth of 5.1%. Both the export orders and

industrial production recorded a strong figure, which is partly because of transactions to prepare for the

Chinese New Year. The overall year-on-year increase of the export value was USD 314 million. By

country, the increase of the export value for China was USD 533 million, while the export value for other

countries has decreased. In particular, the total of the export value for the second to 10th largest trade

partners decreased by USD 399 million, which is a source of some concern. Given the January

Manufacturing PMI of China recently announced, the exports for China are likely to decrease in the

times ahead. Therefore, it is important to observe the market carefully after the Chinese New Year. In the

foreign exchange market, the NT dollar has not reacted positively to the strong figures in the economic

indices, showing that the strength of the economic indices has little impact on the foreign exchange

market.

Even though the NT dollar had already started depreciating since December, before the depreciation of

its closely related currencies such as the U.S. dollar and the Korean won, the NT dollar started to follow

the markets of these currencies after hitting bottom in the middle of December. Compared to the U.S.

Dollar Index and the Korean won, the NT dollar has been on a more remarkable downtrend since the

beginning of the previous year. However, for the times ahead, it is important to consider the linkage

among these three currencies again. If the current instability in emerging countries persists, the NT dollar

would depreciate, following the depreciating Korean won. Even if the currency markets calm down, the

U.S. dollar would be bought back, and it is possible that the NT dollar will still depreciate as a result.

Thus, the NT dollar is likely to continue depreciating for the time being. However, the NT’s low since

the recovery from the Lehman Shock is at the TWD 30.60 level observed during the first half of October

2011. As it would be very unnatural for the NT dollar to depreciate exceeding the TWD 30.60 level

without any specific event to increase risk-averse sentiment in the market, the depreciation of the NT

dollar is expected to be limited.

3. Topics

umber of Taiwanese visitors in Japan


January 31, 2014 44

As has already been reported by the media, the number of foreign visitors in Japan increased

significantly in 2013, and the figure renewed its all-time high. According to the annual statistics for 2013

released by the Japan National Tourist Organization, the number of Taiwanese visitors in Japan recorded

the largest increase, as can be seen in the below table.

Top five countries of origin for visitors in Japan

2012 2013 Increase or decrease

Year-on-year growth rate

Korea 2,042,775 2,456,100 +413,325 +20.2% Taiwan 1,465,753 2,210,800 +745,047 +50.8% China 1,425,100 1,314,500 –110,600 –7.8% U.S. 716,709 799,200 +82,491 +11.5% Hong Kong 481,665 745,800 +264,135 +54.8%

(Unit: Number of people; data source: Japan National Tourist Organization)

The population of Taiwan is around 23 million. Even though the above statistics are based on the

cumulative total number of people, a simple calculation tells us that roughly one out of every 10 people

visited Japan. It is also interesting to see the number of people who left Taiwan. According to the

statistics released by the Tourism Bureau of Taiwan, the total number of people who left Taiwan in 2013

was 11.05 million, excluding those of foreign origin, which is about half of the Taiwanese population.

The cumulative total number of Japanese people who left Japan during the period from January to

November in 2013 was 15.99 million (according to immigration statistics), and the cumulative total

number of people who left Korea (with a population of 50 million) during the period from January to

November in 2013 was 13.64 million (according to the Korea Tourism Organization). In terms of the

ratio for the population, it can be said that the number of people who left Taiwan is remarkably high.


January 31, 2014 45

Takaaki Shimada, Hong Kong Treasury Department

Hong Kong Dollar – February 2014


Hong Kong dollar spot exchange market in January: The Hong Kong dollar weakened due to

concerns about the emerging market.

The Hong Kong dollar depreciated in January. The U.S. dollar/Hong Kong dollar exchange market

opened at the HKD 7.7542 level, and the exchange rate fluctuated at around the same level without many

signs of movement during the first half of the month. From the middle of the month, however, the Hong

Kong dollar started to slowly depreciate. Furthermore, in the second half of the month, the preliminary

figure for the January HSBC Manufacturing PMI of China turned out to be weak on Thursday, January

23, while the Argentinean peso was depreciating sharply. As a result, the Hong Kong dollar depreciated

rapidly. Trading closed at HKD 7.7622 to the U.S. dollar on Monday, January 27, local time.

Hong Kong dollar short-term interest rates in January: The Hong Kong dollar short-term

interest rates remained generally low with sufficient fund supply in Hong Kong, with low

short-term interest rates in the U.S.

As has been the case so far, the Hong Kong dollar short-term interest rates in January remained

generally low with sufficient fund supply in Hong Kong, with low short-term interest rates in the U.S.

Trading closed on Monday, January 27, with the one-month HIBOR at 0.21357% (versus 0.21000% at

the end of the previous month), the three-month HIBOR at 0.38071% (versus 0.37714% at the end of the

previous month), and the one-year interest rate at 0.87143% (versus 0.86643% at the end of the previous

month).

Hong Kong stock market in January: Stock prices in Hong Kong depreciated due to the

cautious attitude in the market concerning the deterioration in Chinese economic indices as well as

the situation in emerging markets.

The benchmark Hang Seng Index in January depreciated due to the cautious attitude in the market

concerning the deterioration in the Chinese economic indices as well as the situation in emerging markets.

In the first half of the month, the Hang Seng Index fell due to the fact that the December Purchasing

Manager Index (PMI) turned out to be weak. In the middle of the month, the index remained at the same

level, as there was no particular factor to influence the market. In the second half of the month, however,

the index fell sharply, as the preliminary figure for the January HSBC Manufacturing PMI of China

turned out to be weak and as market participants grew cautious about emerging markets, having seen the

sharp deterioration of the Argentinean peso. The Hang Seng Index closed trading on Monday, January 27


January 31, 2014 46

at 21,976.10 (versus 23,306.39 at the end of the previous month) by falling 5.7% from the previous

month’s closing level.

12.3

12.5

12.7

12.9

13.1

13.3

13.5

13.7

7.75

7.752

7.754

7.756

7.758

7.76

7.762

7.764

7.766

7.768

13/10 13/11 13/12 14/01

（JPY)（HKD) USD/HKD HKD/JPY


The Hong Kong dollar is expected to depreciate moderately.

Expected Ranges Against the US$: HK$ 7.7610–7.7660


Hong Kong dollar spot exchange market in February: The Hong Kong dollar is expected to

depreciate moderately.

The Hong Kong dollar is expected to depreciate moderately against the U.S. dollar in the Hong Kong

dollar spot exchange market in February. The December employment statistics of the U.S. were released

on January 10 and the number of non-agricultural employees turned out to be an increase of 74,000,

significantly weaker than the market estimate. However, the majority of the market participants saw this

as a result of the cold wave that would not impact any decisions regarding QE tapering at the FOMC

meeting scheduled for January 28 and 29. Furthermore, the preliminary figure for the January HSBS

Manufacturing PMI of China was recently released, and the result was 49.6 with a decline from 50.5, the

previous month’s result. As the figure fell below 50, which is the economic turning point, for the first

time in six months, the Hang Seng Index recorded the largest rate of decrease for the first time in three

weeks, casting a dark cloud over the economic outlook in China. The Hong Kong dollar has been

depreciating against the U.S. dollar since the middle of January and recorded a daytime fluctuation range


January 31, 2014 47

larger than 50 pips on January 24 for the first time in about half a year. It is expected that there will

continue to be pressure to buy the U.S. dollar in February. However, in Hong Kong, there have been

many activities of fund procurement and investment, such as IPOs, and the Chinese yuan has been

appreciating. It is thus unlikely for the Hong Kong dollar to depreciate rapidly. The Hong Kong dollar is

therefore forecast to depreciate moderately.

Hong Kong dollar short-term interest rates in February: As has been the case so far, the Hong

Kong dollar short-term interest rates are expected to remain generally low, thanks to sufficient

funds in Hong Kong as well as low interest rates in the U.S.

As has been the case so far, the Hong Kong dollar short-term interest rates are expected to remain

generally low in February, thanks to sufficient funds in Hong Kong as well as low interest rates in the

U.S.

3. Topics Hong Kong ranked the highest in the Index of Economic Freedom for the 20th consecutive year.

Hong Kong ranked the highest for the 20th consecutive year in the 2014 “Index of Economic Freedom”

jointly released on January 14 by a U.S. think tank, Heritage Foundation, and the Wall Street Journal.

The Index of Economic Freedom gives each country a score out of 100, evaluating the degree of the

country’s economic freedom in terms of (1) rule of law, (2) regulatory efficiency, (3) limited government

regulation, and (4) open markets.

The average score in the 2014 index was 60.3, recording an all-time high. This has demonstrated that

overall economic freedom in the world has been increasing. The world’s top 10 countries in the 2014

index included the same countries as in the previous year’s index, except for the fact that the order of the

countries has changed. The U.S., which was ranked 10th last year, was ranked 12th this year, moving out

of the top 10, while Ireland, which was not among the top 10 countries, ranking 11th last year, was ranked

ninth this year (Japan ranked 25th, while only Hong Kong and Singapore are the only Asian countries that

are among the top 10 countries). The score for Hong Kong was 90.1, with an increase of 0.8 points

compared to 89.3, the score of 2013, exceeding the 90 level for the first time in five years since 2009. In

terms of the breakdown, the score for “labor freedom” increased by 9.3 points, while the scores for

“governmental spending” and “fiscal freedom” increased by 0.8 points and 0.1 points, respectively,

leading the overall increase of the score. On the other hand, the score for “freedom from corruption”

decreased by 1.7 points.

The score for Singapore, which was ranked second with a narrow margin, was 89.4 points, with an

increase of 1.4 points from the previous year’s score. There is thus only a margin of 0.7 points between

Hong Kong and Singapore. Regarding the fact that Hong Kong ranked top in economic freedom for the

20th consecutive year, the Financial Secretary of Hong Kong John Tsang Chun-wah made a remark on


January 31, 2014 48

January 14, “Hong Kong serves as the international financial center, as well as the center for international

trade, the service industry, and distribution. Hong Kong should continue to use its superiority and

potential as momentum for further economic growth.” He also indicated his intention to provide an

environment that enables fair competition by maintaining rule of law as well as a low and simply tax

regime as a basis of economic freedom. It is possible for Singapore to replace Hong Kong as the freest

economy in the near future, and it can be said that the future measures taken by the Hong Kong

government would decide the destiny of Hong Kong as “a model case of economic liberalization” that

can lead the world.


January 31, 2014 49

Tomoko Washiashi, MHBK (China) Treasury Division

Chinese Yuan – February 2014


Foreign exchange market: Both the People’s Bank of China (PBOC) central parity rate as well as the

onshore and offshore actual trading rates renewed the all-time high for the yuan.

In 2013, the Chinese yuan appreciated by around 2.9%. In the Chinese yuan exchange market at the

beginning of 2014, the PBOC central parity rate steadily remained at around CNY 6.1000 to the U.S.

dollar, while the onshore yuan trading rate (hereinafter referred to as “CNY”) flattened out at CNY

6.0500. On the other hand, the offshore yuan trading rate (hereinafter referred to as “CNH”) followed the

trend from the end of the previous year and saw the continued appreciation of the yuan. Thus, the U.S.

dollar/yuan exchange rate reached the CNH 6.0300 level. The gap between the CNY and CNH expanded

to almost reach 200 pips for a moment. Thereafter, the CNY showed its strength at the CNY 6.0500 level,

and the CNH started to depreciate, leading the exchange rate to return to the CNH 6.0400 level.

In the middle of the month, the PBOC central parity rate was set at CNY 6.0930 toward a stronger

yuan. In response to this, both the CNY and CNH exchange rates renewed their high for the yuan at CNY

6.0406 and CNH 6.0160, respectively. This expanded the gap between the CNY and CNH exchange

rates further to almost 260 pips. In the second half of the month, however, the PBOC central parity rate

returned to the CNY 6.100 level, possibly due to the fact that the U.S. dollar was bought against other

currencies. The CNY exchange rate thus returned to a level near CNY 6.0500 again to avoid the lower

end of the accepted fluctuation range. Following this trend, the CNH also depreciated to the CNH 6.0400

level. As a result, the gap between the CNY and CNH exchange rates rapidly narrowed toward the end of

the month.

Interest rate market: Interest rates appreciated toward the middle of the month, although they were on a

downtrend at the beginning of the month.

The money market did not see many signs of movement at the beginning of the year, and a break was

seen in the market fluctuation. The seven-day repo interest rate remained at the 4% level, and the

one-month Shanghai Interbank Offered Rate (SHIBOR) remained at the lower-6% level, decreasing the

overall interest rate level. Thereafter, there were news reports on the IPO (initial public offering)

approval reopening as well as on the postponement of the fund supply operation as a regular open market

operation, against the expectations of market participants (for the seventh consecutive time since the end

of the previous year). In response to these, interest rates started to rise in the middle of January. Both the


January 31, 2014 50

seven-day repo interest rate and the one-month SHIBOR reached the 7% level. After that, the PBOC

announced that it had urgently supplied liquidity to major commercial banks through a large-scale open

market operation (total of CNY 375 billion) before the Chinese New Year, as well as a short-term

liquidity facility (SLF). As a result, the appreciation of interest rates slowed down and the seven-day repo

interest rate fell to the lower-5% level, while the one-month SHIBOR fell to the 6% level.

The SHIBORs and seven-day repo interest rate (closing rate) as of January 24 are as follows.

O/N SHIBOR: 3.7193 (versus 3.1480 at the end of the previous month)

1M SHIBOR: 6.8170 (versus 5.9130 at the end of the previous month)



Seven-day repo interest rate (closing rate): 5.01% (versus 5.40% at the end of the previous month)

15.5

16

16.5

17

17.5

6.02

6.04

6.06

6.08

6.1

6.12

6.14

13/10 13/11 13/12 14/01

（JPY)（CNY) USD/CNY CNY/JPY

2. Impact of the Major Indices on the Market Economic Indices Latest Data Key Points Real GDP growth Rae (fourth quarter in 2013)

+7.7% (YOY)

Even though the real GDP growth rate of China for the October–December quarter in 2013 was up 7.7% year-on-year with a slight decline from the previous result (up 7.8% year-on-year), it was still above the market estimate (up 7.6% year-on-year), demonstrating that the Chinese economy continues to grow in a steady manner, albeit slowly. The GDP growth rate for 2013 was up 7.7%, which is at the same level as the growth rate for 2012, achieving


January 31, 2014 51

7.5%—the target growth rate set out at the beginning of the year. In addition to the improvement in external demand, domestic demand has also increased, which makes it likely for the economy to continue growing steadily in 2014. However, attention is required, as there are financial risks, while the debt level of local governments remains high.

Manufacturing PMI (December)

51.0

According to the announcement of the National Bureau of Statistics of China, the December Manufacturing Purchasing Managers Index (PMI) of China was 51.0 with a slight decline of 0.4 points from the previous month’s result. It was the first time that this index recorded a decline since June last year.

Trade statistics (December) Total export value Total import value Trade balance

(YOY) +4.3 % +8.3 % +USD 25.6 billion

According to the December trade statistics of China released by the Chinese customs authorities on January 10, exports increased by 4.3% YOY with the growth slowing down more than expected. This slowdown is considered to have been caused by the fact that the growth rate was calculated based on the previous year’s level, which was high, as well as that the regulation on certain speculative transactions under the guise of exports was strengthened. Imports increased by 8.3% YOY, exceeding the result in November as well as the market estimate, which was an increase of 5.3%, demonstrating the strength of domestic demand.

Price indices (December) CPI PPI

(YOY) +2.5% –1.4%

According to the National Bureau of Statistics of China, the December CPI of China was up 2.5% YOY. The appreciation of food prices has slowed down, leading to a decline of 0.5 points from the previous month in terms of the growth rate. The annual increase for 2013 was 2.6%, within the target range set out by the Chinese government, at “3.5% or below.” On the other hand, the December Producer Price Index (PPI) of China was down 1.4% YOY, recording a YOY decline for the 23rd consecutive month. Even though the Chinese economy has been growing in a steady manner, transactions among companies have not yet become active.

Money supply (December) M2

(YOY) +13.6%

The growth rate of M2 was up 13.6% YOY, with a decline from the previous month, which was up 14.2% YOY. Furthermore, new money loans denominated in Chinese yuan amounted to CNY 482.5 billion (USD 79.9 billion) in December, recording a decline from the CNY 624.6 billion seen in the previous month. This shows that the measures taken to control trust expansion by the People’s Bank of China have started to yield some effects.


January 31, 2014 52

In terms of the cumulative annual figures for 2013, the total social financing, which is an index used to indicate economic liquidity, was CNY 17.29 trillion with an increase of 9% YOY. The growth rate declined significantly, as total social financing increased by 23% YOY in 2012, demonstrating that the People’s Bank of China has started taking actions on shadow banking.


The yuan is expected to continue appreciating slowly. Expected Ranges Against the US$: CNY 6.0000–6.0600


Foreign exchange market: The Chinese yuan is expected to appreciate before the G20 meeting,

although the appreciation level is likely to be limited.

The Chinese yuan is expected to slowly appreciate in February. Also, a G20 Finance Ministers and

Central Bank Governors Meeting is scheduled for February 22 and 23 (Sydney, Australia). We should be

careful about the possibility of the Chinese monetary authorities leading the PBOC central parity rate

toward a stronger yuan before such an important event. At the moment, the yuan has been trading at

around the lower end of the trading range based on the central parity rate set out by the PBOC. We can

thus say that the appreciation of the yuan has currently been controlled through the PBOC central parity

rate. Therefore, if the PBOC central parity rate is set toward a stronger yuan before the G20 meeting, the

yuan is likely to temporarily appreciate. In the current market, the CNY 6.0000 level has been the turning

point. Although it is possible for the U.S. dollar/yuan exchange rate to approach this level, the pressure to

buy the U.S. dollar has still been fairly high based on actual demand. Furthermore, short-term interest

rates are expected to fall after the Chinese New Year, during which supply & demand balance tends to be

tight in the capital market, while the business indices to be announced in February are likely to be weaker

due to the deterioration in the domestic economic indices that were recently announced. For these

reasons, the yuan is expected to appreciate slowly at the CNY 6.02–6.03 level to the U.S. dollar, although

the U.S. dollar/yuan exchange rate is unlikely to sharply fall below the CNY 6.0000 level.

Interest rate market: Even though the appreciation of interest rates is expected to slow down, interest

rates are likely to fall only to a limited degree.

As it has been confirmed that the Chinese monetary authorities intend to control market liquidity when


January 31, 2014 53

interest rates rise to an excessive degree, interest rates are expected to remain relatively stable even after

the due date for this fund supply program. However, bank demand for fund procurement tends to

increase from January toward March every year, as client demand for loans grows during this period,

which is likely to keep the upward pressure on interest rates high. Thus, the interest rates are expected to

fall only to a limited extent.

4. Topics Instruction has been given to strengthen the regulations on shadow banking operations.

Xinhua News Agency, January 7: At its meeting held on January 6, the China Banking Regulatory

Commission (CBRC) specifies four kinds of operations: financial business, fiduciary business,

small-scale loan business, and collateralized loan business, pointing out that regulations concerning these

types of business should be strengthened. Furthermore, the China Banking Regulatory Commission has

instructed domestic banks to disclose various data such as unlisted assets as well as inter-bank liabilities.

The reopening of IPOs gathers investor attention in the market.

Xinhua News Agency, January 9: In the stock market in Mainland China, where initial public offerings

(IPOs) are scheduled to resume for the first time in more than a year, investors are carefully observing

which companies will undertake IPOs. On January 8, two companies, Guangdong Xinbao Electrical

Appliances Holdings Co Ltd and Zhejiang Wolwo Bio-Pharmaceutical Co Ltd, first started offerings. It

has been reported that the subscription ratio for institutional investors exceeded 100 for both companies.

The Chinese securities authorities indicated the IPO re-opening plan in December last year, in which

around 50 companies are to be listed on a stock exchange before the end of January.

The yuan conversion for China’s capital account balance is to be accelerated.

Xinhua News Agency, January 11: The national foreign exchange administration business meeting was

held on January 11. The State Administration of Foreign Exchange released its principle as agreed to at

the meeting, for China to accelerate the yuan conversion in capital balance (the convertibility of the

Chinese yuan in capital transactions), preventing influence from the cross-border inflow and outflow of

capital, while securing the bottle line of systematic and regional financial risks and promoting the healthy

and sustainable development of the economy. Furthermore, it has been revealed at this meeting that one

of the key operations for the People’s Bank of China (the central bank of China) is to continue expanding

the cross-border use of the Chinese yuan.

The People’s Bank of China releases financial statistics for 2013.

Xinhua News Agency, January 15: The People’s Bank of China (the central bank of China) released its

financial statistical data for FY2013 at the press interview held on January 15. According to the data


January 31, 2014 54

released at the interview, the total social financing in China reached CNY 17.29 trillion in 2013,

renewing the all-time high. The financial industry is seen to have contributed significantly to the

economy in the past year in terms of financing. According to the breakdown of the data, financing

denominated in Chinese yuan amounted to CNY 8.89 trillion while financing denominated in foreign

currencies was CNY 584.8 billion. The percentage of financing denominated in Chinese yuan in the total

social financing was 51.4%—the lowest level ever seen so far.

The announced December foreign exchange fund balance of China expands for the fifth

consecutive month.

Xinhua News Agency, January 16: According to the latest statistics released by the People’s Bank of

China (the central bank of China) on January 16, the foreign exchange fund balance for domestic

financial institutions on December 2013 recorded an increase of CNY 272.88 billion compared to the

previous month. The amount of net increase recorded positive growth for the fifth consecutive month.

The figure recorded a net decrease in June and July last year but the net increase has been expanding

since August.

The People’s Bank of China makes it possible to supply funds for smaller banks through SLF.

The People’s Bank of China, January 23: On January 20, the People’s Bank of China (the central bank of

China) announced its decision to start supplying funds to smaller banks using the Short-term Liquidity

Facility (SLF) that used to be only for large banks, in order to control the short-term interest rate market

that started appreciating sharply since the end of the previous week due to banks’ fund preparation before

the holidays of the Chinese New Year. At the same time, the PBOC also disclosed the fact that some

liquidity had urgently been supplied for commercial banks through an SLF. Furthermore, the total of

CNY 375 billion has also been supplied in the short-term monetary market through a reverse repo this

week. In reaction to these measures, concerns over the recurrent credit contraction have been mitigated in

the market and short-term interest rates in China fell significantly.


January 31, 2014 55

Yasuhiro Nakamura, Sydney Branch

Australian Dollar – February 2014


The Australian dollar remained weak in January due to the unsatisfactory figures in the December

employment statistics of Australia as well as due to a remark made by the director of the Reserve Bank of

Australia (BRA), who gave warning about the appreciation of the Australian dollar.

The Australian dollar/U.S. dollar exchange market and the Australian dollar/Japanese yen market

opened trading at the upper-USD 0.88 level and at the mid-JPY 93 level, respectively. The December

Manufacturing PMI of China was released on January 1, and the result was slightly below the market

estimate. As a result, the Australian dollar remained weak from the market opening on January 2.

However the December HSBC/Markit Manufacturing PMI was released on January 2, and the result was

as expected in the market, mitigating the growing concerns about the Chinese economy. As a result, the

depreciation of the Australian dollar slowed down as well. Thereafter, there were few factors to influence

the market, while market participants were gradually adjusting their long positions on the U.S. dollar that

accumulated during the second half of the previous year. Following this trend, the Australian dollar was

mainly bought back, and the exchange rate temporarily recovered to the USD 0.90 level. However,

market participants continued adjusting their positions further in various markets, and major global stock

prices continued falling globally, encouraging some market participants to sell the Australian dollar to

avert risks. The appreciation of the Australian dollar thus slowed down.

On January 7, the November trade balance of Australia was released, and the size of deficit was better

than the market estimate and the previous month’s result. However, the Australian dollar exchange

market reacted to this only to a limited degree, and the Australian dollar/U.S. dollar exchange rate

remained within a narrow range at around the lower-USD 0.89 level during the first half of the week. On

January 8, the December ADP employment statistics of the U.S. were released with strong figures,

fuelling expectations for the announcement of the December employment statistics of the U.S., which

had been scheduled for January 10. As a result, the U.S. dollar strengthened, leading the Australian dollar

to fall to the USD 0.88 level. On January 9, the November retail sales figure of Australia was released,

and the result was up 0.7% from the previous month, better than the market estimate, which was an

increase of 0.4% from the previous month, thanks to strength in the café and restaurant section as well as

the clothing section. As a result, the Australian dollar rallied to the lower-USD 0.89 level. However,

market participants were encouraged to sell the Australian dollar by witnessing the weakness in the Asian

stock market, and the Australian dollar immediately fell back to the mid-USD 0.88 level. After attracting

substantial attention in the market, the December employment statistics of the U.S. were released,

revealing that the unemployment ratio had significantly improved compared to the previous result, from


January 31, 2014 56

7.0% to 6.7%. However, the change in the number of non-agricultural employees was significantly

weaker than the market estimate. As a result, market participants grew increasingly skeptical about the

acceleration of QE tapering in the U.S., leading the U.S. dollar to depreciate against other major

currencies. The Australian dollar rapidly appreciated and approached the USD 0.90 level again.

U.S. dollar-selling was dominant at the beginning of the following week, as market participants

continued reacting to the result of the December employment statistics of the U.S. released last week.

Thus, the Australian dollar continued appreciating to the upper-USD 0.90 level. On January 14, the

December retail sales figures of the U.S. were released, and the result was strong enough to lead market

participants to buy back the U.S. dollar, resulting in the depreciation of the Australian dollar. On January

15, the following day, a series of economic indices from the U.S. were released, further encouraging U.S.

dollar buybacks. As a result, the Australian dollar continued depreciating and the Australian dollar/U.S.

dollar exchange rate approached USD 0.89. The December employment statistics of Australia were

released on January 16, and unemployment was 5.8%—as had been estimated in the market. However,

the change in the number of employees was a decrease of 22,600, significantly weaker than the market

estimate (an increase of 10,000 from the previous month). As the main reason for the decrease was the

decline in the number of full-time employees, it was taken more seriously in the market with regard to

the future employment environment in Australia than the figure itself would have been. Thus, the

Australian dollar depreciated sharply after the announcement of this figure to the upper-USD 0.87 level.

The Australian dollar remained weak in the second half of the month as well. Major economic indices

from China were released on January 20, and the results were within the estimated range with little

impact on the Australian dollar exchange market. On January 21, the October–December quarter CPI of

New Zealand was announced, and the result was higher than expected. Having seen this, expectations

grew in the market for the central bank of New Zealand to raise the interest rate at an early stage, leading

the New Zealand dollar to temporarily appreciate. However, the Australian dollar exchange market did

not react significantly to this event. The October–December quarter inflation figures for Australia were

released on January 22, and the CPI was up 2.7% year-on-year (whereas the market estimate was a

year-on-year increase of 2.4%) and the underlying inflation rate was up 2.6% year-on-year (whereas the

market estimate was a year-on-year increase of 2.3%), showing extraordinary strength. Market

participants thus expected interest rates in Australia to rise in the times ahead, and as a result, the

Australian dollar appreciated sharply to approach USD 0.89. However, the January HSBC manufacturing

PMI of China was released on January 23, the following day, and the result was 49.6, below the market

estimate of 50.3, without even reaching 50, which is considered to be the turning point. Therefore, a

sense of uncertainty grew in the market regarding the future of China, which reversed the trend, and the

Australian dollar started to depreciate. Thereafter, an RBA Committee member, Heather Ridout,

commented regarding the Australian dollar/U.S. dollar exchange rate on January 24, “Around USD 0.80

would be a fair deal for everybody” and “the Australian dollar hasn’t fallen far enough.” In reaction to

these remarks, the Australian dollar continued depreciating, and the Australian dollar/U.S. dollar

exchange rate fell below USD 0.87.


January 31, 2014 57

87

89

91

93

95

97

0.86

0.88

0.9

0.92

0.94

0.96

0.98

13/10 13/11 13/12 14/01

（JPY)（USD) AUD/USD AUD/JPY


The Australian dollar is expected to remain low in February, due to the downward pressure on long-term interest rates in Australia. Expected Ranges Against the US$: US$ 0.8600–0.8900


The October–December quarter CPI of Australia was released on January 22, and the result was

stronger than the market estimate. However, the inflation is mainly led by the cost appreciation in the

leisure travel and accommodation section, fruit and vegetables section, and tobacco section. The leisure

travel and accommodation cost increased as airfares reached their peak season. While it is turning

summer in Australia, a time at which many people plan a holiday, the Australian dollar continued

depreciating. It is considered that demand for overseas trips to Australia grew as a result of such

backdrop. The price of fruits and vegetables appreciated largely because the harvest was affected by bad

weather in some areas. The appreciation of the tobacco price is a result of the tax increase on tobacco,

which has been applied since December 1 last year. Thus, the appreciation of the inflation rate observed

this time is largely a result of temporary factors. It is therefore difficult for the RBA to see this as

continuous inflation pressure, and the outcome of the RBA Committee meeting scheduled for February 4

is unlikely to fuel inflation concerns.

The gap between the 10-year Australian government bond yield and the policy interest rate of

Australia (the spread between the long rate and the short rate) has been expanding since the second half


January 31, 2014 58

of last year, due to the fact that the monetary policy of the RBA has made it increasingly unlikely for the

interest rate to be reduced, while the rising long-term interest rates in the U.S. as a result of QE tapering

are influencing the long-term interest rate in Australia. The spread is currently close to 200 basis points.

In the past 15 years, excluding the period of the global financial crisis, the spread between the long rate

and the short rate has expanded to the maximum of the lower-200-basis-point level only twice, and the

current spread is close to the highest level seen in the past. Therefore, the expansion of the spread

between the long rate and the short rate is likely to slow down in the times ahead. (At the time of the

global financial crisis, the RBA cut the interest rate rapidly and the spread between the long rate and the

short rate expanded temporarily to the level just below 300 basis points.) The expansion of the spread

between the long rate and the short rate suggests an increase of expected inflation in the market. In the

past, the spread expanded significantly, twice, and the RBA started raising the interest rate immediately

on both occasions. By raising the interest rate, it is possible to lower expected inflation in the market, in

order to reduce the spread between the long rate and the short rate. Given that the RBA is unlikely to

raise the interest rate at this moment, as the December employment statistics have fuelled a sense of

uncertainty for the future outlook for the Australian employment market, the current expansion of the

spread between the long rate and the short rate can only be explained by the excessive rise of expected

inflation leading long-term interest rates to move away from the real economy. Therefore, now that the

spread between the long rate and the short rate is gradually narrowing compared to the levels observed in

the past, downward pressure on the long-term interest rate is likely to increase.

For the above reasons, the RBA Committee is unlikely to grow more cautious about inflation even

after the announcement of the strong figure of the October–December quarter CPI, which was announced

in January. Given the current spread between the long rate and the short rate, interest rates in Australia,

long-term interest rates in particular, are expected to start falling, which is likely to keep the Australian

dollar low.


January 31, 2014 59

Hiroaki Nakano, Singapore Treasury Department

India Rupee– February 2014


In January, the Indian rupee occasionally appreciated during the first half of the month. However, the

rupee depreciated toward the second half of the month.

The U.S. dollar/rupee exchange market opened for the month at the upper-INR 61 level. The December

HSBC Manufacturing PMI of India was announced on January 2, and the result was 50.7, recording a

decline from the previous result of 51.3. As a result, stock prices depreciated sharply for the first time in

six weeks. Following this trend, the rupee also depreciated, and the U.S. dollar/rupee exchange rate rose

to the mid-INR 62 level. Thereafter, stock prices in India remained weak, depreciating for five

consecutive days, and thus the U.S. dollar/rupee exchange rate remained at the mid-INR 62 level,

approaching the highest level observed in the previous month.

However, on January 7, Managing Director of the IMF Christine Lagarde mentioned a plan to revise

the global economic outlook upward for 2014. This remark fuelled risk-taking sentiment in the market

and caused Asian currencies to strengthen on January 8, local time. Following this trend, the Indian rupee

was also bought, and the U.S. dollar/rupee exchange rate fell to approach INR 62. Thereafter, the

December ADP employment statistics of the U.S. were released with strong figures, leading Asian

currencies to weaken on January 9. However, the rupee remained at around INR 62 to the U.S. dollar. On

January 10, the December trade balance of India was released and exports increased by 3.5%

year-on-year, slowing down from the previous month’s increase of 5.9%. On the other hand, imports

recorded a decline of 15.3% year-on-year, slightly better than the previous month’s decline of 16.4%.

The trade deficit was INR 630 billion, expanding from the previous month’s deficit of INR 570 billion.

The November industrial production of India was also below the expected level (the result was down

2.1%, whereas an increase of 0.8% was expected). However, this had little impact on the rupee exchange

market, and the U.S. dollar/rupee exchange rate remained at the upper-INR 61 level without violent

fluctuation. On the same day, the December employment statistics of the U.S. were released after

attracting substantial attention in the market, and the result was significantly below the expected level. As

a result, U.S. dollar-selling increased significantly. On January 13 in the following week, the U.S.

dollar/rupee exchange market opened at the mid-INR 61 level with some gap from the previous day’s

closing rate. The exchange rate once fell below INR 61.50 to the U.S. dollar. Thereafter, the December

Consumer Price Index of India was announced, and the result was up 9.87% year-on-year (whereas the

estimate was an increase of 10.06% year-on-year and the previous month’s result was an increase of

11.24% year-on-year). Subsequently, the December Wholesale Price Index of India was announced on

January 15, and the result was up 6.16% year-on-year (whereas the estimate was an increase of 6.99%


January 31, 2014 60

year-on-year and the previous month’s result was an increase of 7.52% year-on-year). Thus, both the

Consumer Price Index and the Wholesale Price Index fell below the expected levels and the previous

month’s results. As a result, stock prices appreciated, with fading expectations for the central bank of

India to raise the interest rate. Furthermore, the World Bank revised the global economic outlook upward,

which also fuelled risk-taking sentiment in the market. Consequently, rupee-buying increased, and the

U.S. dollar/rupee exchange rate fell occasionally to the lower-INR 61 level on January 17.

In the second half of the month, concerns grew over the possibility for the FOMC meeting, scheduled

to start on January 28, to agree to the continuation of QE tapering. As a result, overall Asian currencies

started weakening on January 20. Following this trend, the rupee also weakened, and the U.S.

dollar/rupee exchange rate once exceeded INR 62 on January 22. Thereafter, the January HSBC

Manufacturing PMI of China was announced on January 23, falling below 50 for the first time in six

months. Risk-averse sentiment persisted in the market on January 24, and overall emerging currencies

were sold in the market. As a result, the U.S. dollar/rupee exchange rate climbed to the upper-INR 62

level. Market participants continued selling emerging currencies, such as the Argentinean peso, in the

following week as well, and the U.S. dollar/rupee exchange rate rose to the lower-INR 63 level on

January 27.

However, the central bank of India unexpectedly decided to raise the interest rate by 0.25% at its

monetary policy meeting on January 28. The repo interest rate was raised to 8.00%. Thanks to this, the

pressure to sell the rupee was weakened, and the U.S. dollar/rupee exchange rate fell to the upper-INR 62

level. Furthermore, the central banks of the countries that were similarly facing the problem of currency

depreciation, such as Turkey and Brazil, released a statement to give warning about interest rate hikes

and currency depreciation, which mitigate concerns about the depreciation of emerging currencies. The

U.S. dollar/rupee exchange rate thus fell further on January 29 before the FOMC meeting, occasionally

reaching the lower-INR 62 level.

However, at its meeting held on January 29, the FOMC decided to continue QE tapering, as had been

anticipated in the market, while concerns about emerging markets were growing again. As a result, the

U.S. dollar/rupee exchange rate rose again and approached INR 63 on January 30.


January 31, 2014 61

1.55

1.6

1.65

1.7

1.75

60.5

61.5

62.5

63.5

64.5

13/10 13/11 13/12 14/01

（JPY)（INR) USD/INR INR/JPY


Key factors include business confidence within India as well as the monetary policy of the FRB. Expected Ranges Against the US$: INR 61.00–65.50


The Indian rupee is expected to remain weak in February 2014.

The central bank of India unexpectedly decided to raise the interest rate on January 28, and the repo

interest rate was thus raised to 8.00%. In its statement, the central bank of India expressed concerns more

than it had ever done before about the slowdown in the economic growth of the country caused by the

rising inflation rate. On January 21, the advisory committee of the central bank of India had just released

its proposal to use the Consumer Price Index as the country’s major inflation index and to lower it to a

level below 8% in a year, with the final target rate set at 4%. Currently, the inflation rate has still been

high, although it has slowed down slightly, which makes raising the interest rate once again the only

option for the central bank of India.

On the other hand, the trade balance of India shows that the trade deficit has fallen as a result of the

fact that imports have declined significantly, thanks to the measure to control the import of gold that was

introduced last year. However, the total import of gold has declined from the annual amount of USD 5–8

billion to around USD 1 billion, compared to the time before the introduction of the measure. This means

that there is currently almost no room to further reduce the trade deficit by controlling the import of gold

any longer. It is therefore difficult to expect a further fall of trade deficit or a trade surplus for India


January 31, 2014 62

unless exports start to increase. Thus, the pressure to sell the Indian rupee is expected to persist due to the

high inflation rate as well as the trade deficit.

The business confidence in India has been ameliorated compared to other emerging countries such as

Indonesia, making the Indian rupee more stable against the U.S. dollar since the second half of last year.

However, the FRB is expected to continue QE tapering in the times ahead, which is likely to strengthen

the pressure to buy the U.S. dollar. Under such circumstances, the Indian rupee is forecast to weaken in

February and beyond.

Key events in February include the announcement of the January trade balance of India scheduled for

February 10, the announcement of the January Consumer Price Index of India scheduled for January 12,

and the announcement of the January Wholesale Price Index of India scheduled for January 14.

This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report is based on information believed to be reliable, but Mizuho Bank, Ltd. (MHBK) does not warrant its accuracy or reliability. The contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment. Furthermore, this report’s copyright belongs to MHBK and this report may not be cited or reproduced without the consent of MHBK, regardless of the purpose.

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