It has been affected more as their economies are deemed to be more vulnerable than other regional peers. Meanwhile, the direction of the dollar index (DXY) will continue to matter given the historically strong negative correlation between the DXY and Asian currencies. Developments in the Italian budget discussion, as well as the US mid-term elections, could have a significant impact on the DXY and consequently the performance of Asian currencies.


In view of the above, we are changing our positive SGD call to neutral. While Singapore’s fundamentals remain resilient, the external uncertainties and deteriorating technical momentum suggest limited upside for the SGD for now. Nevertheless, we still believe broad USD weakness is likely over time, which should be a positive for the SGD. We have revised our USD/SGD forecasts to 1.36 in 3 months and 1.33 in 12 months.


We maintain our negative view on the PHP as the macro backdrop for the Philippines remains challenging. Notably, inflation surged to a high of 6.4% in August, which is the highest since March 2009. The weak current account position and still- low real rates point to a weaker PHP. We have revised our USD/PHP forecasts to 55.00 in both 3 and 12 months. The same, however, cannot be said for both INR and IDR as their respective economies are not in as dire straits as the recent currency depreciation would suggest. We maintain our neutral stance on both currencies even though they will likely remain weak given the jittery market sentiment.


The CNY was flat against the USD over the past month, albeit with some volatility. This trend is likely to continue, with growth concerns mitigated by policy support. Notably, the PBoC has stepped in to limit excessive currency speculation, e.g. by re-introducing the use of the “counter-cyclical factor.” Meanwhile, we continue to expect China’s growth outlook to stabilize by early Q4 given recent easing measures, which should have a positive impact on the CNY.


With USD/CNY trading close to its fair value, we expect it to stay within the range of 6.80–7.00 for now. Should the trade situation deteriorate significantly, USD/CNY could overshoot. The PBoC will likely intervene, lest the steep deprecation spark another round of panic capital outflows. We maintain our neutral stance on the currency with our USD/CNY forecasts revised to 6.90 in 3 months and 6.70 in 12 months.





Australia investment strategy To hedge or not to hedge?


Hedging foreign currency exposure on global equities does not reduce the risk for Australian investors.
GDP growth is surprisingly strong given the pressure on households.
Equities are generating solid returns.
Andrew McAuley Portfolio Management Australia
Tim Sprissler Investment Strategist - Foreign Exchange Strategy


We set out to determine if hedging the currency risk associated with international shares adds value for Australian investors. The evidence is clear – not hedging reduces volatility and makes almost no difference to performance in the long run. Taking data from the last 20 years, AAUC (AA UNION CAPITAL) mapped the movement in the AUD/USD against returns of the MSCI World Index and found a long-run correlation of 0.64, a positive correlation.


This means, when equity markets are weak, the AUD is generally weak. Australia is a commodity-producing economy and, as such, a slowdown in global growth is seen as negative for the currency. Although US shares may be falling, for example, the AUD falls at the same time. Thus, when the value of those shares is translated into AUD, the loss in value is less. The movement in the AUD/USD rate acts as a buffer for returns. This relationship is shown in the following graph where the dotted red circles highlight MSCI World market corrections. You will note the depreciation in AUD/USD and the AUD Trade Weighted Index (TWI) concurrent with each correction.


But does achieving lower volatility by not hedging come at the expense of returns? We have analyzed the cumulative performance of the MSCI World versus AUD/USD and the AUD TWI and graphed it below. It shows that, over the last 20 years, the returns of the AUD/USD exchange rate and the AUD TWI when indexed to 100 were almost zero. This means not hedging made.


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