How Strategists Are Trading Crude's Moves in Asia CurrenciesBy , , and
India’s rupee is clear loser as inflation threatens deficit
Malaysia’s ringgit to outperform peers as nation exports oil
Sell the Indian rupee and Philippine peso. Buy the Malaysian ringgit and Singapore dollar. Bet the ringgit will strengthen against Indonesia’s rupiah.
These are some of the trades that strategists are advocating as a surge of almost 40 percent in Brent crude since June clouds the outlook for Asian currencies, complicating the performance of local economies and the path of local monetary policy.
“If oil prices rise further and continue to stay high for some time, it will complicate the inflation picture for some Asian central banks,” said Charlie Lay, an analyst at Commerzbank AG in Singapore. “Given the strong synchronized global recovery and firm domestic demand fueled in part by low interest rates, inflation is already beginning to rise across Asia.”
Brent has advanced to more than $60 a barrel from this year’s lows of $44.35 in June, driven by tensions in the Middle East and signs that OPEC will extend output curbs beyond March. This has exposed the differences in the region’s economies, some of whom like Malaysia export oil, while others such as India and the Philippines, rely on imports for most of their needs.
Almost all the strategists agree, the rupee will be the big loser.
“USD/INR would probably be the cross to stick to when it comes to playing the current move higher in oil –- especially if oil moves up toward $70 a barrel on supply fears,” said Viraj Patel, a currency strategist at ING Groep NV in London. “One could imagine that USD/INR pushes on toward 66 -– though we would also expect the RBI to quickly step in and curb any excess volatility.”
The rupee closed at 65.42 per dollar on Tuesday, having weakened around 2 percent over the past three months.
On the flip side, Malaysia’s ringgit stands out as a buy.
“The ringgit’s positive correlation with Brent crude will probably return and strengthen, especially where the government’s projection for Brent is particularly conservative at $52 per barrel,” said Peter Chia, a foreign-exchange strategist at United Overseas Bank Ltd. in Singapore. “If the current growth momentum continues, together with increasing hawkishness from Bank Negara, we are fairly confident USD/MYR will gravitate toward our end-2018 target of 4.”
The ringgit advanced 0.2 percent to touch a one-year high of 4.1795 per dollar on Wednesday, from as weak as 4.5002 in January.
Key views from other strategists:
Nomura (analysts including Singapore-based Craig Chan)
- MYR should benefit in a higher oil-price scenario, while INR and PHP are likely to suffer from a terms-of-trade perspective
- For INR, the risk is that the basic balance could fall into deficit, with analysis showing that a $10/bbl rise in oil price could widen the current-account deficit by 0.4% of GDP. Combined with negative growth implications, INR would likely face some depreciation risk
- Higher oil prices would only further support view of a negative near-term flow backdrop for PHP
- Remain long USD/PHP and will continue to hold this position until there are more signals of a hawkish BSP and action against PHP weakness
- At this juncture, there little evidence of this, with some signs even of encouragement of a weaker PHP
Mizuho Bank (Vishnu Varathan, Singapore-based head of economics and strategy)
- Crude rising above $70 a barrel and sustaining above $70-$75 would see a re-ordering of FX in Asia, with probably INR and IDR slipping back
- MYR could stand to gain in such a scenario, with long MYR/IDR and MYR/INR trades gaining favor
- Counterintuitively, THB may not be sold down despite the high oil imports given refiners will be seen as a hedge
- Nuanced point is that oil settling above $70 and contained in a limited range could be positive for THB as long as it is not a case of rapidly accelerating oil charging above $80 and beyond, negatively impacting producers
National Bank of Australia (Julian Wee, Singapore-based senior markets strategist)
- A big determinant is how sustained this spike is likely to be, given that it is ostensibly on the back of a spike in political risk in Saudi Arabia
- If it sustains and/or rises to around $70-$80, then the MYR and IDR could benefit somewhat, especially if there’s a spillover onto perceived demand for commodities
- SGD might get a slight boost if there is a rise in demand for refined oil products, given Singapore exports a significant amount of refining services
- INR is likely to be the big victim of a sustained rise in oil prices given it is a net importer and is experiencing a significant loss of confidence on the back of increasing clarity on the extent of the detriment from the demonetization measure, and the govt’s somewhat panicked response
Commerzbank (Charlie Lay, Singapore-based analyst)
- Most Asian central banks are contemplating reducing monetary accommodation given the strong recovery, reduced slack in their economies, reduced output gap, and the consequent rise in inflation. A sustained rally in oil prices will only push them further along this path
- Main oil import countries and to a lesser degree, the current-account deficit countries, will come back into the radar, e.g. INR and IDR. However, the twin deficits for these two countries are less versus the taper tantrum of 2013 and should be less vulnerable
Commonwealth Bank of Australia (Andy Ji, Singapore-based currency strategist)
- We have initiated a short INR/IDR 1-month NDF position on firmer global oil prices
- Firmer global prices are likely to narrow Indonesia’s current-account deficit in coming quarters
- Contraction in India’s deficit, following the improvement on the back of more stringent regulations over gold and oil imports, has stalled on robust domestic demand for imports