GLOBAL FX STRATEGY   

Sacha Tihanyi  

Scotia Asian FX Update  Senior Currency Strategist 
+852 2861‐4770 
sacha_tihanyi@scotiacapital.com 
Tuesday, June 7, 2011 

% Change over last 24 hours
ASIAN FX WEAKENS IN LIGHT OF EUROZONE AND WEAK US DATA  S&P 500 ‐1.08
• China, Hong Kong, Korea and Taiwan markets back open after long holiday weekend.   Nikkei ‐0.35
Shanghai Comp. 0.84
• USDCNY fixes lower as China rate hike speculation continues to build.  
Hang Seng ‐1.49
• Taiwan sees May CPI today as consensus expects 1.64% y/y.   Crude Oil ‐1.60
• Despite recent global equity gloom, Asia Ex‐Japan equities are outperforming the global average.  Gold ‐0.14
  US 2yr Yield (level) 0.42
   
FX Market Update ‐  Markets continue to lick old wounds and inflict new ones in the face of ever present   
Eurozone worry and weak global economic data, with Friday’s May US nonfarm payrolls still fresh in the   
mind  of the market. The global equity complex is continuing to shed points as the MSCI  World Index  is   
down around 3.4% from last Thursday’s open, and the S&P 500 is down around 4.4% from the first of the   
month in a rather inauspicious start to June.    
   
However, the relative performance of emerging market equities, and Asia in particular, show an interest‐  
ing dynamic that speaks to the impressive ability of Asian FX to sustain valuations in the face of what oth‐  
erwise should be USD‐boosting equity weakness. Looking at the relative performance since May 25th (see   
chart),  Asian  Ex‐Japan  equities  have  outper‐  
formed  global  equities  by  a  margin  of  more   
than 3.5%, very much in line with the impres‐ Asia Ex‐Japan equities out‐
sive  gains  in  the  EM  Asian  currency  block  perform global equities by 
against  the  USD.  Our  trade‐weighted  USD/ more than 3.5% in recent 
EM  Asian  FX  index  is  down  around  0.75%  days 
over  that  same  time  period.  This  has  gener‐  
ally  been  the  correlative  pattern  over  the   
past  year  as  Asia  Ex‐Japan  equity  outperfor‐  
mance has for the most part been accompa‐  
nied  by  Asian  FX  outperformance  relative  to   
the  greenback,  though  during  periods  of   
sharp  underperformance  in  Asian  equities,   
the  currency  complex  has  been  kept  less   
volatile  by  official  efforts.  EUR  has  managed   
to  put  in  a  solid  performance  over  the  past   
few sessions, and Asia has lagged by over 3%   
on a broad trade‐weighted basis, speaking to   
the  much  more  volatile  EUR‐Asia  currency  Source: Scotia FX Strategy, Bloomberg   
dynamic.    
   
This  week  brings  a  number  of  important  Asian  economic  events,  including  China’s  May  trade  data,  Tai‐  
wanese CPI and trade, Korean final Q1 GDP and an interest rate decision, Malaysian industrial production  Speculation over Chinese 
as  well  as  Indian  industrial  production.    There  is  also  a  growing  belief  that  a  Chinese  monetary  policy  rate hike swirls; USDCNY 
move (likely an interest rate increase) is due over the coming days, though we will also note that rumours  trading band widening possi‐
had  persisted  recently  regarding  a  widening  in  the  daily  trading  band  for  USDCNY,  an  event  that  would  ble. 
constitute another incremental step towards greater renminbi flexibility.  On the Chinese trade data front,   
certainly a strong export number will be interpreted in the context of the current state of global demand   
(strong exports offsetting negative gloom over US weakness for instance), however imports may be the   
key signal here considering the signs of a slowing in Chinese domestic growth.    
   
USDCNY(6.4782)•  Given the very weak spate of US economic data recently, culminating in the nonfarm   
payrolls print heading into last weekend, it is rather surprising that CNY has appreciated in recent sessions   
(EUR  strength  has  been  a  CNY‐supportive  factor).  Chinese  markets  open  today  after  the  long  weekend   
and  we  have  received  our  first  post‐nonfarm  payroll  USDCNY  fix.  The  fix  was  pushed  30  pips  lower  to   
6.4816 vs. Friday’s fixing, a positive for Asian FX sentiment despite the weakness in the group that we are 
seeing today vs. the USD. A piece in yesterday’s China Daily is stoking expectations that we could see an 
 
Please note that we also publish a number of other G‐10 focused FX strategy documents. 
If you are interested in being added to this distribution list, please email Camilla_sutton@scotiacapital.com 
GLOBAL FX STRATEGY                                Tuesday, June 07, 2011 
increase in China’s deposit rate into the weekend. This would likely not be supportive of global risk assets considering the   
current environment, but the direction of CNY on the official fix (and via market trading) implies that policymakers will not be   
pushed off their tightening path by signs of economic weakening.   
   
USDKRW(1081.15)• The won is trading a touch weaker in today’s session (down 0.3%) as the Korean market returns from the   
long weekend and prices in the impact of a less constructive global risk environment and weak US jobs data.  The 1075 level  There is nearly a 50‐50 
has generally proven to be quite a difficult hurdle for USDKRW, as several attempts at that point over recent sessions have  chance of a BoK rate 
failed to bring a sustained or conclusive break lower past this support point. In the meantime, the final read on Q1 Korean  hike this week accord‐
GDP  out  early  in  tomorrow’s  Asian  session  will  provide  some  risk  for  the  currency  leading  into  Friday’s  monetary  policy  ing to consensus 
decision.  Given  the  recent  developments  in  Korean  core  inflation  (last  week’s  May  print  came  in  at  3.5%  which  is  a  post‐  
global recession high), the case for a rate hike has grown, particularly considering the stability in USDKRW over the past two   
months.    There  sentiment  amongst  economists  polled  by  Bloomberg  is  tilted  marginally  towards  a  hike,  with  6  of  11   
economists polled expecting a 25bp increase to 3.25%. However, with the continued weakness displayed by the economic   
indicators  of  large  and  important  economies  of  late,  the  Bank  of  Korea  may  be  incented  to  continue  to  be  cautious  with   
monetary normalization despite the near term spike in core. Domestic players are looking for perhaps a 20%‐30% chance of a   
hike,  implying  that  if  the  balance  of  economist  opinion  is  proven  correct  KRW  could  regain  a  bid  (with  BoK  resistance   
perhaps).    
   
USDTWD(28.72)•  Taiwan’s  May  inflation  is  due  today,  with  the  We believe USDTWD is 
market looking for an uptick to 1.64% y/y in headline CPI versus the  still heading towards 
previous  1.34%.  M2  growth  has  eased  off  of  the  upper  end  of  the  28.50 in near term, but 
Central Bank of China (Taiwan) target of 6% y/y growth in M2.  Infla‐ risk aversion temporar‐
tion is just barely above the decade average pace of increase of 1% y/ ily halts gains  
y,  while  M2  growth  is  persisting  a  touch  higher  than  the  5.18%  y/y 
10yr average rate of growth. These trends argue for steady and incre‐
mental policy normalization (at a pace of 12.5bp hikes) for the time 
being. TWD has also remained fairly resilient over the past few ses‐
sions, though is trading lower by 0.2% today in the wake of Asian FX 
weakness.  Our recommended  short  term  trade  of  long  TWD  vs.  the 
USD,  initiated  on  April  20th  at  28.775  with  a  target  of  28.50  and  a 
stop at 29.30, is sitting up 0.2% as TWD has given up some of its pre‐
vious  gains  (of  more  than  0.7%)  over  the  past  few  sessions  as  risk 
aversion has made itself felt. Nevertheless we still like the short term 
28.50 target and look for TWD to regain support, potentially follow‐
ing today’s CPI data.   Source: Scotia FX Strategy, EMED 
 
Key Pricing & Levels
30 Day 
 
1 Day %  1 Week  1 Month  50 Day  100 Day  200 Day 
Hi st  Spot
Chg % Chg % Chg MA MA MA
 
Vol
USDCNY 1.6 6.4782 0.08 0.13 0.29    6.5119   6.5449       6.6082
USDHKD 0.5 7.7786 0.00 ‐0.03 ‐0.08    7.7744   7.7827       7.7736
USDIDR 4.3 8523 0.18 0.41 0.88      8,605     8,744          8,860
USDINR 5.1 44.76 0.13 0.71 0.07      44.72     45.04          45.20
USDJPY 7.4 80.18 ‐0.05 1.72 0.27      82.01     82.05          82.52
USDKRW 9.0 1081.15 ‐0.26 ‐0.17 0.13      1,084     1,102          1,120
USDMYR 9.3 3.0125 ‐0.25 0.02 ‐0.85    3.0133   3.0282       3.0674
USDPHP 5.8 43.30 ‐0.03 0.24 ‐0.14    43.174   43.460       43.649
USDSGD 6.3 1.2321 ‐0.04 0.20 0.02    1.2420   1.2580       1.2829
USDTHB 3.3 30.32 0.03 0.10 ‐0.36      30.17     30.37          30.29
USDTWD 4.5 28.72 0.10 0.48 0.14      28.87     29.10          29.81
AUDUSD 11.8 1.0717 0.13 0.52 ‐0.74    1.0632   1.0349       1.0069
Pricing Source: Bloomberg 6/7/2011

Key Economic Events Over Next 24 Hours* Period Cons Last Significance

4:00 PM TA CPI YoY% MAY 1.64% 1.34% High
4:00 PM TA WPI YoY% MAY 4.40% 4.53% High
5:00 PM SI Foreign Reserves MAY ‐ ‐ $242.52B Low
5:30 PM MA Foreign Reserves 31‐May ‐ ‐ $132.62B Low
NA PH Foreign Reserves MAY ‐ ‐ $67.8B Low
NA ID Foreign Reserves MAY ‐ ‐ $113.81B Low
NA ID Money Supply ‐ M1 (YoY) APR ‐ ‐ 17.40% Meidum
NA ID Money Supply ‐ M2 (YoY) APR ‐ ‐ 16.00% Medium
NA ID Net Foreign Assets (IDR Tln) MAY ‐ ‐ 941.87T Medium
7:00 AM SK GDP at Constant Price (QoQ) 1Q F ‐ ‐ 1.40% High
7:00 AM SK GDP at Constant Price (YoY) 1Q F ‐ ‐ 4.20% High
*indicated times are relative to GMT+8

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GLOBAL FX STRATEGY                                Tuesday, June 07, 2011 

 
 

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