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FX outlook 2018-19
The US dollar is Fed up
DBS Group Research 12 March 2018
Philip Wee
FX Strategist
The US dollar is making a comeback
previous 1.05-1.15 band seen after the ECB launched More Asian currencies have depreciated this year
quantitative easing (QE) in 2015. As the focus on % YTD vs USD, as of 9 March 2018
6 4.0
normalisation turns from the ECB to the Fed, the euro 3.5
4 2.7
should start to retreat from the ceiling of its new range. 1.5 1.5
2
Don’t expect a repeat of last year’s political/economic 0
surprises. Eurozone growth has started to moderate -2 -0.2 -0.3 -0.3
-1.8 -2.0
from its six-year peak of 2.8% YoY in 3Q17. German -4
Chancellor Angela Merkel has finally formed a grand -6 -4.3
THB MYR CNY TWD SGD KRW VND HKD IDR INR PHP
coalition but she and her allies have been weakened by
the process. An increase in Euroscepticism was evident at exceed its official target amidst a record-wide trade
the Italian elections on 4 March, but this was more about deficit this year. Unlike in 2017, the rupee and the rupiah
voters rejecting establishment parties than about exiting will be less immune to Fed hikes due to rising inflation
the EU. and higher 10-year bond yields in the US. Between the
two, higher oil prices are more negative for the rupee,
EUR/USD: a higher pre-normalisation range which has started to feel the spillover effects of the sell-
1.40 off in India’s bond market.
1.35 Pre-normalisation
1.30 range: 1.15-1.25
South & Southeast Asia: Countries with widening twin
1.25
deficits are more vulnerable to rising US rates
1.20 QE range: 1.05-1.15
1.15 % of GDP for years 2017, 2018, 2019 CA: Current Account
1.10 4
3
1.05
2
1.00 1 Budget
CA Budget CA Budget CA Budget Budget
14 15 16 17 18 0
-1 CA CA
-2
The yen should also weaken back into its 110-115 range -3
as rate differentials reassert themselves again, on the -4
precondition that global equities do not falter and result IN ID PH MY VN
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
Hong Kong dollar USD/HKD in the upper half of its convertibility band
2.00
(%, left) • Stress could, however, emerge if Fed hike
30,000 expectations turn too hawkish and trigger a sell-off
1.75
in global stock markets. If so, the HKMA will be
1.50 25,000
obligated to prevent the HK dollar from depreciating
1.25 out of its convertibility band. The HKMA could sell
20,000
1.00 Hang Seng Index Exchange Fund Bills (EFB) to lift short-term HKD rates
(right)
0.75 15,000 and narrow their differentials with their US
Jan-15 Jan-16 Jan-17 Jan-18 counterparts. The HKMA remains confident about
managing volatile markets and capital outflows, and
Growth moderates to official target range will be committed to defend the HKD peg at 7.85.
5 Real GDP, % YoY
4
Govt's 3-4%
• Finally, the HK dollar has yet to fulfill the four
3 growth forecast conditions listed by the HKMA to shift its peg
2
Govt's inflation forecast towards the Chinese yuan. These include 1) a fully
Underlying
3M Hibor inflation
convertible yuan; 2) a China with an open capital
1 % pa
CPI, % YoY
% YoY account without capital controls; 3) sufficient yuan
0
assets to support Hong Kong’s monetary base; and 4)
-1 a HK economy that is more synchronised with China
15 16 17 18
than the US.
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FX: The US dollar is Fed Up 12 March 2018
DBS forecasts • The Indian rupee has been stable within a 63-66
Year Q1 Q2 Q3 Q4 range vs the US dollar since 2Q17. This is unlikely to
USD/INR 2018 64.7 65.9 67.0 67.2
last. We expect rupee volatility to pick up this year
2019 67.4 67.6 67.8 68.0
Policy rate 2018 6.00 6.00 6.00 6.00 as India targets to lift GDP growth to 7-7.5% in FY19
% 2019 6.25 6.25 6.50 6.50 (ending March 2019) ahead of the general elections
10Y bond 2018 7.60 7.70 7.80 7.90 due in May 2019.
% 2019 7.95 8.00 8.00 8.00
FY15 FY16 FY17 FY18 FY19 • The central government led by the ruling Bharatiya
Real GDP 7.5 8.0 7.1 6.6 7.2
Janata Party’s (BJP) has decided to tolerate some
CPI 4.9 5.0 3.3 3.7 4.6
Curr a/c -1.1 -0.6 -0.7 -1.8 -2.2 fiscal slippage to address the key factors (youth
Budget -3.5 -3.7 -3.5 -3.5 -3.2 joblessness, the agrarian debt crisis) responsible for
% YoY for GDP & CPI, % of GDP for current account & budget balances its dismal performance at the Gujarati elections.
DBS forecasts in red, historical data in black. FY ends in March
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
DBS forecasts • The Malaysian ringgit has spent the past year
Year Q1 Q2 Q3 Q4 appreciating back to its strongest level seen in April
USD/MYR 2018 3.95 4.08 4.20 4.18
2016. Looking ahead, the positive factors that
2019 4.16 4.14 4.12 4.10
Policy rate 2018 3.25 3.25 3.50 3.50 propelled the ringgit to become Asia’s second best-
% 2019 3.50 3.50 3.50 3.50 performing currency in 2017 will start to wane.
10Y bond 2018 3.90 3.95 4.00 4.05
% 2019 4.10 4.10 4.10 4.10
• First, don’t expect the economy to repeat its robust
2015 2016 2017 2018 2019 5.9% growth seen in 2017. We have projected
Real GDP 5.0 4.2 5.9 5.0 5.0
growth to moderate to 5% in 2018, at the lower end
CPI 2.1 2.1 3.9 3.5 3.0
Curr a/c 2.9 2.1 3.0 2.8 3.2 of the government’s 5-5.5% target, but still remain
Budget -3.2 -3.1 -3.0 -2.8 -2.7 above the 4.2% low seen in 2016. More importantly,
% YoY for GDP & CPI, % of GDP for current account & budget balances growth is expected to be broader, with firmer
DBS forecasts in red, historical data in black
domestic demand offsetting some of the slack in the
external sector.
USD/MYR 9 Mar: 3.9115
4.60 4.60
• Second, the government has acknowledged the
4.40 4.40 rating agencies’ assessment that it would not be able
4.20 4.20 to meet its balanced budget goal by 2020, a target
4.00 4.00 likely to be extended to 2022-23. Faced with a tough
3.80 3.80 election that must be held by August, Prime Minister
3.60 3.60
Najib Razak increased spending in the budget
unveiled last October. To keep its sovereign debt
3.40 3.40
Jan-15 Jan-16 Jan-17 Jan-18 ratings within the A band, Malaysia will, however,
keep to a fiscal consolidation path by targeting a
Malaysia's growth/inflation to moderate lower in 2018 lower budget deficit of 2.8% of GDP vs 3% last year.
7 Real GDP, % YoY
BNM o/n policy rate, % pa
6 • Third, there will be at least two more Fed hikes in
5 March and June this year before the next rate
5-5.5% growth target
4 increase in Malaysia. On 25 January, Bank Negara
3 Malaysia started to normalise monetary policy with
2 2.5-3.5% inflation target a 25bps hike in its overnight policy rate (OPR) to
1 3.25%, its first increase in 3.5 years. Since then, CPI
CPI inflation, % YoY
0 inflation has fallen to 2.7% YoY in January, below the
15 16 17 18 policy rate. Unless inflation extends its decline below
this year’s official 2.5-3.5% target (which was
Stocks off peak, 10Y bond yield ease lowered from 3-4% last year), we see one more OPR
4.65 1,900 hike to 3.50% in 3Q18.
4.45 1,850
10Y bond
1,800
4.25 (%, left) • General election, or GE14, must be held on or
1,750
4.05 before 24 August. Prime Minister Najib and his
1,700
3.85 Barisan Nasional party need to secure 112 out of the
1,650
3.65 KL Comp Index 1,600 222 seats contested for a parliamentary majority.
3.45 (right)
1,550 The party won 133 seats in the last election held in
3.25 1,500 May 2013. The race is likely to be a close one, given
Jan-15 Jan-16 Jan-17 Jan-18
that five out of the 13 states are swing states, two of
which are governed by the opposition.
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FX: The US dollar is Fed Up 12 March 2018
Philippine peso The peso heading for a new record low in 1-2 years
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
33 50% Fibonacci 33 • The next Fed hike in March will push the US policy
retracement
32 range 32
rate above its Thai counterpart. For 2018, we see
three Fed hikes and none by the Bank of Thailand
31 31
Jan-15 Jan-16 Jan-17 Jan-18 (BOT). The Finance Ministry has upgraded its 2018
growth outlook to 4.2% from 3.8% on the
Thai stocks and bonds hold on to gains assumption that the policy rate remains steady at
3.25 1,900 1.50% throughout the year.
SET Index
3.00 (right) 1,800
2.75 1,700 • Thailand has been experiencing “growth optimism
2.50 1,600 without inflation”. After moving out of deflation in
2.25 1,500 2016, CPI inflation has not been able to rise above
2.00 10Y TH bond 1,400 the BOT policy rate, even as real GDP growth pushed
(%, left) above the BOT’s 1-4% inflation target in 3Q17.
1.75 1,300
1.50 1,200 Looking ahead, we expect Thailand’s growth to
Jan-15 Jan-16 Jan-17 Jan-18 remain strong around 4%, with inflation averaging
around 1.5% in 2018-19. Hence, we expect the BOT
Thailand is experiencing "growth without inflation" to refrain from rate hikes this year and to start
5
1-4% inflation target normalising rates only in 2019.
4
3 Real GDP, % YoY
• Unlike in the past couple of years, Thailand’s current
2 BOT 1D repo rate, % pa account surplus will narrow to less than 10% of GDP
1 amidst a wider fiscal deficit this year. This, coupled
0 with policy measures to encourage overseas direct
-1 investment and a stronger US dollar in the region,
-2 CPI, % YoY Core inflation, % YoY
should help the baht reverse some of its strong gains
14 15 16 17 18
over the past year.
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FX: The US dollar is Fed Up 12 March 2018
Vietnamese dong The dong is still stable, but not as steady as last year
DBS forecasts • The Vietnamese dong is, over the next couple of
Year Q1 Q2 Q3 Q4 years, unlikely to be as stable as it has been in past
USD/VND 2018 22,745 22,832 22,920 22,970
eight months. We expect the dong to break out of its
2019 23,020 23,069 23,120 23,170
Policy rate 2018 6.25 6.25 6.25 6.25 tight 22,700-22,750 range and depreciate towards
% 2019 6.50 6.50 6.75 6.75 and above 23,000 in 2018-19.
2015 2016 2017 2018 2019
Real GDP 6.7 6.2 6.8 6.4 6.6 • We expect the US dollar to recover this year on Fed
CPI 0.6 4.7 2.6 3.6 3.8 hikes supported by a stronger US growth/inflation
Curr a/c -0.1 4.1 1.3 3.2 4.0
outlook. Over the past few years, the dong has
Budget -5.0 5.0 -3.5 -3.7 -3.5
% YoY for GDP & CPI, % of GDP for current account & budget balances depreciated with its Asia ex Japan (AXJ) peers when
DBS forecasts in red, historical data in black the US dollar was strong, but remained stable
(especially in 2017) when the greenback weakened
USD/VND 9 Mar: 22762 against AXJ currencies.
23000 USD/VND 1.05
(left)
• The Vietnamese economy is unlikely to repeat last
22500 1.00
year’s stellar performance. The bar to beating this
year’s official 6.5-6.7% growth target is high. Robust
22000 0.95
export growth is set to moderate with global growth
21500 USD/AXJ 0.90 amidst more US-led protectionist measures. With
(right) public debt approaching the 65% constitutional limit,
21000 0.85 Vietnam needs to attract foreign investments. To
Jan-15 Jan-16 Jan-17 Jan-18
this end, Vietnam intends to step up its planned
divestment of hundreds of state-owned companies
GDP growth higher, inflation lower, trade deficit narrow
of around VND 5,000 tn or US$220bn (more details
US$mn, 12M rolling sum % YoY
will be available in 2Q18). This has become more
4,000 Real GDP 7
(right) 6 challenging this year because global equities have,
2,000
5 since February, been struggling to rise against a more
0 4 hawkish US rate outlook and a stronger US dollar.
-2,000 3 More so if the Ho Chi Minh stock index relinquishes
CPI
(right) 2 its position as Asia’s best performer this year.
-4,000
1
Trade balance (left)
-6,000 0
15 16 17 18
• To achieve this year’s growth target, the State Bank
of Vietnam (SBV) is targeting 17% credit growth in
Best stock market, and possibly bond market, in Asia 2018 after bank lending increased 18.2% in 2017.
8.00 1,200
Moody’s has been encouraged by the meaningful
Ho Chi Minh progress in resolving problem assets in the banking
7.50 1,100
stock index
7.00 (right) 1,000 sector. Fitch recently upgraded the ratings of three
6.50 900 Vietnamese lenders. We also noted that high growth
6.00 800 has not been accompanied by sharply higher
5.50 700 inflation and widening trade deficits.
5.00 600
10Y bond • Still, Vietnam should guard against complacency,
4.50 (%, left) 500
4.00 400 especially when investor confidence is strong.
Jan-15 Jan-16 Jan-17 Jan-18 Moody’s has cautioned against more monetary
accommodation to support headline growth at the
expense of macroeconomic stability. The World Bank
was wary that rapid credit expansion could
encourage excessive risk-taking and worsen asset
quality over the longer term.
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FX: The US dollar is Fed Up 12 March 2018
DBS forecasts • The Australian dollar has been in a new and higher
Year Q1 Q2 Q3 Q4 0.74-0.81 trading range against the US dollar since
AUD/USD 2018 0.78 0.76 0.74 0.75
June 2017, in line with Australia’s better growth
2019 0.76 0.76 0.77 0.78
Policy rate 2018 1.50 1.50 1.55 1.65 performance and outlook. Having hit the ceiling in
% 2019 1.80 1.90 2.05 2.20 January, the Oz has been, and is expected to keep
10Y bond 2018 2.85 2.93 3.01 3.06 retreating towards the floor of this range.
% 2019 3.16 3.32 3.39 3.45
2015 2016 2017 2018 2019 • The Oz has started to lose its rate-differential
Real GDP 2.5 2.6 2.3 2.8 2.8
advantage to the greenback. The AU 10Y bond yield
CPI 1.5 1.3 1.9 2.2 2.3
Curr a/c -4.7 -2.9 -1.9 -2.1 -2.0 has, for the first time since mid-2000, fallen below its
Budget -1.9 -1.5 -0.9 -1.5 -1.3 US counterpart since 21 February. The next US rate
% YoY for GDP & CPI, % of GDP for current account & budget balances hike in March will lift the Fed Funds Rate above the
DBS forecasts in red, Bloomberg consensus in blue
Reserve Bank of Australia (RBA) cash rate; both
Historical data in black
policty rates are currently at 1.50%. We expect three
AUD/USD Fed hikes in 2018, followed by another two increases
9 Mar: 0.7844
0.85 0.85 in 2019. Even if growth exceeds 3% over the next
year, the RBA has no intention to follow other
0.80 0.80 central banks in raising rates this year. The Oz
depreciated the last time AU rates fell below that of
0.75 0.75 the the USD’s in the late 1990s.
0.70 0.70
• The RBA has set a high bar to raise rates. A couple
0.65 0.65
of things need to happen before the RBA is
Jan-15 Jan-16 Jan-17 Jan-18 convinced that inflation is on track to move above
the mid-point of its 2-3% target. First, the RBA needs
Australia's growth without inflation more progress in the labour market towards full
5 employment. Second, businesses need to increase
4 wages.
Real GDP, % YoY
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FX: The US dollar is Fed Up 12 March 2018
DBS forecasts • The British pound could not sustain its recovery
Year Q1 Q2 Q3 Q4 above its psychological 1.40 level against the US
GBP/USD 2018 1.39 1.37 1.35 1.37
dollar. Sterling is likely to spend the rest of year in a
2019 1.38 1.40 1.41 1.43
Policy rate 2018 0.50 0.65 0.70 0.80 lower 1.35-1.40 range with downside risks.
% 2019 0.90 1.00 1.10 1.20
10Y bond 2018 1.50 1.60 1.70 1.80 • Sterling will depreciate with a weaker euro. The
% 2019 1.92 2.09 2.15 2.20
sterling’s appreciation since the start of 2017 has
2015 2016 2017 2018 2019 been in line with the rise of the euro, the largest
Real GDP 2.3 1.9 1.8 1.5 1.5
component in the DXY. We believe that the euro has
CPI 0.0 0.7 2.7 2.5 2.1
Curr a/c -5.2 -5.8 -4.8 -4.4 -3.7 started to retreat from the ceiling of its new and
Budget -4.1 -2.9 -1.8 -2.1 -1.8 higher “pre-normalisation” range between 1.15 and
% YoY for GDP & CPI, % of GDP for current account & budget balances 1.25. With the Eurozone, and not the US, now
DBS forecasts in red, Bloomberg consensus in blue
experiencing “growth without inflation”, the Fed is
Historical data in black
now increasingly seen to be well ahead of its EU
GBP/USD counterpart in normalising monetary policy.
9 Mar: 1.3850
1.60 1.60
1.55 1.55 • The Bank of England (BOE) is expected to deliver a
1.50 1.50 “dovish hike” this year, possibly in May. CPI inflation
1.45 1.45 is no longer surging towards 3% as it did into the BOE
1.40 1.40 hike last November. While the UK’s key inflation
1.35 1.35
gauges have stabilised around their peaks, they have
1.30 1.30
to retreat lower. With the pound having appreciated
1.25 1.25
1.20 1.20
back to around its Brexit referendum levels and
Jan-15 Jan-16 Jan-17 Jan-18 Brexit uncertainties keeping the UK’s growth outlook
below 2%, the BOE expects inflation to eventually fall
UK inflation gauges have yet to come off their highs back towards its official 2% target over the next two
% YoY, % pa years. According to its latest inflation report, the BOE
5 is looking at “one hike per year” over the next three
4 RPI-X years. Clearly, UK rate hike expectations pale
3 CPI against the prospect for 3-4 Fed hikes this year.
2
Real GDP
1
BOE base rate
• According to the Commodity Futures Trading
0 Commission (CFTC) Commitment of Traders report,
-1 speculators have turned net long on sterling since
14 15 16 17 18 4Q. Appetite for the dollar weakened as global
reflation trades picked up momentum with the
Speculators are exposed if Brexit shifts towards an
synchronised world recovery. Sterling also drew
unfavourable outcome
40 support from the BOE’s hike last November. When
thousands of CFTC contracts
20 this year started, some EU leaders gave false hope
0 for negotiations with the UK to move towards a “soft
-20
Brexit”. Over the past month, the UK and Brussels
-40
-60 remain divided on a myriad of issues that could lead
Non-commercial
-80 to a “hard Brexit” or “no deal”. The immediate risk
net long GBP positions
-100 to the pound is a failure to agree on the terms of
-120
Jan-15 Jan-16 Jan-17 Jan-18 UK’s Brexit transition period by the end-March
deadline.
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
Japanese yen
• It has become challenging to make a confident call
DBS forecasts on the Japanese yen. Our base case scenario sees
Year Q1 Q2 Q3 Q4 the return of a dovish stance at the Bank of Japan
USD/JPY 2018 108 112 116 115 (BOJ) and a more hawkish US interest rate outlook
2019 114 112 111 110
Policy rate 2018 -0.10 -0.10 -0.10 -0.10
lifting USD/JPY back into its 110-115 range.
% 2019 -0.10 -0.10 -0.10 -0.10 Conversely, we are aware that the yen could reprise
10Y bond 2018 0.08 0.09 0.10 0.10 its safe-haven role if the US 10Y bond yield rises
% 2019 0.10 0.10 0.10 0.10 above 3% and hurts global equities including the
2015 2016 2017 2018 2019 Nikkei.
Real GDP 1.4 0.9 1.6 1.1 0.9
CPI 0.8 -0.1 0.5 0.6 1.0
Curr a/c 3.1 3.8 4.0 3.7 3.5
• Japan has reaffirmed its commitment to continue
Budget -6.7 -5.7 -5.0 -5.5 -5.0 its quantitative and qualitative easing (QQE) with
% YoY for GDP & CPI, % of GDP for current account & budget balances yield curve control (YCC) policies. The Abe
DBS forecasts in red, historical data in black
government has, in mid-February, reappointed
Haruhiko Kuroda for a second five-year term as BOJ
USD/JPY 9 Mar: 106.82 governor. Equally important were the appointments
130 130
of reflationist Mazaumi Wakatabe and “BOJ-insider”
125 125
Masayoshi Amamiya as Kuroda’s deputies.
120 120
115 115
• Having pushed back speculation that it engaged in
110 110
“stealth tapering”, the BOJ now holds the stance
105 105
that “Japan is not yet in a situation where the BOJ
100 100
can offer a plan on how and when to exit its ultra-
95 95
easy policy”. The return of a dovish stance at the BOJ
Jan-15 Jan-16 Jan-17 Jan-18
and a more hawkish Fed hike outlook have potential
Nikkei tumbles on doubts over BOJ policies to renew monetary policy divergences and arrest this
0.75 26,000 year’s appreciation in the yen. Unfortunately, as
10Y JGB Nikkei 225 mentioned above, the odds for a flight to safety into
0.50 24,000
(%, left) (right) the yen on risk aversion cannot be ruled out too.
22,000
0.25
20,000 • The odds of a policy response to address
0.00
18,000 undesirable yen strength is no longer a zero
-0.25 16,000 probability. Chief Cabinet Secretary Yoshihide Suga
-0.50 14,000
and Vice-Finance Minister for international affairs
Jan-15 Jan-16 Jan-17 Jan-18 Masatsugu Asaakawa have come out to warn that
recent yen moves have been one-sided. The risk of
Japan's GDP growth slips below inflation again intervention cannot be ruled out if USD/JPY falls to
6 100-102. Koichi Hamada, economic adviser to Prime
5 Minister Shinzo Abe, has suggested that the BOJ
4 CPI inflation Real GDP
% YoY % QoQ saar 2% considers buying foreign bonds if it runs out of
3 inflation target
domestic assets to purchase. Until then, the cabinet
2
1 CPI ex Food has, meanwhile, approved a tax reform plan for the
0
% YoY coming fiscal year starting in April to provide tax
-1 incentives for Japanese companies to redirect
-2 retained earnings toward lifting wages and
15 16 17 18
increasing capital investment.
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up 12 March 2018
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FX: The US dollar is Fed Up
12 March 2018
Group Research
Economics & Strategy
Eugene Leow
Samuel Tse
Rates Strategist - G3 & Asia
Economist - China & Hong Kong
+65 6878-2842 eugeneleow@dbs.com
+852 3668-5694 samueltse@dbs.com
Chris Leung
Philip Wee
Economist - China & Hong Kong
FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com
+65 6878-4033 philipwee@dbs.com
Ma Tieying
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 matieying@dbs.com
Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).
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