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Lower oil prices: Good news for Asia except Malaysia – BofA
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, offer their outlook on rates and FX in Asia, and the impact from lower oil prices in Asian countries.
Key Quotes
“Plenty has been written on the positive impact of lower oil on Asia. The bottom line is that Thailand, Korea, Singapore and India are the biggest beneficiaries of lower oil simply because they are the biggest net importers of oil. Our estimates show lower oil prices deliver a favorable mix of stronger growth and lower inflation for all countries in the region except Malaysia. Korea and Thailand benefit the most from the growth dividend (though Thailand did not really pass on the lower oil benefits last year), while India benefits the most from lower inflation, followed by the Philippines and Indonesia.”
“Market impact of lower oil prices on fixed income and FX is fairly straightforward. Lower oil prices exert a powerful disinflationary force providing ample room for Asian central banks, especially India and Indonesia, to ease monetary policy. In India, we call for rate cuts in early 2016. However, given rains were very good in June and oil has started to drop again, there are chances rate cuts might be brought forward. In Indonesia, we are calling for one rate cut in 4Q15. As such, we are currently received 5y INR NDOIS (current 6.94%), long 10y IGB (current 7.95%) and long 10y IndoGB with 50% FX hedge (current 8.30%). Not surprisingly, our Scope90 model is also forecasting lower rates in India and Indonesia.”
“In the case of Korea and Thailand, policy rates are already very low. Even though the bar to cut rates is high (as the marginal benefit from another rate cut has diminished considerably), we think there are non-trivial chances that BOK and BOT might ease once more this year. As such, we remain received 1y1y KRW NDIRS (outright and using options, current 1.73%) and 1y1y THB IRS (current 1.63%). After forecasting lower rates for a long time, our Scope90 model is now forecasting higher rates in Korea. The model is consistent with our direction in Thailand rates.”
Key Quotes
“Plenty has been written on the positive impact of lower oil on Asia. The bottom line is that Thailand, Korea, Singapore and India are the biggest beneficiaries of lower oil simply because they are the biggest net importers of oil. Our estimates show lower oil prices deliver a favorable mix of stronger growth and lower inflation for all countries in the region except Malaysia. Korea and Thailand benefit the most from the growth dividend (though Thailand did not really pass on the lower oil benefits last year), while India benefits the most from lower inflation, followed by the Philippines and Indonesia.”
“Market impact of lower oil prices on fixed income and FX is fairly straightforward. Lower oil prices exert a powerful disinflationary force providing ample room for Asian central banks, especially India and Indonesia, to ease monetary policy. In India, we call for rate cuts in early 2016. However, given rains were very good in June and oil has started to drop again, there are chances rate cuts might be brought forward. In Indonesia, we are calling for one rate cut in 4Q15. As such, we are currently received 5y INR NDOIS (current 6.94%), long 10y IGB (current 7.95%) and long 10y IndoGB with 50% FX hedge (current 8.30%). Not surprisingly, our Scope90 model is also forecasting lower rates in India and Indonesia.”
“In the case of Korea and Thailand, policy rates are already very low. Even though the bar to cut rates is high (as the marginal benefit from another rate cut has diminished considerably), we think there are non-trivial chances that BOK and BOT might ease once more this year. As such, we remain received 1y1y KRW NDIRS (outright and using options, current 1.73%) and 1y1y THB IRS (current 1.63%). After forecasting lower rates for a long time, our Scope90 model is now forecasting higher rates in Korea. The model is consistent with our direction in Thailand rates.”
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