RMB wins the jackpot at the beginning of the year

On January 20, Biden was sworn in as the 46th president of the United States, marking a new era for China. While there is no guarantee that Sino-US relations will be smooth, it at least provides an opportunity to repair the rift created by Trump's administration.

On January 25, Chinese President Xi Jinping attended the Davos agenda Dialogue of the World Economic Forum by video and delivered a special speech, conveying to the world that China will continue its domestic policy. Although he did not directly mention Biden, he called on the international community to restore multilateralism and reduce barriers to trade and investment. Given that Biden is currently busy with domestic affairs, we do not expect a change in US policy toward China for now. China will concentrate on developing a "double cycle" strategy in accordance with the latest five-year plan.

After the change of ownership of the White House, the dollar strengthened moderately, while many emerging market currencies performed poorly. The renminbi continues to lead Asia, rising 0.9 per cent from the start of the year, and the dollar against the offshore renminbi reached about 6.47 this week, but slightly higher than the low of 6.43 in early January, reflecting a slight weakness in the renminbi. Despite the recent consolidation, the renminbi is still at its strongest level since mid-2018.

• The rebound of the epidemic is less likely to disrupt the process of China's economic recovery.

Earlier this month, there were sporadic outbreaks in some parts of China, where the strictest controls have been adopted since the beginning of last year, and some have even implemented fully closed management. At one point, there were more than 200 new cases of COVID-19 in a single day, the highest since July last year, although it was negligible compared with the number at the beginning of last year (see chart 1). In view of the approach of the Spring Festival, the CPC Central Committee and the State Council Office advised the Chinese people to celebrate the Spring Festival on the spot.

Nevertheless, we believe that this round of strict prevention and control measures will not have the same significant impact on macro data as last year. China's factories continue to operate and export trade is carried out in an orderly manner. The scale of control implemented in the areas where the outbreak occurred is small and will not curb the recovery of consumption. Recent data also show that China's economic recovery is still strong. The export performance in December last year exceeded expectations, with the export volume growing by 18.1% in a single month compared with the same period last year, and the annual growth rate reached 3.6%. On the import side, due to low commodity prices and weak domestic demand, the growth rate fell by 1.1% for the whole year, with an increase of 6.5% in December compared with the same period last year. As a result, China's trade surplus reached $535 billion in 2020, the highest since 2015.

China's trade surplus with the United States has also further expanded, reaching 317 billion US dollars last year. Although China has begun to implement the first phase of the Sino-US economic and trade agreement, the amount is still higher than at the beginning of Trump's administration. Next month, the two sides will conduct an annual review of the economic and trade agreement, which will be the first trade policy test facing the Biden administration. Given that Chinese imports of US goods are well below the amount stipulated in the agreement, the PBoC may want to keep the renminbi strong in order to ease US concerns about China's excessive competitiveness. However, since the exchange rate of the renminbi at the China Foreign Exchange Trading Center (CFETS) rose 5.2 per cent compared with January 2020, while the exchange rate of the renminbi against the dollar rose by as much as 7.3 per cent over the same period, the renminbi remains competitive from a trade point of view.

In the fourth quarter of last year, China's GDP grew 2.6 per cent month-on-month, 6.5 per cent year-on-year, up from 6.2 per cent in the third quarter. So far, China's economy has grown by 2.3% for the whole year, making it one of the few economies in the world that have achieved positive growth. In December, industrial value added also grew faster than expected, with an increase of 7.3% over the same period last year, with a strong driving force continuing until the end of the year. Looking at the big picture, given the rapid GDP growth in the second half of last year, this year's sequential balance reached 5.9 percentage points (see chart 2). This means that even if the quarter-on-quarter growth rate is zero, China's economy could grow by at least 5.9% this year.

• Policy tightening has attracted attention, but it will take time for it to take effect.

As China's economic recovery is expected to continue, and more importantly, the scope of the recovery will be wider, the withdrawal of stimulus policies is increasingly becoming the focus. Last week, with short-term interest rates soaring as liquidity absorption suddenly hit and the people's Bank of China warned of asset price bubbles, many feared that policy would return to normal faster than expected.

However, given that CPI growth is only 0.2 per cent year-on-year, while PPI has eased but is still in a state of tightening, monetary policy is unlikely to tighten quickly. No matter how the policy changes, higher yields will continue to enhance the attractiveness of the renminbi, and we expect investors to increase their exposure to China.

At present, China's recovery is stable, has a strong external position, and tensions between China and the United States have eased, bringing constructive prospects for offshore RMB support. At a time of sound fundamentals and renewed risk appetite, we expect the dollar to hit another 6.25 against the offshore RMB in the future, reaching pre-war lows in Sino-US trade.

The outflow of capital from the South Korean stock market has blocked the Korean won.

The won continues to lag behind other Asian currencies, falling another 1 per cent in the past two weeks and 1.6 per cent year-to-date. Due to concerns about the release of COVID-19 vaccine, the pending scale of the US stimulus package and the decline in risk sentiment, foreign exchange trading in emerging markets has cooled slightly in recent days. The most risk-sensitive currencies, such as the Brazilian real and the South African rand, have performed particularly poorly.

The dollar has now rebounded to more than 1100 against the South Korean won, and SGX won / dollar futures have fallen nearly 0.9.Still, the South Korean won, like other Asian currencies, is still at its highest level since 2018, and the recent decline is very slight compared with the appreciation in 2020. In addition, the continued weakness of the Korean won coincides with the slight strengthening of the US dollar, so we still believe that the long-term appreciation trend of the Korean won remains unchanged and is just being consolidated at the moment.

Capital outflow from the South Korean stock market is the main cause of the recent weakness of the Korean won. Following strong inflows in the fourth quarter of last year, particularly in November, foreign investors began to withdraw, with capital inflows falling to negative from a peak of $6.5 billion in mid-December on an one-month rolling basis (see chart 3). However, as South Korean local investors are still bullish, the Korea Composite Stock Index (KOSPI) is unaffected, and it hit a record high earlier this year. The KOSDAQ index of the South Korean gem, mainly retail, also broke through the 1000 mark, reaching this high for the first time since September 2000.

• The momentum of economic development continues to improve.

The recent economic data released by South Korea are also very encouraging. GDP in the fourth quarter was better than expected, with a month-on-month growth of 1.1%, higher than the average market estimate of 0.9% and a year-on-year decline of 1.4%. A new round of epidemic prevention measures implemented at the end of last year had a significant impact on the economy, with personal consumption shrinking 1.3 per cent, the first quarterly decline since the first quarter of last year. On the other hand, the rebound in investment in the construction industry has boosted domestic demand, making the growth structure more balanced in the fourth quarter than in the previous quarter. While domestic demand continues to be a drag on South Korea's overall economic growth, it has improved from the third quarter (see chart 4). South Korea's economy shrank by 1.0% for the whole year, which is milder than European economies and the United States, but inferior to mainland China and Taiwan.

We expect South Korea's electronics industry to continue to grow strongly to provide strong support for economic recovery. Samsung is expected to see a surge in profits in the fourth quarter, with its share price hitting an all-time high earlier this month. The surge in chip prices since December has been a boon to Samsung and South Korea's national current account surpluses and will indirectly push up the won.

• South Korean policy will not be tightened in the short term

At present, South Korea's domestic economy continues to recover, and export performance remains strong, with exports rising 10.6% in the first 20 days of January compared with the same period last year. As a result, South Korea is unlikely to tighten policy in the short term. In mid-January, the Bank of Korea issued a policy statement saying that in view of low inflation and a "moderate" economic recovery, monetary policy would continue to be loose. The central bank also stressed that the rapid growth of household loans and rising house prices pose a threat to financial stability. We believe that this is most likely to lead to macro-prudential measures by the central bank rather than higher borrowing costs, mainly because the surge in interest rates will undermine the pace of domestic economic recovery.

With a gradual recovery in South Korea, strong demand for technology exports and a global economic recovery driven by vaccination, the won is expected to remain strong. However, unless equity capital inflows rebound, the dollar is unlikely to fall significantly against the South Korean won.

New Taiwan Dollar-the leading advantage of the semiconductor industry will ensure that the New Taiwan dollar continues to appreciate

As Taiwan's economy continues to grow strongly, the "Central Bank of Taiwan" continues to suppress the appreciation of the New Taiwan dollar and has recently stepped in to crack down on foreign exchange speculation that may be caused by enterprises. Since August last year, the "Central Bank of Taiwan" has been investigating grain companies' transactions, saying they are detrimental to foreign exchange stability. Earlier this month, the Central Bank of Taiwan also imposed sanctions on banks that use non-deliverable forward foreign exchange contracts (NDF) to handle these transactions. However, the investigation and justification of the case by the "Central Bank of Taiwan" cannot change the basic facts of the imbalance in capital flows. Last year, Taiwan's current account surplus recorded double-digit growth, a rapid growth that is bound to continue this year, with fewer and fewer channels for capital flows.

Taiwan Semiconductor Manufacturing Co Ltd's dominant position in the global market has also ensured that Taiwan's exports are growing unabated. It is reported that after the recent outbreak of the "shortage of automotive electronic chips," the German minister of economy contacted the Taiwan authorities directly. Taiwan Semiconductor Manufacturing Co Ltd also recently announced that he would invest 28 billion US dollars this year, equivalent to half of the expected annual sales, marking a bright future for the science and technology boom.

Taiwan's electronics exports will remain strong in the coming months. At the same time, although Taiwan Semiconductor Manufacturing Co Ltd's share price has more than doubled from the previous year, foreign capital will continue to flow into the Taiwan stock market. These are the two main driving forces pushing up the new Taiwan dollar. On the other hand, the intervention of the "Central Bank of Taiwan" will also continue to slow the appreciation of the NT dollar, but it will not reverse the strengthening trend, so we still believe that the exchange rate of the US dollar against the NT dollar will continue to decline. At present, the exchange rate of the US dollar against the New Taiwan dollar is still at its highest level in more than 20 years, reaching about 28.2, and is expected to fall below 28. SGX NT / USD futures should return to December highs of 0.36 and forward contracts will fall back to recent lows of around 27.8.

With some information on SGX foreign exchange futures contracts