Uob Q1 2019

Quarterly Global Outlook
Q1 2019
ASEAN Winners In The
US-China Trade Conflict
ASIA FOCUS FX STRATEGY
Are We Seeing Trade And Investment Cracks Start To Appear In
Diversion From US-China Trade Rift? The Strong US Dollar Armor
SINGAPORE FOCUS COMMODITIES STRATEGY

The 2019 SGS Crude Oil Takes Over The Volatility
Supply Schedule Baton From Copper And Gold
MYANMAR FOCUS US FOCUS

Myanmar In Transition: Assessing The Likelihood
Opportunities & Challenges Of A US Recession In 2019
CONTENT
04
EXECUTIVE SUMMARY CHINA � 31
ASEAN Winners In The US-China Trade Conflict
HONG KONG � 32
10 INDIA � 33
FX, INTEREST RATE & COMMODITIES FORECASTS
INDONESIA � 34
11 JAPAN � 36
ASIA FOCUS
Are We Seeing Trade And Investment Diversion MALAYSIA � 37
From US-China Trade Rift?
MYANMAR � 38
15 PHILIPPINES � 39
SINGAPORE FOCUS
The 2019 SGS Supply Schedule SINGAPORE � 40
SOUTH KOREA � 41
18
MYANMAR FOCUS TAIWAN � 42
Myanmar In Transition: Opportunities & Challenges
THAILAND � 43
20 VIETNAM � 44
US FOCUS
Assessing The Likelihood Of A US Recession In 2019
AUSTRALIA � 45
23 EUROZONE � 46
FX STRATEGY
Cracks Start To Appear In The Strong US Dollar Armor NEW ZEALAND � 47
UNITED KINGDOM � 48
27
COMMODITIES STRATEGY UNITED STATES OF AMERICA � 49
Crude Oil Takes Over The Volatility Baton
From Copper And Gold
FX TECHNICALS � 50
COMMODITIES TECHNICALS � 55
Information as of 07 December 2018
Scan the QR Code for a list of all our reports [email protected]

www.uob.com.sg/research
Bloomberg: UOBR
EXECUTIVE SUMMARY
ASEAN Winners In The US-China Trade Conflict
Synchronized Slowdown In 2019 Emerging Markets Markit Manufacturing PMI, SA
Source: OECD, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research
0
World OECD US Eurozone Japan China
2017 2018 2019
Synchronized Slowdown, US growth will be the sustained job to end 2018 with 4 hikes. We expect the
But Far From Recession In 2019 creation and wage gains but the pace is Fed rate trajectory to remain at three
Global growth in 2018 turned out to likely to ease from around 3% in 2018 to more 25bps hikes in 2019 on the back of
be better than expected, and this was 2% in 2019 due to fading effects of fiscal continued positive growth outlook and US
despite the simmering trade tensions stimulus, softer business spending while wages. But Fed’s likely shift from the well
between US and China. Heading into US housing market may be another source communicated “gradual rate trajectory”
the New Year, we expect global pace to of weakness. to more emphasis on data dependency,
slow in 2019 and there is plenty of good will make the policy path more uncertain.
reasons for that: moderating trade flows, But to be clear, slower growth does If there is a significant weakening of US
continued slowdown in manufacturing not equate to a recession year. Recent economic data or re-escalation of trade
activity as reflected by the PMIs and global concerns about the US growth outlook tensions, then that could warrant a more
electronic cycle downturn, and global was sparked by the first UST yield curve cautious Fed and the risk could be lesser
trade tensions can flare up again which inversion (on 3 Dec) since 2007 as the yield hikes, from 3 to probably just 2, but
may hurt manufacturers both in terms of spread by the 5- and 2-year UST turned certainly not zero.
a slowdown in export orders and weaker negative. Meanwhile, the spread between
business sentiments. China’s GDP growth the 10- and 2-year UST – traditionally Meanwhile, across the Atlantic, the
is expected to ease further to 6.3% in seen as a good predictor of recession 4 European Central Bank is finally on the
2019, the slowest pace since 1990, and to 6 quarters ahead– has been narrowing path of normalization, firstly with the end
that will weigh on activities in the rest of (to about 10-11 bps as of 6 Dec) but it is of QE in Dec 2018 followed by the long-
Asia while European growth is also likely still positive. While it is not inconceivable awaited rate hike which we project in
to ease to 1.6%. Japan’s outlook in 2019 that the 10s-2s spread may turn negative 4Q 2019. Bank of Japan is still the least
could be particularly challenging, likely at some point in 2019, putting a forecast likely to normalize its easy monetary
to be dampened to sub-1% given the timeframe of 4 to 6 quarters, that implies policy anytime soon, especially with its
headwinds of trade issues (i.e. potential a recession in 2020/21, not 2019. Like all challenges in growth and downside price
auto tariffs) and a looming sales tax hike good things, we believe that US growth pressures in 2019. Among Asian central
in Oct. will come to an end at some point (i.e. banks, some (like BI and BSP) will follow
business cycle), but that end is not in the Fed but the majority may stay on
2018 has been a robust year for US, 2019, in our view. pause, as growth retreats and inflation
and the economy is still on track to ebbs while trade uncertainty still looms.
expand in 2019 and bag a new record for As such, the US Federal Reserve is China may cut RRR once by early 2019.
uninterrupted expansion. Underpinning almost certain to hike once more in Dec
Quarterly Global Outlook 1Q2019

04 UOB Global Economics & Markets Research EXECUTIVE SUMMARY
ASEAN Winners In Trade Dispute While we still see a base case of 3 more expectations for on-going twin tightening
We believe the US-China trade negotiation FED rate hikes next year, the balance of by the US Federal Reserve, i.e. gradual
is likely to be a long-drawn process well risks is for fewer rate hikes next year as rate hikes and Balance Sheet Reduction
into 2019 (extend beyond the 90-day global trade risks mount. (BSR) makes it possible that short rates
ceasefire), and there is significant risk that and US Treasuries (UST) yields will
both parties would fail to overcome their Amidst this backdrop, the European continue to head higher.
differences, leading to re-escalation in Central Bank (ECB) will formally conclude
trade tensions. Overall, the trade dispute its QE by the end of this year and possibly We expect to see 3M US Libor to head
is bad for export-oriented Asian economies start its first rate hike in 4Q19. As such, above 3% in 2Q19 to 3.45% by end 2019.
and we have downgraded their growth 2019 will likely see the transfer of the Libor vs. OIS spread is expected to remain
outlook in 2019. monetary policy tightening leadership wider than normal due to tighter liquidity.
from the FED to the ECB. Consequently, The widening US fiscal deficit and the
But even before the US-China trade our conviction FX view for 2019 is that Fed’s balance sheet outlook will weigh
relations took a turn for the worse, foreign of a gradual recovery in the EUR/USD negatively on UST (i.e. higher yields), and
and Chinese companies alike were from current level of 1.13 to 1.20. In the we expect to see 10Y UST yield to reclaim
already looking to the ASEAN countries sidelines, the AUD/USD may well stabilize the 3% handle and climb to 3.50% by the
for investment opportunities due to factors and recover moderately from 0.73 to 0.77 end 2019.
like lower wage and production costs, tax as well. But any meaningful strength will
incentives and better access to the regional be tempered by on-going concerns over Singapore money market rates and
markets. In our ASEAN focus piece, we China slowdown. On the other hand, GBP/ Singapore Government Securities (SGS)
noted that further worsening in US-China USD will likely stay depressed below 1.30 yield are also expected to mirror the
trade relations may accelerate investment and possibly test 1.25, given the difficult gradual rise in their US counterparts. We
flows to the region and the manufacturing and frustrating Brexit process. see both 3M Sibor and 3M SOR rising
sector in ASEAN could be the biggest above 2% in 1Q19 to the 2.5% handle by
beneficiary. Initial signs of investment In the Asia FX space, we see possibly the the end 2019. Concurrently, we see 10Y
pickup in Thailand, Taiwan and Vietnam final leg of US Dollar strength in the first SGS yield rising above 2.5% in 1Q19 to
for 3Q 2018 could be a prelude to a shift in half of 2019. Given ongoing uncertainties 2.9% by end 2019.
supply chains. As part of the CPTPP which over US-China trade relation and on-going
will come into effect end-2018, ASEAN slowdown in China, the CNY is still seen _________________________________
countries including Malaysia, Vietnam, weakening past 7.0 to the USD to 7.10
Singapore and Brunei may get a further by 3Q19. The rest of Asia FX will likely Commodities Strategy
edge to attract these investments. weaken in tandem by another 2.4% to Crude Oil Takes Over The Volatility
4.5% against the USD in 1H19. As such, Baton From Copper And Gold
What To Watch In 2019? SGD is still seen weakening past 1.40 2018 has been a very challenging year
Beyond the on-going specter of President to 1.41. Thereafter, USD/Asia may well for the entire commodities space. Across
“Tariff Man” Trump, there are several consolidate across 2H19 as further USD 2018, gold has felt the weight of ever rising
events that will matter in 2019. In Asia, strength will be capped as the FED will interest rates. Amidst this sell-off, net long
there are a few key elections in India, be widely seen reaching the tail end of position in gold has been completely
Indonesia and Thailand while among its tightening process by then. However, unwound, something not seen since about
the G7, the EU will have parliamentary given the on-going moderation in Asian two decades ago. However, with the FED
elections in May. ECB will also get a new economic growth prospects, we feel that it likely to reach the tail end of its tightening
President after Draghi steps down in Oct. is premature to call for a return to outright cycle across 2019, we see gradual support
And in Jan when Democrats regain control Asia FX strength in 2H19. emerging for gold. In addition, given
of the House, perhaps more fireworks in a renewed support from the abovementioned
divided US Congress? Or maybe, Trump _________________________________ oversold position, we now upgrade our
can strike a infrastructure deal with them? gold outlook from negative to neutral and
Rates Strategy see gold consolidating from USD 1,200 /
_________________________________ Rates Are Still Likely To Head oz to USD 1,300 / oz across 2019.
Gradually Higher In 2019
FX Strategy With the elevated global trade tensions Copper and the rest of the industrial
Cracks Start To Appear and start of yield curve inversion in the metals complex also had a challenging
In The Strong US Dollar Armor front end of the UST curve, risks have year as global growth moderated and
The outlook for the US Dollar for 2019 is indeed increased for an even gradual trade weighed down by US-China trade
clearly less strong than in 2018. Various tightening path from the FED. However, on conflict. Similarly, net long positioning in
drivers are now in place to chip away at balance, we think it is premature to call a Copper was mostly liquidated and global
the US Dollar’s strength. Growth in the pause in the tightening cycle and maintain inventory in Copper across LME, COMEX
US is moderating from around 3% this our current view of 3 more rate hikes from and SHFE has also halved since peaking
year to 2% next year. The start of the US the FED in 2019. Notwithstanding recent in April. As such, 3M LME Copper will
Treasuries yield curve inversion in the front acute bouts of risk aversion and increasing likely be capped within the USD 6,000 /
end has also started to weigh on the USD. signs of growth moderation in the US, our mt to USD 7,000 / mt trading range across

EXECUTIVE SUMMARY UOB Global Economics & Markets Research 05
2019. While strength will be capped by on- economies due to the US-China trade approaching an inflection point where
going global trade tensions, weakness will tensions. These markets could potentially flattening is no longer the path of least
be tempered by oversold positioning and benefit most from a shift in supply chain if resistance.
inventories. US-China trade tensions drag on.
What lies ahead at this late cycle phase
In the energy space, crude oil suffered _________________________________ will depend on how markets manage the
an intense bout of sell-off across 4Q, with transition into an investment environment
both Brent and WTI crude oil plunging by Singapore Focus that is less forgiving due to diminished
more than 1/3 from their respective Oct The 2019 SGS Supply Schedule liquidity amidst a backdrop of slowing
highs. Further jump in crude oil supply We expect SGS bonds outstanding to economic activity. The tricky part with
from US, Russia and Saudi Arabia, increase in line with the 6% average growth transitions, even in the best of times, is
coupled with the surprised “leniency” rate experienced since implementation of that the process is seldom smooth or
from the Trump administration to grant Liquidity Coverage Ratio (LCR) in 2015. linear.
temporary waivers for the import of Iranian A 6% growth rate equates to around SGD
crude oil triggered the sell-off. As such, 7bn of net supply or SGD 23bn of gross _________________________________
crude oil’s 3M implied volatility jumped supply in 2019.
to as high as 50%, shooting way above GLOBAL FX
copper’s implied volatility at around 20% SG rates are expected to continue their USD/JPY: With the BOJ likely to stick to
and gold’s implied volatility at around 10%. track higher in 2019 while the yield curve its dovish tone in 2019 due to dimming
Overall, given lingering oversupply issues, could see some steepening impulse from growth, trade-related uncertainties and
Brent crude oil is likely to be depressed supply in the first half of the New Year. inflation still far from its 2% target, we
and volatile at its current USD 55 / bbl to maintain the view that the path of least
USD 65 / bbl trading range. At the moment _________________________________ resistance is for gradual weakness of
of writing, OPEC has failed to reach a deal the JPY. As such, we reiterate our USD/
for production cut with Russia. Myanmar Focus JPY point forecasts at 113 in 1Q19, 114 in
Myanmar In Transition: 2Q19 and 115 in 3Q and 4Q19. Key risk to
Hereafter is a brief synopsis of key Focus Opportunities & Challenges our view is a deeper rout in equities which
pieces as well as key FX and Rates views. Myanmar is the new frontier for business would eventually trigger safe haven funds
in ASEAN. A large and populated country back into the JPY.
From the UOB Global Economics and just opening its doors to foreign investors,
Markets Research team, we wish our there will be many opportunities in many EUR/USD: Overall, with easing headwinds
readers a successful and productive 2019! sectors including labor intensive industries against the EUR and the gradual pricing of
and greenfield investments, particularly monetary tightening in Europe, a sustained
in oil, gas, and mining sectors. In order recovery in EUR is our conviction view
_________________________________ to attract more FDI, the government within G10 currencies. Overall, we see
passed the Myanmar Investment Law EUR/USD bottoming and rising gradually
Asia Focus 2016 and the Myanmar Companies across next year from 1.15 in 1Q19 to 1.20
Are We Seeing Trade Law 2018. Nonetheless, Myanmar still in 4Q19.
And Investment Diversion presents investors with several economic
From US-China Trade Rift? and technical challenges that need to be GBP/USD: As Brexit Day looms, implied
Due to the additional tariffs that were addressed by the government. volatility in the GBP/USD options has
already imposed, trade and investment risen to the highest levels since July 2016,
diversion away from China and the US _________________________________ reflecting the overhang of uncertainties
will be inevitable. This could have a larger heading into the crucial 11 December vote,
impact on China than the US due to the US Focus and this is likely to persist. Positioning in
sheer size of Chinese exports compared Assessing The Likelihood both spot and options have also gradually
to the latter. The disruption to the supply Of A US Recession In 2019 deteriorated against the GBP in the recent
chain will quicken if corporates are Based on the latest Fed Reserve’s US few months. We are maintaining our
becoming more convinced that the US- recession probability and excess bond negative view on GBP/USD, forecasting
China trade dispute will be long-drawn premium (EBP) forward looking indicators, the pair at 1.25 across 1Q and 2Q19
and therefore warrant adjustments to we are unlikely to see the US economy before a slight recovery to 1.26 at 3Q19
their medium/long-term strategies. Based enter into a downturn in 2019, even as and 1.27 at 4Q19.
on the preliminary data on trade and the US Treasury markets saw its first yield
investment so far, we believe that trade curve inversion in more than a decade on AUD/USD: Although the macro backdrop
diversion has yet to become evident (due 3 Dec 2018. for both domestic and external remains
to frontloading activities) whereas there challenging, it appears that the bulk of
are nascent signs of investment pick- Looking ahead into 2019, the current US the AUD weakness may be behind us.
up in places such as Thailand, Taiwan monetary policy cycle will be on course The negative positioning (as per CFTC)
and Vietnam, suggesting diversion of to converge with the long term neutral against the AUD is already showing signs
some manufacturing activities into these rate and the UST yield curve will also be of reversing from the most extreme levels

in over 3 years, setting the stage for a HKD towards the top end of its 7.75 to Domestically, Indonesia’s current account
more sustainable recovery in AUD. Going 7.85 convertibility band. Then, the HKMA and fiscal account are expected to remain
forward, we expect AUD to draw support will need to resume its regular intervention in deficit albeit some improvements,
across 2019 from improved pricing for an to ensure that the rise in HKD Hibor keeps at -2.5% and -2.0% respectively. This
eventual rate hike by RBA. Our updated pace with further projected US rate hikes. makes the IDR vulnerable alongside other
forecasts for AUD/USD are 0.74 in 1Q19, As for the USD/HKD, it is still expected to Emerging Market currencies as the Fed
0.75 in 2Q19, 0.76 in 3Q19 and 0.77 in be capped at 7.85 and average 7.80 for continues its gradual rate hikes. Externally,
4Q19. the next 4 quarters. Indonesia is also not spared from trade
headwinds due to the protracted trade
NZD/USD: With the recent move, the USD/TWD: Our cautious outlook of dispute between US and China. That said,
NZD/USD looks over-extended in the Taiwan together with a further slowdown BI matching of the pace of Fed’s tightening
near term. Absent a new positive trigger, in the global electronics cycle are likely in 2019 may alleviate pressure on the IDR.
further gains in the currency pair are likely to underpin further weakness in the TWD Overall, we expect the IDR to continue to
to moderate in pace. Overall, we forecast against the USD for the next 4 quarters. weaken alongside other Asian currencies.
NZD/USD at 0.69 in 1Q19, 0.70 in 2Q19, However, Taiwan’s strong current account We forecast USD/IDR at 14,600 in 1Q19,
0.71 in 3Q19 and 0.72 in 4Q19. balance is likely to cushion the local dollar 14,700 in 2Q19 and 14,800 in 3Q and
against acute weakness. Overall, with 4Q19.
further rate normalization by the Fed,
ASIAN FX USD/TWD is likely to rise further to 31.2 in USD/THB: As the Fed continues its
USD/CNY: It is probably premature to 1Q19, 31.6 in 2Q19 before flattening out gradual rate hikes in 2019, the THB is
anticipate sustained weakness in USD/ at 32.0 in 3Q and 4Q19. likely to remain defensive against the USD
CNY after the recent truce on trade but downside risks remain limited due to
tariffs, especially when details are still USD/KRW: The KRW still faces a long Thailand’s strong fundamentals. Overall,
lacking and challenges for an eventual list of challenges going into next year. we reiterate mild weakness of THB against
resolution remain. There is still clear and Economic growth has moderated starting the USD, at 33.00 in 1Q19, 33.30 in 2Q,
wide divergence in economic data and 3Q18 and should remain weak as the 33.50 in 3Q and 4Q19.
monetary policy between China and US negative effects of the protracted trade
which may continue to underpin a higher dispute between US and China show USD/PHP: A short squeeze on oversold
USD/CNY. Overall, we maintain our up more prominently in 2019 (barring a EMs currencies such as the PHP caused
measured trajectory of USD/CNY above significant breakthrough in negotiations). the currency to rebound aggressively
7.00 next year, with point forecasts at 6.95 A concurrent slowdown in the global from a 13-year low of 54.43. The recent
at 1Q19, 7.00 at 2Q19, 7.10 at 3Q and electronics cycle would also weigh on the recovery in PHP could be short-lived.
4Q19. KRW. In addition, the KRW is not expected With the USD underpinned by further rate
to receive any near-term support from the normalization by the US Fed, we maintain
USD/SGD: A protracted stand-off between BoK, which is likely to stay on hold through a modestly higher trajectory for USD/PHP,
Washington and Beijing on trade is a clear 1H2019. Overall, we expect KRW to pare expecting the pair to trade up to 54.00 by
negative driver for the SGD. Also, with the recent gains and eventually weaken past mid-2019 and 55.00 by end-2019.
CNY poised to weaken past 7.00 against 2018 low of 1,145 to the USD. We forecast
the USD in 2019, SGD is likely to be USD/KRW at 1,130 in 1Q19, 1,150 in USD/VND: US and China are both
followed with a move beyond 1.40/USD, 2Q19 and 1,160 in both 3Q and 4Q19. Vietnam’s largest trading partners and
weakest levels since May 2017. Perhaps next year, first order effects of the trade
the dominant factor limiting excessive USD/MYR: There is risk of further MYR spat may cause a further drop in Vietnam’s
SGD weakness is the possible increase weakness beyond 4.20 against the USD, exports, denting sentiments on the
in policy slope by the MAS in its next particularly if the weakening trend in RMB domestic currency. Going forward, amidst
biannual meeting in April 2019. Overall, and other regional currencies resumes. on-going broad USD strength, we can
we maintain our view of a gradual rise in Despite the sudden plunge in Brent oil expect further weakness in the VND in the
the USD/SGD to test above the key 1.40 from a high of $86.74 / bbl in Oct to current next 4 quarters towards 24,000. As such,
resistance. Our forecasts for USD/SGD levels of about $60, there had been little we reiterate USD/VND point forecasts
are 1.39 in 1Q19, 1.40 in 2Q19 and 1.41 pass-through to the MYR. The government at 23,500 in 1Q19, 23,800 in 2Q19 and
in 3Q and 4Q19. also reiterated there will not be any 24,000 in 3Q and 4Q19.
recalibrations to the budget at this juncture
USD/HKD: Going forward, Hong Kong’s in response to falling oil prices. The USD/MMK: Despite a moderation of the
economic growth is expected to moderate current account surplus continues to be pace of decline in 4Q18, the MMK is still
further in 2019, to 2.8% from 3.3% in 2018. supported by healthy goods trade surplus. expected to weaken next year given that
In addition, the high dependency on trade Our revised USD/MYR point forecasts are Myanmar’s large current account deficit
makes Hong Kong’s economy vulnerable 4.23 by mid-2019 and 4.25 by end-2019 is forecasted to widen further to 5.6%
to further deterioration in US-China trade (from 4.22 and 4.20 previously). of GDP in 2019 from 5.4% in 2018. Our
relations. Also, a widening gap between updated USD/MMK forecasts are 1,560 in
local (3M Hibor) and US (3M Libor) rates, USD/IDR: The macro backdrop behind 1Q19, 1,580 in 2Q19 and 1,600 in 3Q and
currently at 71bp is likely to buoy the USD/ IDR remains challenging next year. 4Q19.

USD/INR: Given that the macro outlook BOE: The BoE kept rates at 0.75% BOJ: Among the G10 central banks, BOJ
for India remains challenging in 2019, again when it met in early November. continues to be the least likely to normalize
further gains in the INR are unlikely. Also, The quarterly Inflation Report, which its easy monetary policy anytime soon,
a widening current-account deficit in 2019 accompanied the rate decision, stated: and it remains premature for the BOJ to
may kick-start weakness in INR again but “The economic outlook will depend talk about normalizing/tapering its easing
the weakness would be checked by RBI significantly on the nature of EU program too, because Japan is still
trying to match the pace of Fed rate hikes. withdrawal, in particular the form of new some distance away from its 2% inflation
Overall, we think USD/INR may bottom trading arrangements, the smoothness of target. The projected weaker growth
at around 70 in the near term and head the transition to them and the responses environment and likelihood of downside
higher in 2019. We forecast USD/INR at of households, businesses and financial price pressures in 2019 adds further
71 in 1Q19, 72 in 2Q19 and 73 in 3Q and markets”. We see the BoE sitting on the challenges to BOJ’s monetary policy next
4Q19. sidelines for now as it waits for greater year. We think that the BOJ may still need
clarity given the wide and complicated to do more “tweaks” to monetary policy to
_________________________________ range of Brexit outcomes. We have reassert its easy monetary policy position,
penciled in a rate rise around mid-2019, just like what it did in the July 2018 MPM.
GLOBAL INTEREST RATES but nonetheless, remain very mindful that This may happen again, possibly in early
FOMC: We still expect another rate hike rates could go in either direction. 2019 although we cannot rule out that the
from the Fed at the 18/19 Dec FOMC to “tweaks” may be brought forward to the
bring the FFTR range to 2.25%-2.50% RBA: The RBA held its OCR at 1.5% at its last meeting of 2018 on 19/20 Dec.
by end-2018. We also maintain our 2019 last meeting for the year. The concluding
rate hike expectation at three 25bps hikes paragraph of December’s accompanying _________________________________
which now implies that we expect the Fed statement was exactly the same as the one
to exceed their long run FFTR at 3.0% in November, with the RBA saying: “The ASIAN INTEREST RATES
by mid-2019. That said, Fed’s likely shift low level of interest rates is continuing to PBoC: We continue to expect another
from the well communicated “gradual support the Australian economy. Further reserve requirement ratio (RRR) cut
rate trajectory” to more emphasis on data progress in reducing unemployment and from the central bank in late 2018-early
dependency, will make the policy path having inflation return to target is expected, 2019, after having made its fourth RRR
more uncertain. If there is a significant although this progress is likely to be reduction in 2018 alone. This should
weakening of US economic data or a gradual. Taking account of the available continue to keep domestic liquidity ample
significant escalation of trade tensions information, the Board judged that holding as indicated by relatively low funding
in 2019, then that could warrant a more the stance of monetary policy unchanged costs in the interbank market. Thus, we
cautious Fed and the risk could be lesser at this meeting would be consistent with do not anticipate any policy interest rate
hikes, from 3 to probably just 2, but not zero. sustainable growth in the economy and cut from PBoC over the next 3-6 months,
In the meantime, the Fed’s balance sheet achieving the inflation target over time”. given that the US Fed is still on the rate
reduction (BSR) program will continue as The latest GDP print is certainly a big miss hike path and the European Central Bank
scheduled and that implies the FOMC will relative to RBA expectations. Whilst the is moving towards policy normalization.
not add more rate hikes (beyond what is bigger picture of a gradually tightening Domestically, consumer price inflation
implied in the dot-plot chart) unless we get labour market and a slow lift in wage is expected to rise slightly in 2019 even
a sharp inflation surprise. growth remains intact, we see no change though producer price inflation could
in policy until at least end-2019. come under downward pressure from the
ECB: At its 25 October meeting, the ECB trade conflicts. As such, any aggressive
reaffirmed that its asset purchase scheme RBNZ: The RBNZ kept the OCR steady cuts in RRR or even policy interest rate
will end in December 2018 and that interest at 1.75% in November. The accompanying cuts would be a signal that the US-China
rates could rise after next summer, sticking press release did not include the line from negotiations may not be turning out well.
to guidance first unveiled in June and the previous statement in September that
repeated at every meeting since. We are the next move could be "up or down". MAS: Following the “measured
of the view that the ECB will not be in any However RBNZ Governor Orr did say adjustment” increase in Oct 2018 MPS
rush to give clearer guidance, especially "there are both upside and downside risks and barring “a significant setback in
given the uncertain economic backdrop. In to our growth and inflation projections. global growth”, we believe the MAS could
fact, we think that economic forecasts will As always, the timing and direction of further tighten the current stance at their
be revised down in December, which will any future OCR move remains data April 2019 meeting (via another slight
offset an earlier rate hike expectation than dependent". We get the sense that increase in the policy slope), due to the
what is currently priced in (around October the RBNZ is moving towards a more growth staying above potential (even as
2019). Nonetheless, we still expect net neutral stance now, whilst remaining it is projected to moderate in 2019) while
asset purchases to end in December 2018. accommodative, especially following average core inflation is likely to creep
As for policy rates, we are not anticipating recent positive data on inflation, and the higher to 1.5-2.5% in 2019.The latest
any rate increases until much later in 2019 labour market. We keep to our view that GDP growth projection and MAS inflation
– which will lift the deposit rate to 0% (from the OCR will remain on hold until at least outlook do not change our view of further
-0.4% currently) and the refi rate to 0.25% the end of 2019, before rising slowly tightening in 2019. The biggest uncertainty
(from 0% currently) by the end of 2019. thereafter. for this view is still resting on how US-

China trade tensions will evolve in the hikes in 2019 but the Fed policy path is consumption tax policy is expected to lift
months leading up to April 2019. more uncertain next year as the Fed shifts next year’s inflation albeit at a manageable
emphasis to data dependence. So our level. Although growth risks are tilted to
RBI: The Reserve Bank of India (RBI) has 75bps cumulative rate hike in 2019 may the downside, we think BNM is unlikely to
kept its benchmark repo rate unchanged face some downside risks if US economic reset the path of policy rates for now.
at 6.50% in the last two meetings of data weakens significantly or the US-China
2018 but shifted to “calibrated tightening” trade tension re-escalates. For now, we BOT: The Bank of Thailand (BoT) is
stance from “neutral” since October and keep our 25bps/quarter rate hike forecast, expected to hike the policy rate from 1.5%
despite the sharp downward revision in each in Q1, Q2, and Q3 consecutively to to 1.75% in Dec 2018. For 2019, we expect
its near-term inflation forecast. Governor reach 6.75% by end 2019. the BoT to slowly raise the benchmark
Urjit Patel also commented there’s the rate from 1.75% to 2%, possibly in 2H19.
possibility of “commensurate policy BOK: The Bank of Korea (BOK) raised Gradually reducing monetary policy
actions” if inflation continues to undershoot its benchmark base rate by 25 bps to accommodation will continue to support
which seemed to suggest room for policy 1.75% in Nov, a year after its previous economic growth and help cap financial
u-turn to cut interest rates. Looking ahead, hike in Nov 2017. The rate hike was stability risks in the future.
any increase in oil trajectory and further primarily meant to address risk of financial
Fed monetary tightening will likely keep imbalance and also to narrow the gap with BSP: To contain inflation and preserve
the door open for more RBI hikes next US rates. While Governor Lee pointed market confidence, Bangko Sentral ng
year. For now, there remains prospect of out that the policy rate is not at a neutral Pilipinas (BSP), raised its reverse repo
a 25 bps hike in February 2019, though level yet, weaker growth and contained rate (RRR) five times this year by a
the possibility has been much reduced domestic inflation should see the BOK cumulative 175 bps to 4.75% as at end-
due to moderating growth and inflation as retaining its very gradual pace in monetary November. Further rate hikes may resume
well as pressure to ease the credit crunch normalization. We expect the BOK to stay in 2019 given that there are upside risks
leading into election next year. Even with on hold through 1H2019, assuming no to inflation and downside risks to the PHP
less hawkish RBI, we think that rate cuts major surprises in domestic economic amidst further USD strength next year. We
should be off the table for now. conditions or rate normalization trajectory foresee a possibility of + 50bps hike in the
in the major economies. reverse repo rate by BSP in 1H 2019.
BI: Bank Indonesia (BI) has thus far raised
the BI 7-day Reverse Repo Rate by a BNM: Bank Negara Malaysia (BNM) kept SBV: As the economy would be looking
cumulative 175bps to reach the current the Overnight Policy Rate (OPR) steady at in good shape and well able to handle a
level of 6.00% since May 2018. The series 3.25% and statutory reserve requirement return to higher interest rates, the SBV
of rate hikes decision remain consistent ratio (SRR) at 3.50% at its final monetary will likely hike the policy rate from 6.25%
with BI’s pre-emptive, front-loading, and policy meeting this year. The policy rate has to 6.5% in 2H19 to reduce financial
ahead-of-the-curve strategy to anchor the been kept on hold since a hike in January. stability risks. Moreover, the monetary
stability of the domestic financial market Since then, both growth and inflation has policy normalization could help reduce
against increased uncertainty in the global moderated while MYR weakness persists. inflationary pressure and keep headline
financial markets. Our expectation for the The floating of domestic fuel prices (which inflation to remain stable next year.
Fed Reserve remains at three 25bps rate could be implemented by 2H19) and the
Real GDP Growth Trajectory

y/y% change 2017 2018F 2019F 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F
China 6.9 6.6 6.3 6.8 6.7 6.5 6.4 6.6 6.4 6.2 6.1
Eurozone 2.4 1.9 1.6 2.4 2.2 1.7 1.4 1.5 1.5 1.7 1.7
Hong Kong 3.8 3.3 2.8 4.6 3.5 2.9 2.4 2.5 2.9 2.8 2.8
Indonesia 5.1 5.3 5.2 5.1 5.3 5.2 5.3 5.1 5.3 5.2 5.2
Japan 1.7 1.0 0.8 1.1 1.4 0.4 1.0 1.2 0.7 1.7 -0.3
Malaysia 5.9 4.8 4.8 5.4 4.5 4.4 4.7 4.6 4.7 4.8 4.9
Philippines 6.7 6.2 6.5 6.6 6.2 6.1 6.0 6.4 6.4 6.5 6.5
India 7.1 6.7 7.2 7.7 8.2 7.1 6.8 6.8 6.8 7.2 7.1
Singapore 3.6 3.4 2.5 4.6 4.1 2.1 2.6 1.7 2.5 3.2 2.7
South Korea 3.1 2.5 2.5 2.8 2.8 2.0 2.3 2.4 2.3 2.8 2.5
Taiwan 2.9 2.7 2.3 3.1 3.3 2.3 2.1 2.3 2.1 2.4 2.3
Thailand 3.9 4.2 4.0 4.9 4.6 3.3 4.0 3.7 3.8 4.2 4.2
US (q/q SAAR) 2.2 2.9 2.0 2.2 4.2 2.3 2.5 1.2 2.0 1.2 0.8
Source: CEIC, UOB Global Economics & Markets Research

FX, INTEREST RATE & COMMODITIES FORECASTS
FX 07 Dec 18 1Q19F 2Q19F 3Q19F 4Q19F RATES 07 Dec 18 1Q19F 2Q19F 3Q19F 4Q19F
USD/JPY 113 113 114 115 115 US Fed Funds Rate 2.25 2.75 3.00 3.25 3.25
EUR/USD 1.14 1.15 1.16 1.18 1.20 USD 3M LIBOR 2.77 2.95 3.20 3.45 3.45
GBP/USD 1.28 1.25 1.25 1.26 1.27 US 10Y Treasuries Yield 2.89 3.25 3.35 3.40 3.50
JPY Policy Rate -0.10 -0.10 -0.10 -0.10 -0.10

AUD/USD 0.72 0.74 0.75 0.76 0.77
EUR Refinancing Rate 0.00 0.00 0.00 0.00 0.25
NZD/USD 0.69 0.69 0.70 0.71 0.72
GBP Repo Rate 0.75 0.75 0.75 1.00 1.00
DXY 96.8 96.1 95.6 94.5 93.3
AUD Official Cash Rate 1.50 1.50 1.50 1.50 1.75
USD/CNY 6.89 6.95 7.00 7.10 7.10 NZD Official Cash Rate 1.75 1.75 1.75 1.75 1.75
USD/HKD 7.81 7.80 7.80 7.80 7.80

CNY 1Y Benchmark Lending 4.35 4.35 4.35 4.35 4.35
USD/TWD 30.84 31.20 31.60 32.00 32.00 HKD Base Rate 2.50 3.00 3.25 3.50 3.50
USD/KRW 1,118 1,130 1,150 1,160 1,160 TWD Official Discount Rate 1.38 1.38 1.38 1.38 1.50
USD/PHP 52.68 53.00 54.00 55.00 55.00 KRW Base Rate 1.75 1.75 1.75 1.75 1.75
PHP O/N Reverse Repo 4.75 5.00 5.25 5.25 5.25

USD/MYR 4.16 4.19 4.23 4.25 4.25
SGD 3M SIBOR 1.77 2.05 2.30 2.50 2.50
USD/IDR 14,522 14,600 14,700 14,800 14,800
SGD 3M SOR 1.91 2.00 2.25 2.45 2.45
USD/THB 32.83 33.00 33.30 33.50 33.50
SGD 10Y SGS 2.26 2.75 2.80 2.80 2.90
USD/MMK 1,545 1,560 1,580 1,600 1,600
MYR O/N Policy Rate 3.25 3.25 3.25 3.25 3.25
USD/VND 23,310 23,500 23,800 24,000 24,000
IDR 7D Reverse Repo 6.00 6.25 6.50 6.75 6.75
USD/INR 70.90 71.00 72.00 73.00 73.00
THB 1D Repo 1.50 1.75 1.75 2.00 2.00
USD/SGD 1.37 1.39 1.40 1.41 1.41 VND Refinancing Rate 6.25 6.25 6.25 6.50 6.50
EUR/SGD 1.56 1.60 1.62 1.66 1.69 INR Repo Rate 6.50 6.75 6.75 7.00 7.00
GBP/SGD 1.75 1.74 1.75 1.78 1.79

COMMODITIES 07 Dec 18 1Q19F 2Q19F 3Q19F 4Q19F
AUD/SGD 0.99 1.03 1.05 1.07 1.09
1,200- 1,200- 1,200- 1,200-
Gold (USD/oz) 1,239
SGD/MYR 3.04 3.01 3.02 3.01 3.01 1,300 1,300 1,300 1,300
Brent Crude Oil (USD/bbl) 60 55-65 55-65 55-65 55-65
SGD/CNY 5.03 5.00 5.00 5.04 5.04
6,000- 6,000- 6,000- 6,000-
JPY/SGDx100 1.22 1.23 1.23 1.23 1.23 LME Copper (USD/mt) 6,070
7,000 7,000 7,000 7,000

10 UOB Global Economics & Markets Research
ASIA FOCUS
Are We Seeing Trade And Investment Diversion
From US-China Trade Rift?
The escalation in trade tensions between US and China resulted in the first tranche of tariffs being implemented on US$50bn of goods
by US and China on 6 Jul 2018. The second and latest tranche took effect on 24 Sep when US imposed 10% tariff on US$200bn of
Chinese goods and China levied 5-10% tariff on US$60bn worth of US goods in retaliation.
Despite the temporary ceasefire on trade tariffs as both sides go into a 90-day negotiation period post-G20 (which started on 1 Dec
and will close around early March 2019), the lack of consistent details and even differences based on statements from the White
House and the Chinese government left markets weighing the prospects of a breakthrough in the trade impasse. While our base case
is for a long-drawn negotiation process well into 2019 (i.e. extension to the 90-day negotiation period), we think that there remains
significant risk that the US and China would fail to overcome their differences and are not be able to reach an eventual agreement,
leading to re-escalation in the trade tensions.
Given that Chinese goods will now cost more in the US and vice versa due to the additional tariffs that were already imposed, trade
and investment diversion away from China and the US will be inevitable. This could have a larger impact on China than the US due
to the sheer size of Chinese exports compared to the latter. The disruption to the supply chain will quicken if corporates are becoming
more convinced that the US-China trade dispute will be long-drawn and therefore warrant adjustments to their medium/long-term
strategies.
The American Chamber of Commerce in South China published a recent survey report on the impact of the US-China trade tensions
on businesses and investment decisions. Not surprisingly, nearly 80% of surveyed companies have experienced “serious impact or
negative impact” of the combined tariffs on various business operations. Nearly half of the respondents reported loss in markets to
companies from other countries due to the trade dispute. According to the findings, the top three competitor countries are Vietnam,
Germany and Japan (in order of importance). This will have impact on their investment decisions as more than 60% of the companies
are delaying or canceling investments into China and a similar proportion are considering relocation of some or all manufacturing
out of China. Southeast Asia is the first choice for most respondents planning relocation, suggesting some silver lining for the region.
Even before the US-China trade relations took a turn for the worse, foreign and Chinese companies alike were already looking to the
ASEAN countries for investment opportunities, which include the China-led Belt & Road Initiative. The attractiveness of the ASEAN
region was due in part to the lower wage and production costs, tax incentives and better access to the regional markets. Any further
worsening in US-China trade relations will likely accelerate the flows of investment to the region.
The manufacturing sector in ASEAN could be the biggest beneficiary, having received the largest share of China’s outward direct
investment in the last two years. By industry, the Economist Intelligence Unit (EIU) sees Malaysia and Vietnam as the key beneficiaries
in the information and communications technology (ICT) products segment as the presence of major electronics companies in these
countries will allow for easier redeployment of production and investment to these destinations. Using the same reasoning, Thailand
and Malaysia will stand to gain most in the automotive segment given established export networks in these countries while Vietnam
which is already an important garment production centre, will be able to scale up in the midst of the ongoing US-China tensions.
Based on the preliminary data on trade and investment so far, we believe that trade diversion has yet to become evident (due to front-
loading activities) whereas there are nascent signs of investment pick-up in places such as Thailand, Taiwan and Vietnam, suggesting
diversion of some manufacturing activities into these economies due to the US-China trade tensions. These markets could potentially
benefit most from a shift in supply chain if US-China trade tensions drag on.
As part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which will come into effect on 30
Dec 2018, ASEAN countries including Malaysia, Vietnam, Singapore and Brunei have a further edge to attract these investments
given the additional benefits to exporters and importers operating from these markets.

ASIA FOCUS UOB Global Economics & Markets Research 11
The Scale Of Disruption To The Global Production Chain
China Export Growth & Manufacturing Outlook
Will Be Large Given China And The US Are The Main Hubs
Source: Asian Development Bank Source: Macrobond, UOB Global Economics & Markets Research
US-China Trade Tension: Export Performance (USD, y/y %) China, Foreign Trade, Import, Countries, Import, Value, USD
Source: CEIC, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research
25
15.8
20
14.8
12.6
15
9.6
8.9
8.1
8.0
10
6.4
0
-2.1
-5
-10
PH SK TW TH ID SG CN VN MY
2016 2017 2018 YTD y/y
United States, Foreign Trade, Census Bureau,

Manufacturing Outlook In Asia Largely Showing Weakening Trend
Countries, Import, Goods, USD
Source: Macrobond, UOB Global Economics & Markets Research Source: Macrobond, UOB Global Economics & Markets Research

12 UOB Global Economics & Markets Research ASIA FOCUS
Malaysia’s Exports To The US
China Is Top Trading Partner With ASEAN
That Could Potentially Gain From Trade Substitution
Source: Bloomberg, UOB Global Economics & Markets Research Source: BNM
Top 10 Trading Partners With ASEAN (2017)

18.7%
600 20%
500 16%
10.2%
9.9%
400
8.3%
12%
5.7%
300
5.0%
4.7%
4.0%
3.7%
8%
3.0%
200
100 4%
0 0%
CN EU US JP SK SG MY HK TH ID
US$bn % of total
China: Foreign Direct Investment and Outward Direct Investment Wage Costs In ASEAN Are Mostly Lower Than In China
Source: Macrobond, UOB Global Economics & Markets Research Source: CEIC, ILO, UOB Global Economics & Markets Research
2017 Average Monthly Wages (US$)

4,887
* Minimum wage
3,788
3,332
2,026
1,639
937
774
405
284
240
207
183
170
133
Japan
Singapore
Hong Kong
Taiwan
Indonesia
Myanmar
Malaysia
South Korea
Cambodia*
China
Philippines
Thailand
Laos
Vietnam
Manufacturing Receives
US-China Trade Tension: Signs of Investment Diversion?
Largest Share Of China’s Investment In ASEAN
Source: CEIC, UOB Global Economics & Markets Research Source: CEIC, UOB Global Economics & Markets Research
VN FDI: Total Registered Cap (Oct) 27.9 35.9 China's ODI to ASEAN by key sectors (% of total)
100%
21.9
ID Inv Realization: Foreign (Sep) 32.2
80%
19.2 5.4
SK Inward Direct Inv Permitted (Sep) 22.9 13.4
60%
19.0 15.2
MY Funds Inflow: FDI (Jun) 35.3 40%
8.4 17.3
TH Net FDI (Aug) 8.0 20%
22.5
TW Approved Foreign Investment 8.0
7.5 0%
(Oct)
2.6
MM Permitted Enterprise FDI -20%
7.9
Approved (Sep)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.9
PH FDI Approved (Jun) USD billion Manufacturing Wholesale and Retail Trade
2.1 Leasing and Commercial Service Construction
Transport, Storage and Postal Service Financial Intermediation
0.0 10.0 20.0 30.0 40.0 Real Estate Electricity, Gas & Water Production and Supply
Farming, Forestry, Animal Husbandry, Fishery Mining
2018 YTD latest 2017 2016 Others

ASIA FOCUS UOB Global Economics & Markets Research 13
ASEAN: Major Trade And Investment Opportunities
Relocation of supply chain activities to Vietnam is likely to be most pronounced in more basic industries such as wood product furniture,
textile and apparels. For more sophisticated industries with more complex supply chains such as mobile phones, automotive, laptops
and electronics, we may see the shift of activities with lower value-added in the realms of production and assembly, as an initial response
Vietnam in supply-chain adjustment.
1. Intel, Foxconn, LG, and Samsung have recently relocated some parts of their manufacturing to Vietnam.
2. Goertek, the Chinese company assembling Apple’s AirPods, has rerouted all production of the earbuds to Vietnam.
There is potential to increase exports of computer parts to the US and farm products to China such as cassava chips, soybean, seafood,
processed food and frozen food. Potential relocation of investment to Thailand are in industries producing aviation parts, automobile and
parts, computers and parts, electronics, energy equipment, and agricultural machinery.
Thailand 1. Harley Davidson shifted part of its processes to Thailand.

2. Delta Electronics, which supplies power components to Apple Inc., offered $2.1 billion in July to purchase a Thai affiliate to expand
production.
3. Merry Electronics making headphones for firms like Bose Corp. intends to move some of its production to Thailand from southern
China.
Indonesia has absolute advantage in resource-based sectors and her commodity exports to China are estimated to arrive as final
consumption products vis-à-vis a raw or intermediate products for re-exporting. It is also expected to see some mild benefits in
ICT and automotive production relocation as a result of the US-China trade tensions. Investments are also rising in the areas of
telecommunications and provision of consumer products, notably dairy-based consumption products.
The top 5 sector investments based on the latest FDI reports suggested the areas of energy provision (electricity, gas, and water supply),
transportation and storage as well as telecommunication, construction-related (real estate, industrial, an office buildings), mining, and
Indonesia non-machinery metal industries continue to be the areas of great interest. These areas are somewhat less affected by the direct effect
of the trade tensions, although indirectly it has been affected through the slowing down of the FDI’s momentum that is seen notably in
Q3 this year
Key iPhone assembler, Taiwan-based electronics manufacturer Pegatron is preparing to shift production of non-iPhone products
(including set-top boxes and other smart devices) hit by U.S. tariffs on Chinese exports to a rented factory on Indonesia's Batam Island
within the next six months.
Based on the central bank’s study, the products that Malaysia would likely gain from trade substitution opportunities are mostly in the
E&E industry, such as electrical machines, electronic integrated circuits and semiconductors for solar panels cells.
1. Large entry of Chinese semiconductor assembly and test player into Malaysia’s semiconductor firm Unisem.
Malaysia 2. MNCs’ enquiries to local outsourced semiconductor and test companies (OSAT) have risen. These include enquiries for the
possibility for OSAT to go downstream in electronics manufacturing and transfer of MNCs’ matured products in China to Malaysia,
which the local companies are not keen due to the labour intensiveness and lower margins.
3. A number of MNCs with existing operations in Penang are in the midst of expanding or planning for expansion. Higher demand for
machines from MNCs operating in Malaysia.
There is increasing interest to establish manufacturing and production facilities in Thilawa Special Economic Zone (SEZ) among the
firms.
Myanmar signed a memorandum of understanding (MoU) with China in September 2018 agreeing to establish the China-Myanmar
Economic Corridor (CMEC), part of the Belt and Road Initiative. Under the MoU, the governments agree to collaborate in several
Myanmar industries such as transport, basic infrastructure, construction, manufacturing, agriculture and telecommunications.
In November 2018, the Myanmar government and China’s state-owned CITIC Group signed the framework agreement for the proposed
US$1.3 billion deep-sea port in Kyaukphyu. Myanmar is also in the midst of finalizing an agreement to export cattle to meet increasing
Chinese demand.
Economic Planning Secretary Ernesto Pernia said that the US-China trade war should benefit the Philippine economy, helping increase
exports by 5% as the country becomes an alternative source of products and even a site for supply chains. He added that there are
already signs electronics and computer components, previously sourced from China, are now going to the Philippines.
1. Ayala Corp is in talks to provide land to a Chinese company planning to build one of the world’s biggest tile factories in the
Philippines Philippines.
2. Chinese steel company Panhua Group will build a 305-hectare integrated steel manufacturing plant at an industrial estate in
Misamis Oriental Special Economic Zone, with an investment of US$3.5bn.
3. China Gezhouba to invest initial US$2bn in New Clark City to develop 500-hectare mixed-used industrial park in Clark, north of the
capital, which is expected to attract electronics manufacturing companies, technology firms and light industries.
4. New Kinpo Group, a Taiwanese contract electronics maker, looks to build new facilities in the Philippines.
Source: Bloomberg, Newswires, UOB Global Economics & Markets Research
For full report, please refer to our website: www.uobgroup.com/research.

14 UOB Global Economics & Markets Research ASIA FOCUS
SINGAPORE FOCUS
The 2019 SGS Supply Schedule
We expect SGS bonds outstanding to increase in line with the 6% average growth rate experienced since implementation of Liquidity
Coverage Ratio (LCR) in 2015.
A 6% growth rate equates to around SGD 7bn of net supply or SGD 23bn of gross supply in 2019.
SG rates are expected to continue their track higher in 2019 while the yield curve could see some steepening impulse from supply
in the first half of the New Year.
2018 Supply Announcement 2019 Supply Announcement
Outstanding SGS bonds grew by about 5% per annum on Over the past few years, outstanding SGS bonds have grown
average over the past five years. In the past one to two years, steadily, at around 5% - 8% per annum. Market conditions
there has been increased demand for high quality liquid have been supportive, driven by an increased demand for
assets from financial institutions. Subject to prevailing market high quality liquid assets from financial institutions. MAS
conditions, MAS plans to grow outstanding SGS at a slightly intends to maintain a similar pace of growth for SGS bonds
faster rate in 2018 to meet the higher demand. MAS will in 2019, subject to prevailing market conditions. Increasing
continue to monitor market conditions and calibrate issuance the amount of outstanding SGS bonds will meet the demand
sizes to facilitate an efficient and liquid secondary market. for high quality liquid assets from financial institutions and
improve secondary market liquidity. MAS will continue to
monitor market conditions and calibrate issuance sizes to
facilitate an efficient and liquid secondary market.
MAS released the 2019 SGS auction calendar on the 12th supply growth received a boost stemming from regulatory driven
November. Overall there was no major surprise, but it does contain demand. The implementation of Liquidity Coverage Ratio (LCR)
a few tweaks in response to market dynamics seen this year. acted as a demand shock for High Quality Liquid Assets (HQLA)
which resulted in a doubling of net supply that year to SGD 7.1bn.
In the table above, we’ve highlighted the main difference in language The average annual growth rate in SGS since 2015 has been
between 2019 and 2018’s announcements that accompanies more volatile, ranging from 3.9% to 7.9%, compared to the
the auction calendar. Our takeaway from the statements is that previous period due to the tiered transition phase for regulatory
demand for SGS is expected to mean revert back to historical compliance. This transition period to the LCR regime will be
averages after having experienced above average growth in 2018 complete by 01 January 2019, and with that we are expecting to
and especially in 2015. see year on year SGS growth rates become less volatile. Average
growth rate going forward is likely to oscillate around 6.0% in the
Annual growth in the SGS market from 2008 to 2014 had absence of new demand shocks. Supply shocks, i.e. fiscal deficit
been fairly stable and ranged from 4.0% to 5.6% or around an financing requirements, do not apply since SGS proceeds are ring
average of SGD 3.6bn of net supply each year. In 2015, SGS fenced and cannot be used to pay for Government expenditures.
Growth In SGS Bonds Outstanding (2008 to 2018) What’s Coming Up In 2019?

Auction schedule extended by 1 month
Source: Bloomberg, UOB Global Economics & Markets Research Next year’s SGS auction schedule will see November being
9.0% reintroduced back into the regular calendar for 10 bond auctions
(excluding mini-auctions) in 2019 compared to 9 bond auctions in
8.0%
2018. New issuance tenors shift from 5Y and 10Y this year to 5Y
7.0%
and 20Y next year, but the incremental duration from a 20Y new
6.0% issue will be offset by a 10Y re-open substituting for this year’s
5.0% 15Y re-open.
4.0%
Swan song for Mar 2046
3.0%
30Y tenor (Mar 2046) will be re-opened again in 2019, to satisfy
2.0%
requirements for regular long bond issuances from the insurance
1.0% industry. We are likely to see the introduction of a new 30Y
0.0% benchmark in 2020, and given the availability of Mar 2046, the
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 status shift into an off the run bond suggests that the bond might
Pre LCR average Post LCR average
take a break from the next few regular auction schedules after 2019.

SINGAPORE FOCUS UOB Global Economics & Markets Research 15
A nod to LCR requirements
Next year’s plan for the shorter maturity bonds closely resembles 2018 2019
what had transpired this year in terms of mini-auction utilization.

Q1 2Y, 5Y*, 30Y, mini 5Y*, 5Y, 30Y
Both mini-auctions in 2018 were optioned for the 5Y tenor clearly
Q2 5Y, 10Y*, 20Y 2Y, 10Y, 20Y*, mini
indicating that demand from financial instructions was robust due
to LCR requirements. 2019’s calendar has taken this on board by Q3 2Y, 7Y, 15Y 2Y, 5Y, 10Y, mini
increasing the frequency of 5Y auctions to three times from this Q4 mini 7Y
year’s twice. * New Issue
Source: Bloomberg, UOB Global Economics & Markets Research
Longevity tweak for 2Y benchmark

The 2Y SGS benchmark in waiting (Oct 2021) will be re-opened SGS Years Remaining Amount Outstanding
twice next year and in a departure from semi-annual changes in
the 2Y benchmark bond, Oct 2021 will retain benchmark status 01/06/2019 0 8,700,000,000
for the rest of 2019 after its first re-open auction in May. Hence, 01/10/2019 1 7,100,000,000
revealing the motivation behind a double re-open in order to 01/07/2020 1 5,500,000,000
ensure sufficient liquidity. This tweak to increase the longevity in
01/09/2020 2 8,000,000,000
the 2Y SGS benchmark will help to reduce transactional costs due
to indexation rebalancing. 01/06/2021 2 8,000,000,000
01/10/2021 3 3,200,000,000
Mini-auctions option for longer maturities 01/04/2022 3 3,400,000,000
Schedule for mini-auctions has been pushed closer together in
01/09/2022 4 6,300,000,000
2019 and coincides with the 2Y SGS re-opens. This offers an
option for alternatives in the event that demand for 2Y bonds turn 01/02/2023 4 2,900,000,000
out to be below expectations. The trade-off is that it leaves the 01/07/2023 4 8,800,000,000
last quarter of the year without a pressure relief valve if demand 01/02/2024 5 New
for SGS duration were to pick up during the supply drought period
01/09/2024 6 6,400,000,000
between Q4 2019 and Q1 2019.
01/06/2025 6 3,900,000,000
Historical seasonality unperturbed 01/06/2026 7 4,200,000,000
The messaging from 2019’s auction calendar is similar to this year 01/03/2027 8 8,300,000,000
when bucketed into quarterly tranches. Seasonal tendencies have
01/05/2028 9 3,000,000,000
not been significantly altered by next year’s supply pipeline. The
30Y re-open in 1Q will remain the focal point from now till auction 01/07/2029 11 2,200,000,000
day and should keep yields at the longer end of the curve supported 01/09/2030 12 4,200,000,000
baring an external shock. Historically, Q2 tends to be associated 01/09/2033 15 5,900,000,000
with a swoon in yields, broadly driven by diminished euphoria from
01/08/2036 18 3,800,000,000
the start of the year; this may turn out to be shallower in 2019 in
light of a mini-auction as well as due to the flatter yield curve. 01/07/2039 21 New
01/04/2042 23 5,100,000,000
Expecting incremental net duration increase for 2019 01/03/2046 27 5,800,000,000
Overall, we expect duration injection in 2019 to be marginally
higher than in 2018. Given the adaptations in the 2019 calendar
with LCR requirements in mind, we see a reasonable likelihood of
mini-auctions being optioned for a longer maturity bond (> 10Y). The SGS Market In 2018
This possibility will increase if issuances from statutory boards SGS Curve
and quasi government entities in 2019 fail to satiate investors Year to date (mid Nov), SGS yields have broadly risen in response
demand for good quality long duration assets. to an ongoing FED tightening cycle. The curvature is flatter with
the 2s30s at 111bps in January falling to 79bps as of 16 November.
However, the aforementioned masks the bifurcation that has
SGS Tenor 2018 Auctions 2019 Auctions Change
occurred in the SGS curve. Specifically, tenors between 10Y
2 2 2 - to 30Y have essentially repriced their yields higher in a parallel
5 2* 3* 1 fashion over the year such that current levels in 10s15s, 10s20s,
and 10s30s are effectively unchanged when compared to their
7 1 1 -
January levels. SGS curve flattening has therefore been driven by
10 1* 2 1
yield gains in the shorter maturities and with the back end of the
15 1 0 -1 curve locked, the 2s10s30s butterfly has richened from 25bps in
20 1 1* 0 January to parity as of 16 November.
30 1 1 0
* Tenor with New Issue

16 UOB Global Economics & Markets Research SINGAPORE FOCUS
How does the 2019 SGS calendar play into this? SG bondswap spreads have been tight across tenors in 2018.
An auction calendar designed with anticipated LCR demand in This is consistent with 1) the rate differential between domestic
mind means that January’s new 5Y issuance will be an important unsecured funds, proxied by MAS bills, and the synthetic SG
litmus test. The widely held assumption is for the auction to go funding rates via FX swaps and 2) our composite proxy of domestic
well, for a size that is not significantly smaller than this year’s SGD credit stress which is residing on the low end of its post 2008 Great
2.9bn of Feb 2023. If 5Y auction demand were to under deliver Financial Crisis range. One of the more widely held thematic for
and with 30Y re-opening and 20Y new issue to follow, this could the year ahead is for the return of volatility premised on slowing
pose richening risk for the 2s10s30s butterfly in the first half of global growth and central banks tightening liquidity conditions,
2019. thus it remains to be seen if tight SG bondswap spreads are able
to transition and emerge unscathed this time next year. Our strong
SGS Yield Curve In 2018 preference is to fade bondswap spread inversions (IRS < SGS) as
those positions represent a fairly cost effective way for riding on
the consensus volatility theme.
How does the 2019 SGS calendar play into this?

3.20 Supply impact on spreads to UST and SG IRS if any is likely
2.70 to be of limited magnitude and transitory in duration. The more
significant driver behind both spreads is the domestic currency’s
2.20
performance and any related capital flow outcomes.
1.70
1.20
Jan
2018 SGS vs. UST Spread Range
Apr
20Y Source: Bloomberg, UOB Global Economics & Markets Research
Jul
10Y
Oct 0.20
2Y
1.20-1.70 1.70-2.20 2.20-2.70 2.70-3.20 0.00
-0.20
Bondswaps And SGS Discount To UST
SGS performance vs. UST is on track to put in a credible showing -0.40
%
for 2018 as the SGS yield discounts hover close to their year
-0.60
to date range lows across all the benchmark tenors. Deeper
discounts has been the path of least resistance given that the
-0.80
SGS market in this FED hike cycle has generally held onto its
lower beta sensitivity towards overnight changes in UST prices. -1.00
Back to back steepening of the SGD NEER slope by MAS in April 2Y 5Y 10Y 15Y 20Y 30Y
and October has also helped to bolster the appeal of SG assets. 15-Nov-18
Notably, market confidence in the domestic currency versus its

trade weighted basket has proven fairly resilient; mounting “V”
shaped recoveries on occasions when it weakened to the trading 2018 SGS vs. IRS Spread Range
band’s parity. Into 2019, our US macro team expects the FED
to deliver another 3 rate hikes. In addition, the interplay between
FED balance sheet reduction and US budget deficit will also be 0.30
supportive of UST yields. On the other hand signs of slowing
0.25
growth have already been felt in survey data and jittery markets
0.20
lowers the bar for adverse capital flows and the concurrent risk
repricing could cause SGS to underperform UST. 0.15
0.10
%
0.05
0.00
-0.05
-0.10
-0.15
2Y 5Y 10Y 15Y 20Y 30Y
15-Nov-18

SINGAPORE FOCUS UOB Global Economics & Markets Research 17
MYANMAR FOCUS
Myanmar In Transition: Opportunities & Challenges
Myanmar’s GDP is expected to expand by 6.9% in 2018, mainly driven by improving exports and FDI and manufacturing expansion.
Going forward, the local currency is expected to weaken against the USD as a result of current account deficit and the strengthening USD.
The government passed the Myanmar Investment Law 2016 and the Myanmar Companies Law 2018 so as to attract more foreign
investment.
Myanmar also signed a Memorandum of Understanding (MoU) with China for the China-Myanmar Economic Corridor (CMEC) which
would connect China’s landlocked Yunnan through Mandalay to Yangon and Kyaukphyu on new roads and a high-speed railway.
Although Myanmar is rich with opportunities in many sectors, investors faced several economic and technical challenges that need to be
addressed by the government.
Exhibit 1: Rapid Economic Growth Has Relied

Exhibit 2: A Weakening Local Currency Despite Increasing FDI
On External Sources Of Financing
Source: IMF, UOB Global Economics & Markets Research Source: IMF, UOB Global Economics & Markets Research
10 5,000 0
8 4,500 200
6 4,000
400
3,500
4
3,000 600
2
2,500 800
0
2,000 1,000
-2
1,500
1,200
-4 1,000
-6 500 1,400
-8 0 1,600
2010 2011 2012 2013 2014 2015 2016 2017 2018F 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Current Account (% Of GDP) GDP Growth (%) Net FDI Inflows (Million USD) USD-MMK Exchange Rate - inverted (RHS)
Exhibit 3: Development Zones In The MIL 2016 Table 1: Investment Benefits For Promoted Industry
Zone The MIL 2016 The FIL 2012

Source: MIC
Exempt corporate income tax Exempt corporate income tax
Zone 1
for 7 years for 5 years for all businesses
Exempt corporate income tax
Zone 2 -
for 5 years
Exempt corporate income tax
Zone 3 -
for 3 years
Source: MIC

18 UOB Global Economics & Markets Research MYANMAR FOCUS
Exhibit 4: Improving The Ease Of Doing Business Ranking Exhibit 5: As A Large Petrochemical Facility,
Is A Must For Myanmar Kyaukphyu Is A Pivotal Point On the CMEC
Source: World Bank, UOB Global Economics & Markets Research Source: Reuters
Ease of Doing Business Index 2019

171
154
138
69
27
Cambodia Laos Myanmar Vietnam Thailand
Exhibit 6: Low Wage Costs Attract Exhibit 7: Myanmar-Thailand Border Trade

Multinational Enterprises To Myanmar Reached $2.9 Billion In 1H18
Source: Trading Economics, UOB Global Economics & Markets Research Source: MOC, UOB Global Economics & Markets Research
Minimum Wages (USD/Month)

274 3,823 3,706
3,325
3,099 3,175
2,894 2,944
2,587
170 170 2,229 2,222
1,705
128
1,241
90.5
2013 2014 2015 2016 2017 1H18

Thailand Cambodia Vietnam Laos Myanmar Thailand's Border Exports To Myanmar (USD Million)
For full report, please refer to our website: www.uobgroup.com/research.

MYANMAR FOCUS UOB Global Economics & Markets Research 19
US FOCUS
Assessing The Likelihood Of A US Recession In 2019
Based on the latest Fed Reserve’s US recession probability and excess bond premium (EBP) forward looking indicators, we are unlikely
to see the US economy enter into a downturn in 2019, even as the US Treasury markets saw its first yield curve inversion in more than a
decade on 3 Dec 2018.
Looking ahead into 2019, the current US monetary policy cycle will be on course to converge with the long term neutral rate and the UST
yield curve will also be approaching an inflection point where flattening is no longer the path of least resistance.
What lies ahead at this late cycle phase will depend on how markets manage the transition into an investment environment that is less
forgiving due to diminished liquidity amidst a backdrop of slowing economic activity. The tricky part with transitions, even in the best of
times, is that the process is seldom smooth or linear.
Inversions In Parts Of Yield Curves

– Not Time To Panic, Yet United States, Government Benchmarks Yield
Something happened to US Treasuries on Source: Macrobond, UOB Global Economics & Markets Research
3 Dec (2018). The US Treasury markets
saw its first yield curve inversion in more
than a decade since 2007 as the curve
flattened further that day. The spread
between 5- and 2-year UST yields fell to
a -0.36bps while the 5- and 3-year UST
yields fell even more to -0.6bps on that
day.
While the 5- and 2-year or the 5- and

3-year spreads are not the best measures
versus the more popular spread between
the 10- and 2-year UST – traditionally
seen as a good predictor of recession 4
to 6 quarters ahead – has been narrowing
(to about 11-12 bps as of 6 Dec) but it is
still positive. While it is not inconceivable
that the 10s-2s spread may turn negative
at some point in 2019, and with a forecast
timeframe of 4 to 6 quarters. This implies
a US recession in 2020/21, not in 2019.
As such, while inversions parts of the

US yield curves are worth noting, one
should not conclude that a US economic
recession is imminent, without taking into
account of other data.

20 UOB Global Economics & Markets Research US FOCUS
Watch For Levels And Speed Of
Recession Probability Curve US Recession Probability Is Rising But Still Far From “40%” Threshold
So what is the chance of a US recession Source: Macrobond, UOB Global Economics & Markets Research
in 2019? Based on the US recession
probability as calculated by the New York
Federal Reserve, the short answer is the
chance of recession has risen but not very
high at 14.12% (as of Nov 2018 for a Oct
2019 recession projection).
To put it into context, the likelihood for 40% Threshold

recession is considered high at the 40%
threshold, so by that measure, we are not
there yet.
In addition to the level of the recession

probability and the threshold, one should
also watch for the “speed” at which the
probability is rising. In the prior episodes,
US recessions were preceded by sharp US Recession Risk & The Excess Bond Premium Also Points To Low Recession Chance
move higher of the probability, as events
such as financial crisis in the 2008 and Source: Macrobond, UOB Global Economics & Markets Research
the subsequent business and consumer

reactions triggered the economic
downturn.
At the current juncture, the slow climb up

and tentative moves suggest that the risk
of recession should remain contained for
now. However, risk events abound in 2019
that could very well trigger a sharp spike in
the recession probability.
For example, if the current US-China trade

truce and negotiations, ending in early
March 2019, take a turn for the worse,
that could certainly figure prominently
in investors’ risk aversion, which in turn
could drive down long term US treasury Watch Out For Moves In Excess Bond Premium
yields, as seen in late May 2018 when the Another forward-looking indicator that is used to gauge the probability that the US
White House announced trade tariff on economy will enter a recession sometime during the next 12 months is the excess bond
Chinese goods after having announced in premium (EBP which is essentially corporate bond credit spread). Again, the risk is low
statements just weeks earlier of “no trade at 16.1% (as of Oct 2018). To be sure, we believe that US growth after an long stretch
war”. of uninterrupted expansion will eventually come to an end at some point (i.e. business
cycle), but that end is not in 2019, in our view.

US FOCUS UOB Global Economics & Markets Research 21
1. Yield curve chart
Looking into 2019, the current US Flat Curvature Reminiscent of Late Cycle Expansion
monetary policy cycle will be on course Source: Bloomberg, UOB Global Economics & Markets Research
to converge with the long term neutral
rate. In this late cycle stage, the UST 3.5
yield curve will also be approaching 3.0

an inflection point where flattening is 2.5
no longer the path of least resistance.
2.0
Although we are not ruling out a curve
inversion scenario, it will become 1.5
%
increasingly clear that curve flattening 1.0
tailwinds from the rate hike cycle and 0.5
a global hunt for yield are diminishing
0.0
while steepening pressures are
building from deficit financing and -0.5
asymmetric inflation risk. Looming on -1.0

1999 2002 2005 2008 2011 2014 2017
the horizon is a phase of aggressive
NBER Recession 2s10s UST
curve steepening but this outcome is
premature until there is consensus that
we have reached a cyclical peak in the
Fed funds rate. Ebbing Liquidity and Tighter Financial Conditions
2. Financial Conditions chart Source: Bloomberg, UOB Global Economics & Markets Research
Liquidity as seen through the lens of 16 1.0

the combined FED, ECB and BOJ’s
balance sheet expansion programs, 15
0.5
ushered forth an extended period of
14
easier financial conditions globally.
USD Trillion
This enabling environment which has 0.0
Index
13
incentivized a global hunt for yield
and compression of risk premiums 12
-0.5
has reached a turning point when the
11
FED balance sheet reduction program
-1.0
began in October 2017 and is set 10
to decline more measurably when
the ECB ends its net asset purchase 9 -1.5
2015 2016 2017
program at the end of 2018. Investors G3 Central Bank Balance Sheet (lhs) World Financial Conditions Index (rhs)
should therefore be cognizant of a
possible dawning scenario where the
price of risk undergoes a symmetric
unwind.
3. Volatility table
There has been a nascent reawakening
2018 Late Cycle (since 2000)
of volatility across equity, rates and Indicator Current
currency markets this year and it is a Average Max Average Max
reasonable proposition to make that
Equity Volatility (VIX) 16.4 15.7 37.3 16.7 33.5
the halcyon days for volatility may
be behind us. What lies ahead at 53.1
this late cycle phase will depend on Rates Volatility (MOVE) 53.4 71.8 80.1 123.8
how markets manage the transition 7.7
Currency Volatility (CVIX) 7.5 8.7 8.4 9.3
into an investment environment that
is less forgiving due to diminished Source: Bloomberg, UOB Global Economics & Markets Research
liquidity amidst a backdrop of slowing
economic activity. The tricky part with
transitions, even in the best of times,
is that the process is seldom smooth
or linear. Thus, aside from potentially
higher average volatility levels during
late cycles, episodes of volatility spikes
in the later stages can also reach more
extreme levels.

22 UOB Global Economics & Markets Research US FOCUS
FX STRATEGY
Cracks Start To Appear In The Strong US Dollar Armor
Asia FX Tried Its Best To Steady In 4Q After An Intense Year Of Sell-Off Growth To Stall Or Moderate In 2019
For China And Asean 5
GDP Forecasts 2018 2019
114
China 6.6% 6.3%
112
Singapore 3.4% 2.5%
110
Malaysia 4.8% 4.8%
108
Thailand 4.2% 4.0%

106
Indonesia 5.3% 5.2%

104
102
Philippines 6.2% 6.5%
Nov Jan Mar May Jul Sep Nov
Source: UOB Global Economics & Markets Research
Asia Dollar Index (ADXY)
Across October and November, the weakness in most Asian FX Heading into 2019, as negative effects of the protracted trade
panned out largely as anticipated, anchored by further declines in stand-off between Beijing and Washington begin to sink in more
the CNY. Despite dropping for a third straight quarter, the pace of materially, growth slowdown in the most Asia economies would
decline has moderated. become more evident. Amidst this cautious backdrop, regional
central banks are likely to hike rates more carefully and the wide
The Asia Dollar index (ADXY), a popular gauge of Asia FX declined monetary policy gap with the Fed would still underpin a defensive
by 0.3% to 104.46 over the past two months, after dropping 4.2% tone in Asia FX for most part of 2019.
(in 2Q18) and 2.1% (in 3Q18) respectively. Also, volatility in most
Asian FX pairs remains muted, smoothed by measures by various Overall, we are still projecting a further 2.4% to 4.5% slide in most
central banks to mitigate capital outflows and FX interventions. Asia FX against the USD in the first half of 2019. Thereafter, USD
Average implied volatility of USD/Asian FX (SGD, MYR, IDR, strength against Asia FX may taper off in the second half of 2019
THB, CNH) steadied around 6% across October – November, with once we head towards the tail end of the FED’s hiking cycle.
little pass-through from the turbulent equity markets correction
occurring in the same period. Over in G-10, a recovery in the EUR is our conviction view for next
year. We see EUR/USD bottoming and rising gradually across
A swift reversal of the popular consensus trades was the standout next year from 1.15 to 1.20. With that, the Dollar Index (DXY) is
of this quarter. Markets returned to buy PHP, IDR and INR in expected to retreat gradually from 96 to about 93 in the same
November due to oversold conditions and high carry after a year- period. In addition, despite concerns over growth slowdown in
long selloff. The pace of their recovery was also accentuated by a China, the AUD/USD may take advantage to recover above the
rapid fall in oil prices which eased the pressure on their respective 0.77 level.
current-account deficits. With the move, hedging costs and levels
for PHP, IDR and INR have become more attractive for investors
to hedge against further weakness into 2019.

FX STRATEGY UOB Global Economics & Markets Research 23
USD/CNY To Continue Its Measured Push
Above 7.00 Despite Temporary Tariff Truce An Intensifying Slowdown In China Weighs On The RMB
Immediately after the G20 tariff truce between US and China, Source: Bloomberg, UOB Global Economics & Markets Research
USD/CNY fell hard from 6.95 to 6.85. However, this correction is
53
unlikely to derail USD/CNY materially from its upside trajectory
towards the psychological 7.00 level. Reaching that level is now a 52
matter of time, especially when recent data has shown a marked
51
deterioration of the Chinese economy as negative effects of the
trade conflict between US and China are starting to show. The 50
latest China manufacturing PMI dropped to 50.0 in Nov from 50.2
49
in Oct, nearest to contraction territory (defined as below 50.0) since
July 2016 and adds to a growing list of data disappointments. This 48
is in contrast to US data which has broadly stayed firm.
47
On the monetary policy front, the People’s Bank of China (PBoC) is 46

also adopting a more targeted accommodative stance, even though Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
it has not announced any official shift from its “prudent and neutral” New Export Orders Manufacturing PMI
policy. The PBoC has cut the Reserve Requirement Ratio (RRR)
for the fourth time this year in early Oct, with the latest cut releasing
RMB 750 billion of liquidity back into the banking system. We Yield Advantage Of China's 10Y Bonds At Its Narrowest
continue to see scope for further RRR cuts in the months ahead, To The US 10Y Treasuries Since 2010
possibly around early 2019 ahead of the Spring Festival. On the Source: Bloomberg, UOB Global Economics & Markets Research
other hand, we expect the Fed to hike once more this year (Dec)
4.0
and three times in 2019, bringing the Fed funds rate to a range of
3.7
3.00 – 3.25% by end 2019. 3.4
3.1
Despite the clear divergence in economic data and monetary policy 2.8
2.5
as pointed above, the pace of further RMB weakness may still be 2.2
measured. Markets probably took into account the various targeted 10Y UST yield 10Y CGB yield
measures implemented by the PBoC in the last few months. A 200
20% reserve margin ratio for forward sales of CNY as well as the
reintroduction of Counter Cyclical Factor (CCF) have discouraged 100
speculation and dampened extreme moves in the domestic
currency. Barometers of RMB devaluation pressures such as the
0
CNH forward points and the gap between CNY and CNH remain Dec Mar Jul Nov
low and stable. 10Y China-US yield gap (bps)
Taking into account all the factors as discussed, we maintain our

measured trajectory of USD/CNY above 7.00 next year, with point
Front-Loading Of Orders Resulted In
forecasts at 6.95 at 1Q19, 7.00 at 2Q19, 7.10 at 3Q and 4Q19. Robust Exports Growth Which Is Expected To Turn Lower Eventually
As both CNY and CNH forwards are still below the psychological Source: Bloomberg, UOB Global Economics & Markets Research
7.00 level, one may find value in hedging for further USD upside at
current levels. At this juncture, it is probably premature to anticipate
45
sustained weakness in USD/CNY after the recent truce on trade
tariffs, especially when details are still lacking and challenges for an 35
eventual resolution remain. 25
In recent years, China is gaining prominence as the bellwether 15
for the rest of Asia. So as China’s growth slows further to 6.3% in 5

2019 from 6.6% in 2018, there should be a noticeable drag on other
-5
Asia economies. Negative effects of the existing bilateral tariffs on
US and China goods should sink in more materially in 1H19 as -15
effects of frontloading of exports (in 4Q18) in anticipation of higher
-25
tariff rates fade. Together with the ongoing risk aversion in financial Jan-14 Dec-14 Nov-15 Nov-16 Oct-17 Sep-18
markets, the weakness of Asian FX is likely to continue, extending China Exports (YoY, CNY terms)
the slide by a further 2.4% to 4.5% against the USD from current
levels for the next 4 quarters.

24 UOB Global Economics & Markets Research FX STRATEGY
A Sustained Recovery In EUR EUR/USD Pinned Down At 1.05 To 1.25 Range
The ingredients for a more sustained recovery in the EUR are Since QE Started In Early 2015
falling in place in 2019. Source: Bloomberg, UOB Global Economics & Markets Research
5000 1.50
Firstly, the EUR 2.6 trn bond-buying programme will draw to a close
1.45
by the end of December. To a certain extent, the massive stimulus 4500
1.40
plan by the European Central Bank’s (ECB) has kept the EUR/USD
4000 1.35
pinned within a 1.05 to 1.25 range since its implementation in early
2015. So, once the ECB’s balance sheet stops expanding in 2019, 1.30
3500
one of the key pressure point on the EUR could start to alleviate. 1.25
3000
Also, as suggested by ECB President Draghi recently (26-Nov), 1.20
the recent weakening in euro-area growth momentum is likely to 2500 1.15
be “temporary” and unlikely to scupper the withdrawal of monetary 1.10
2000
stimulus. 1.05
1500 1.00
Next, with policymakers still largely confident that they would Dec-08 Jul-10 Mar-12 Nov-13 Jun-15 Feb-17 Oct-18
weather the slowdown, discussions by the ECB about its maiden ECB Balance Sheet (million euros) EUR/USD (RHS)
rate hike would eventually begin in 2019. This is likely to a key
upside catalyst for the EUR especially where pricing for a rate move
higher is very modest now. According to Bloomberg, markets are
Rise In Italian BTP Yield Tops Out,
only pricing in a 6 bps hike in ECB’s deposit rate to -34 bps from Providing A Floor To EUR/USD At 1.12
-40 bps currently. Source: Bloomberg, UOB Global Economics & Markets Research
350 1.26
Aside to the growth slowdown, increased risks related to Italy’s
fiscal sustainability also weighed on the EUR over the last couple 1.24
of months. The European Commission had rejected Italy’s draft 300
1.22
budget of a 2.4% (of GDP) deficit for 2019 in Oct and Italy replied
that it would stick to its original spending plans. The stalemate has 250
1.20
resulted in 10-year Italian bonds (BTP) widening to as much as 326
bps above 10-year German bonds (Bunds) on 20-Nov, the widest 1.18
200
since Apr 2013. 1.16
150
That said, the probability of a euro break-up within the next 12 1.14
months is still at a low 12% in Nov, according to latest sentix survey.
100 1.12
The same measure was as high as 73% at the height of the Greek Nov 17 Feb 18 May 18 Aug 18 Nov 18
debt crisis in 2012. Currently, the BTP-Bund spread has stopped 10Y BTP-Bund spread (bps) EUR/USD (RHS)
widening and is steady just below 300 bps and a further stabilization
in 2019 could conversely benefit the EUR.
Recent Italian Budget Crisis Is Less Intense
Going forward, while spot EUR/USD has been attempting to bottom Than The Greek Crisis In 2012
at 1.12 in Nov, risk reversals have already bottomed in Aug and has Source: Bloomberg, UOB Global Economics & Markets Research
been grinding higher since. Unless there is a severe escalation in
80
the EU-Italy row, further downside in EUR/USD is limited and the
positive factors mentioned above are likely to spur a sustained rally 70
in 2019. Overall, we see EUR/USD bottoming and rising gradually 60
across next year from 1.15 in 1Q19 to 1.20 in 4Q19.
50
40
%
30
20
10
0
Jun-12 Oct-13 Feb-15 Jun-16 Oct-17
Probability of Euro Break-Up in 12 Months

FX STRATEGY UOB Global Economics & Markets Research 25
Risks To Our USD View Markets Are Only Pricing In About 2 Rate Hikes Within A Year,
The current bout of USD strength both against Developed Markets Including The Upcoming Hike In Dec
(DM) and Asia Emerging Markets (EM) in 2H18 has largely been Source: Bloomberg, UOB Global Economics & Markets Research
anchored on monetary and economic divergences between US and
3.00
its peers. US economic data such as GDP, jobs, ISM manufacturing
and sentiment surveys are at their best levels in years (or even 2.80
decades in the case of unemployment rate) and that gave the US
2.60 2.62
Fed the confidence to stick to its gradual rate hike trajectory this
year. 2.40
2.20
As the Fed approaches its neutral rate, which we estimate is at about
3% (current: 2.00% - 2.25%), there is increased market speculation 2.00
of a further graduation in hiking trajectory or even a rate pause in
1.80
the coming year. On 29-Nov, FOMC Chairman Jerome Powell said
interest rates remain “just below” the neutral rate, which is seen as 1.60
a significant departure from his hawkish comments made on 3 Oct Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18
when he said “we may go past neutral”. Powell reiterated there is Fed Funds Rate in Dec 2019 (%, as implied by OIS)
no pre-set policy path and the Fed is paying “very close attention”
to data. Should US data start to underperform estimates in the
coming year, the Fed could hike lesser than expected. Our base A Sudden Plunge In Oil Prices Over The Last 2 Months
case remains that of 3 rate hikes across 2019. Further downward May Cap Any Runaway Inflation Expectation Next Year
expectation of Fed rate hikes may put downside risks to our USD Source: Bloomberg, UOB Global Economics & Markets Research
forecasts.
90
On the other end of the spectrum, an overshoot of US inflation 85

leading to a steeper rate hiking trajectory response from the Fed
80
remains our key upside risk to our USD forecasts. However, with
the sudden plunge in oil prices in 4Q18 from a 4-year high of USD 75
86.74 / bbl (Brent crude) to current levels of about USD 60, coupled
70
with the temporary truce against further hikes in trade tariffs
between US and China, the pass-through to higher inflation looks 65
more unlikely compared to just a quarter ago.
60
55
Nov 17 Feb 18 May 18 Aug 18 Nov 18
Brent Crude, USD per barrel

26 UOB Global Economics & Markets Research FX STRATEGY
COMMODITIES STRATEGY
Crude Oil Takes Over The Volatility Baton From Copper And Gold
Acute Correction Wipes Out All Of Brent Crude Oil's Gains For The Year
130
125
120
115
110
105
100
95
90
85
80
Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Oct 18 Nov 18
Gold Spot (USD / oz) Brent Crude Oil (USD / bbl) 3M LME Copper (USD / MT)
As the US Federal Reserve continued to hike into the on-going Elsewhere, in the energy space, crude oil stole the limelight for
US-China trade row, investor concerns over the potential negative all the wrong reasons. Global investors and industry players were
impact on global growth and activity intensified. All these cumulated completely blindsided by the last minute “leniency” from the Trump
in the intense sell-off in crude oil across 4Q in which all of its administration which granted temporary waivers for continued
painstaking gain made since the start of the year was erased in just import of Iranian crude oil. The conversation for crude oil suddenly
under 6 weeks. As volatility in crude oil spiked, gold and copper flipped from a potential supply deficit due to the Iran export sanction
were contend to stay out of the limelight and instead consolidated to the renewed supply overhang due to global growth slowdown.
around familiar levels without much fanfare across 4Q. As such, both Brent and WTI crude oil collapsed by more than 1/3
from their respective peaks in Oct. Have we seen the worst for
Specifically in the precious metals space, gold performed much- crude oil?
better-than expected as it managed to stay afloat over the past 2
months above the psychological USD 1,200 / oz level. This was Finally, in the industrial metals space, LME Copper was the exact
after it successfully fought off an initial sell-off in mid-August to antithesis of crude oil. After suffering an earlier heart stopping 20%
as low as USD 1,160 / oz. It would appear that the long running sell-off across 3Q as prices collapsed from as high as USD 7,300
inverse relationship between ever rising US rates and lower gold / MT in early Jun to as low as USD 5,800 / MT in mid Aug, LME
prices has now weakened. Is there now a new driving factor for Copper has so far managed to stay out of the limelight, spending
gold? the past 3 months obediently range trading within a very tight band
from USD 6,000 / MT to USD 6,300 / MT. There was no news of
any labor unrests in key copper mines. Neither was there any news
of large ticket stop losses from speculative trading positions. Has
Copper turned over a new leaf?

COMMODITIES STRATEGY UOB Global Economics & Markets Research 27
Gold: Building A Base
Above USD 1,200 / oz In Recent Weeks, Gold Has Been Consolidating Around USD 1,200 / oz
Against all odds, gold has done relatively Source: Bloomberg, UOB Global Economics & Markets Research
well over the past 2 months as the precious
1400
metal managed to consolidate above USD
1,200 / oz and even put on modest gains to
USD 1,230 / oz. 1350
Since last year, we had maintained a 1300

convicted negative view on gold. This
negative view was mainly driven by 1250
the expectation of higher US rates and
consequently a stronger USD is negative 1200
for gold. This negative view had worked
well across most of last year and in the first
1150
half of this year. However, since September, Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Oct 18 Nov 18
gold appears to have stabilized in the face XAU spot (USD / oz)
of higher US rates and the stronger USD.
Has something changed?
Gold Appears Oversold With Spec Net Positioning Now At A Level Last Seen In Early 2000s
For now it may be premature to conclude Source: Bloomberg, UOB Global Economics & Markets Research
from this relative stability in gold that USD
strength is over extended and has ran its 350,000 2000
course. Rather, it is worth noting net long 300,000 1800
positioning in gold has been completely 250,000 1600
erased over the past year. In fact, futures 200,000 1400
implied positioning is now marginally 150,000 1200
negative, something that has not been 100,000 1000
seen since the early 2000s. In other words, 50,000 800
it would be difficult for gold positioning to 0 600
worsen further. There may also be the -50,000 400
return of safe haven support. -100,000 200
-150,000 0
As such, in view of this renewed support Dec 93 Sep 96 Jun 99 Mar 02 Dec 04 Oct 07 Jul 10 Apr 13 Jan 16 Oct 18
from oversold positioning, we now adopt CFTC Net Positioning Gold Spot (USD/oz)]
a neutral view in gold and see gold
consolidating around the USD 1,200
to USD 1,300 / oz range across 2019. Palladium Rallied Hard As The Rest Of The Preciouse Metals Complex Stabilized
However, it is important to note that this
does not mean that gold has resumed its
bull run. US rates are still seen continuing 115
their gradual climb higher and that will cap 110

any meaningful recovery in gold.
105
On a related note, Palladium maintained 100

its winning streak as it continued its strong 95
rally that started in Aug. From its Aug low of
90
about USD 840 / oz, Palladium has rallied
by about 40% to USD 1,200 / oz. The more 85
stringent automobile emission standards
80
by the European Union in favor of the use
of Palladium in autocatalytic converters 75
Jan 18 Feb 18 Apr 18 May 18 Jul 18 Aug 18 Sep 18 Nov 18
triggered this strong rally. Strength in Gold Spot (USD / oz) Silver Spot $/Oz Platinum Spot $/Oz Palladium Spot $/Oz
Palladium also spilled over to a modest
rally in Platinum lifting it from USD 760 / oz
in Aug to USD 800 / oz.

28 UOB Global Economics & Markets Research COMMODITIES STRATEGY
Crude Oil: Volatility To Stay Elevated
Admist Renewed Oversupply Concern Brent Crude Oil Implied Volatility Spiked As Price Collapse By More Than 1/3 In Barely 6 Weeks
Since the middle of the year, financial Source: Bloomberg, UOB Global Economics & Markets Research
markets were primed for the start of US
sanctions against export of Iranian crude 90 60
oil in November. This export ban raised 85

55
worries of a potential supply deficit of more 50
than 2 mio bpd of crude oil. However, at 80
45
the very last minute, literally hours ahead
75 40
of the start of the US sanctions, the Trump
administration surprised by announcing 70 35
temporary waivers for the import of Iranian 30
crude oil. That blindsided global investors 65
25
and triggered the acute sell-off in crude oil
60
prices across November, triggering a spike 20
in volatility. 55 15
Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Aug 18 Sep 18 Oct 18 Nov 18
Concurrently, in recent weeks, more Brent Crude Oil (USD / bbl) Crude Oil 3M Implied Volatility
evidence emerged of the potential negative
impact on the global economy from the on-
going US-China trade conflict. The latest US Led The Recent Jump In Crude Oil Supply, Alongside Saudi And Russia
quarterly GDP data across Asia all turned Source: Bloomberg, UOB Global Economics & Markets Research
out to be weaker-than-expected. This has
raised concerns over a potential slowdown 12000
in global demand for energy just as the 11500
supply deficit from Iran was temporarily
11000
mitigated.
10500
In the background, the world’s three largest 10000
producers of crude oil, namely US, Saudi
9500
Arabia and Russia continued to pump even
more oil over the past few months adding 9000
to global supply just as global demand 8500
appears to be tapering off.
8000
Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
Further exacerbating the sell-off in crude oil
Russia Crude Oil Supply ('000 bbl) Saudi Arabia Crude Oil Supply ('000 bbl)
prices were delta hedging for the producer US Crude Oil Supply ('000 bbl)
hedges against lower crude oil prices that
were put on earlier in the year. Elevated
delta hedging pushed oil prices lower. Brent Price Curve Flipped Back Into Contango As Immediate Tightness Eased

On 2 Nov, after news emerged of waivers
for Iranian crude oil export, we downgraded
our Brent crude oil forecast to USD 65 85
to 75 / bbl range from USD 75 to 85 / 75

bbl range. In view of further evidence of
growing global supply, coupled with further 65
moderation in global growth outlook, we 55

hereby lower our crude oil forecast further Brent 1st month futures Brent 5th month futures
to USD 55 to 65 / bbl range. 3
2
At the moment of writing, OPEC 1
0
disappointed by failing to reach a deal
-1
for any production cut. Russia was also
-2
reportedly reluctant to commit to any Dec 17 Feb 18 Mar 18 May 18 Jun 18 Aug 18 Sep 18 Nov 18
production cuts. As such, Brent crude oil 1st vs 5th futures spread
is currently struggling at the USD 60 / bbl
handle. Over the near term, we can expect
oversupply concerns to continue to weigh
on crude oil.

COMMODITIES STRATEGY UOB Global Economics & Markets Research 29
Copper: Holding Firm Above
USD 6,000 / MT Amidst On-Going Copper Price Stays Soft Alongside The Retreat In China Manufacturing PMI
Global Trade Uncertainties Source: Bloomberg, UOB Global Economics & Markets Research
There is a reason why Copper is often
8000 53.0
referred to as “Dr Copper”. Historically
Copper price has been a good indicator of 7500 52.5
the overall health of the global economy. 52.0

7000
This is because of Copper’s widespread 51.5
6500
industrial use. In recent years, given the 51.0
growing significance and size of China’s 6000 50.5
economy, copper price has traded in 5500 50.0
close tandem with China’s PMI indicator. 49.5
5000
This close relationship has stayed intact 49.0
as China’s official PMI indicator softened 4500 48.5
from above 52 at the start of the year to 4000 48.0
just 50.1 in the latest November update. Dec 13 Jul 14 Feb 15 Sep 15 May 16 Dec 16 Jul 17 Mar 18 Oct 18
This coincided with the sell-off in 3M LME LME 3M Copper (USD / MT) China Manufacturing PMI
Copper from its mid-year peak of USD

7,300 / MT to the current level of USD
6,300 / MT. Copper Implied Volatility Stay Soft Alongside Gold, As Crude Oil Volatility Spikes

After the climb down in Jun, Copper
50
appears content to stay out of the fray.
Since September, as the global trade 45
outlook muddied further, 3M LME Copper 40
has successfully consolidated above 35

USD 6,000 / MT. The latest 3 month trade 30
tariff “truce” between US and China only 25
managed to elicit a marginal rise in 3M 20
LME Copper from USD 6,250 / MT to 15
USD 6,300 / MT. As such, Copper 3 month 10
implied volatility stayed relatively soft at 5
20%, compared to Brent crude oil 3 month
0
implied volatility which spiked to almost Dec 17 Jan 18 Mar 18 Apr 18 Jun 18 Jul 18 Aug 18 Oct 18 Nov 18
50%. Copper 3M Volatilty Brent Crude Oil 3M Volatility Gold 3M Volatility
In terms of positioning, the sell-off in

Copper across 2Q has resulted in an Net Long Copper Positioning Mostly Liquidated Due To Global Trade Concerns
almost complete liquidation of net long
positioning in Copper. Net positioning as
implied from Copper futures on COMEX 80000
is now marginally long. It is unlikely that

60000
positioning will flip into negative because
of on-going medium term supply deficit 40000
concerns. In addition, global inventory
20000
in Copper as measured across LME,
COMEX and SHFE has also halved since 0
peaking in Apr. As such, pressure from
-20000
further inventory liquidation will ease.
-40000
Overall, in the coming year, it is likely
that Copper will continue its on-going -60000
Dec 13 Jul 14 Mar 15 Oct 15 May 16 Jan 17 Aug 17 Mar 18 Nov 18
consolidation around the USD 6,000 to
COMEX Copper net position
USD 7,000 / MT range. Any immediate
strength will be muted given the on-going
uncertainties over global trade. However
weakness below USD 6,000 / MT is
likely mitigated as well given that both
positioning and inventories have been
largely unwounded.

30 UOB Global Economics & Markets Research COMMODITIES STRATEGY
CHINA
FX & Rates 1Q19F 2Q19F 3Q19F 4Q19F Ample Market Liquidity As PBoC Continues To Ease Credit Conditions
Including The Four RRR Cuts YTD
USD/CNY 6.95 7.00 7.10 7.10
Source: Macrobond, UOB Global Economics & Markets Research
CNY 1Y Benchmark Lending 4.35 4.35 4.35 4.35
Economic Indicators 2016 2017 2018F 2019F
GDP 6.7 6.9 6.6 6.3

CPI (average, y/y %) 2.0 1.6 2.2 2.4
Unemployment rate (%) 4.0 3.9 3.9 4.0
Current account (% of GDP) 1.8 1.3 0.3 0.5
Fiscal balance (% of GDP) -3.8 -4.2 -4.2 -4.0
3Q18 GDP Growth Continues

On Path Of Gradual Moderation
China reported a moderation in 3Q18
GDP growth to 6.5% from 6.7% in 2Q18,
bringing the YTD growth to 6.7% y/y, down
from 6.9% in 2017. Despite the robust trade
data so far, the slowdown in manufacturing Policy Stance Maintained Domestically, consumer price inflation
growth in 3Q18 suggests that the negative But Private Enterprises In Focus is expected to rise slightly in 2019 even
impact from the trade tensions with US PBoC’s 3Q18 monetary policy though producer price inflation could come
is starting to seep into the economy. The implementation report reiterated its under downward pressure from the trade
secondary industries showed a sharp neutral and prudent policy. Similar to the conflicts. As such, any aggressive cuts in
slowdown in growth rate to 5.3% y/y 2Q18 monetary policy implementation RRR or even policy interest rate cuts would
from 6.0% in 2Q18 while growth in the report, it emphasized the need to maintain be a signal that the US-China negotiations
primary and tertiary industries picked up “comprehensive balance” of multiple may not be turning out well.
to 3.6% and 7.9% (from 3.2% and 7.8%) targets by making “dynamic micro-
respectively. adjustments” depending on the conditions. USD/CNY To Still Test
What is new is perhaps the indication of the Above 7.00 In 2019
We maintain our forecast that China’s GDP central bank’s increased focus on providing Immediately after the G20 tariff truce
growth rate will moderate further to 6.4% assistance to private enterprises and small between US and China, USD/CNY fell
y/y in 4Q18 for full-year 6.6% growth. Our and micro enterprises (SMEs), through hard from 6.95 to 6.85. At this juncture, it is
2019 growth forecast for China remains improved liquidity provision, lending probably premature to anticipate sustained
at 6.3% until we see greater clarity on the support, and macroprudential assessment weakness in USD/CNY after the recent
US-China trade developments. On the (MPA) of financial institutions, though truce on trade tariffs, especially when
assumption of a long negotiation process, the central bank said that banks should details are still lacking and challenges for
the negative impact on exports, investment continue to conduct their due diligence an eventual resolution remain.
and private consumption will show up more and not follow the lending requirements
clearly in early 2019. The extension of the “unconditionally”. There is still clear and wide divergence
downturn in China’s property market from in economic data and monetary policy
2H18 could also weigh on the outlook for We continue to expect another reserve between China and US which may
investment and private consumption. requirement ratio (RRR) cut from the continue to underpin a higher USD/CNY.
central bank in late 2018-early 2019, after As such, this correction is unlikely to
The policymakers have used a mix of having made its fourth RRR reduction in derail USD/CNY materially from its upside
proactive fiscal and monetary policies 2018 alone. This should continue to keep trajectory towards the psychological 7.00
to soften any potential drag on growth, domestic liquidity ample as indicated by level. Overall, we maintain our measured
which include further broadening of tax relatively low funding costs in the interbank trajectory of USD/CNY above 7.00 next
measures (new deductions for personal market. Thus, we do not anticipate any year, with point forecasts at 6.95 at 1Q19,
income tax effective 1 Jan 2019) and cuts policy interest rate cut from PBoC over the 7.00 at 2Q19, 7.10 at 3Q and 4Q19.
to the reserve requirement ratio (RRR). next 3-6 months, given that the US Fed is
We can expect further stepping up in still on the rate hike path and the European
Chinese policy actions should the trade Central Bank is moving towards policy
negotiations hit a road bump. The first normalization.
signals should come from the tone in the
upcoming annual Central Economic Work
Conference (CEWC) in December 2018.

UOB Global Economics & Markets Research 31
HONG KONG
FX & Rates 1Q19F 2Q19F 3Q19F 4Q19F
Hong Kong: Retail Sales and Visitors from Mainland (3mma y/y)
USD/HKD 7.80 7.80 7.80 7.80
HKD Base Rate 3.00 3.25 3.50 3.50
GDP 2.2 3.8 3.3 2.8

CPI (average, y/y %) 2.4 1.5 2.4 2.4
Fiscal balance (% of GDP) 4.5 5.6 2.0 2.0
US-China Uncertainty
Increasingly Weighing On
Trade And Consumption Demand
Hong Kong’s GDP growth continued to
be marked lower as expected, falling to
2.9% y/y in 3Q18 from 3.5% in 2Q18. This
3-Month Interbank Rates, Daily, (%)
was the slowest quarterly growth pace in
two years. Other than the US-China trade Source: Macrobond, UOB Global Economics & Markets Research
tensions related drag, Typhoon Mangkhut
which hit in September was likely to have
contributed to the weaker tourism and
consumption data in 3Q18. And despite
sustained strength in the labour market
(the seasonally adjusted unemployment
rate has remained at a 20-year low of 2.8%
in 3Q18), sentiment soured due to the
weakness in the financial markets as the
Hang Seng index entered a bear market
in the 3Q after dropping 20% from its peak
in January. The positive surprise came
from fixed investment which was helped
by a low base but the cautious economic
outlook will likely cap further gains ahead.
The government noted that the negative
impact from US-China trade tensions have
started to surface, affecting re-exports of Inflation To Stay Largely Stable a result, the aggregate balance though still
mainland origin goods to the US that are Hong Kong’s headline composite inflation at the lowest since 2008, was stable since
implemented with additional tariffs, though edged higher to 2.4% y/y in January- at about HKD 76 bn.
these constituted only about 15% of Hong October from average 1.5% in 2017. This
Kong's total exports to the US in 3Q18. had been mainly driven by higher utilities Going forward, Hong Kong’s economic
and food prices while durable goods growth is expected to moderate further
All in all, we foresee a weaker growth trend maintained a deflationary trend. The in 2019, to 2.8% from 3.3% in 2018. In
for Hong Kong ahead as the negative inflation is likely to stay reasonably stable addition, the high dependency on trade
impact from the trade tensions is expected in 2019 despite weaker economic growth makes Hong Kong’s economy vulnerable
to become more evident ahead while as higher domestic costs and feedthrough to further deterioration in US-China trade
the tightening financial conditions could from the upward adjustment in the ceiling relations. Also, a widening gap between
increase market volatility. Higher domestic of the government’s rates concession from local (3M Hibor) and US (3M Libor) rates,
interest rate environment is set to weigh 2Q18 will continue to exert some mild currently at 71bp is likely to buoy the USD/
on the outlook as Hong Kong banks hiked upward pressure in the coming months. HKD towards the top end of its 7.75 to 7.85
their prime rates in September for the first We expect inflation rate of 2.4% in 2018 convertibility band. Then, the HKMA will
time in more than a decade. and 2019. need to resume its regular intervention to
ensure that the rise in HKD Hibor keeps
Looking ahead, we see further moderation USD/HKD To Stabilize Around 7.80 pace with further projected US rate hikes.
in 4Q18 GDP growth to 2.4% with our full- Since late August, as the HKD shied As for the USD/HKD, it is still expected to
year growth forecast at 3.3%. We maintain away from 7.85, the weak side limit of its be capped at 7.85 and average 7.80 for the
our 2019 growth rate at 2.8%, with risks convertibility band against the USD, the next 4 quarters. Prevailing spot of USD/
tilted to the downside. Hong Kong economy Hong Kong Monetary Authority (HKMA) HKD is 7.81.
is amongst the most vulnerable to the US- had not conducted any FX intervention. As
China trade conflicts.

INDIA
INR Continues To Be Weighed Down By Trade Deficits
USD/INR 71.00 72.00 73.00 73.00
INR Repo Rate 6.75 6.75 7.00 7.00
GDP 8.2 7.1 6.7 7.2

CPI (average, y/y %) 4.9 4.5 3.6 3.6
Current account (% of GDP) -1.0 -0.6 -1.9 -2.5
Growth Outlook Has Become

Less Buoyant
India’s GDP growth slipped to 7.1% y/y
in 3Q18 from 8.2% in 2Q18, the slowest
pace this year. The below consensus
growth was primarily due to higher imports
and a moderation in private consumption And Any Rebound In Crude Price Could Lead To Renewed Pressure On The INR
growth to 7.0% y/y in 3Q18 from 8.6%
in 2Q18. However, fixed investment
remained buoyant as it registered a third
consecutive quarter of double-digit growth
at 12.5% y/y, together with a surge in
government spending in the quarter.
Private consumption expenditure which

accounts for more than half of the GDP
will likely continue to drive growth ahead.
However, continued strength in private
consumption and investment demand
will likely maintain pressure on the trade
balance and thus the domestic currency.
The Reserve Bank of India (RBI) expects
GDP growth for 2018-19 at 7.4% (7.2-
7.3% in H2) and for H1:2019-20 at 7.5%
with risks somewhat to the downside. Our More Moderate Pace Of Rate Increase less hawkish RBI, we think that rate cuts
FY2019 growth forecast at 7.2% is slightly As Growth And Inflation Ease should be off for now.
lower than RBI's estimate. The RBI has kept its benchmark repo
rate unchanged at 6.50% in the last INR's Strength Unlikely To Sustain
Inflation Slipped To 13-Month Low two meetings but shifted to “calibrated INR’s 5.9% jump against the USD in
And Is Expected To Continue Falling tightening” stance from “neutral” since November was the biggest monthly gain
The headline inflation has eased to 3.3% October and despite the sharp revision in almost 7 years. A large part of the rally
y/y in October, the third consecutive in its near-term inflation forecast. Also was probably due to a sudden plunge in
month that it was below the RBI’s interesting was Governor Urjit Patel’s oil prices which eased the pressure on
medium-term target rate of 4%. This comment that there’s the possibility of India’s current-account deficit. Given that
sharp pullback in inflation was due mainly “commensurate policy actions” if inflation the macro outlook for India (as discussed
to lower food prices (vegetables, sugar continues to undershoot which seemed above) remains challenging in the year
and confectionery) while there remained to suggest room for policy u-turn to cut ahead, further gains in the INR are unlikely.
notable price pressure on housing and interest rates. Also, a widening current-account deficit
fuel and utilities. The RBI now expects in 2019 may kick-start weakness in INR
the inflation to stay below the target rate Looking ahead, any increase in oil again but the weakness would be checked
in coming months as it revised sharply trajectory and the progression in Fed’s by RBI trying to match the pace of Fed rate
lower its inflation projection to 2.7-3.2% monetary tightening will likely keep the hikes (we expect 3 hikes in 2019).
in H2:2018-19 from 3.9-4.5% previously door open for further RBI hikes next year.
though this is expected to rise to 3.8- For now, there remains prospect of a 25 Overall, we think USD/INR may bottom
4.2% in H1:2019-20, with risks tilted to the bps hike in February 2019, though the at around 70 in the near term and head
upside. possibility has been much reduced due higher in 2019. We forecast USD/INR at
to moderating growth and inflation as 71 in 1Q19, 72 in 2Q19 and 73 in 3Q and
well as pressure to ease the credit crunch 4Q19. The prevailing spot is 70.50.
leading into election next year. Even with

INDONESIA
Rupiah And BI Policy Rate
USD/IDR 14,600 14,700 14,800 14,800
Source: BI, Bloomberg, UOB Global Economics & Markets Research
IDR 7-Day Reverse Repo 6.25 6.50 6.75 6.75
Economic Indicators 2016 2017 2018F 2019F 9.0 15500
GDP 5.0 5.1 5.3 5.2 8.0 15000
CPI (average, y/y %) 3.5 3.8 3.5 3.8 7.0 14500
Unemployment rate (%) 5.6 5.3 5.5 5.4 6.0 14000
Current account (% of GDP) -1.8 -1.7 -2.8 -2.5 5.0 13500
Fiscal balance (% of GDP) -2.5 -2.5 -2.1 -2.0 4.0 13000
3.0 12500
2.0 12000
Growth Slowed In Q3 And May 1.0 11500
Extend Into 2019 Amidst Tighter 0.0 11000
Policies May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18
Indonesian economy grew by 5.17% BI Policy Rate (%) Rupiah (vs USD)
yoy in Q3 2018 versus 5.27% in the
preceding quarter. Growth is driven by all
components, where the highest growth Where The Fed Goes, face some downside risks if US economic
is recorded by imports growth at 14.1% BI Will Likely Follow data weakens significantly or the US-
yoy, followed by exports at 7.5%. As for Indonesia’s inflation remained stable so China trade tension re-escalates. For
domestic demand, investment spending far as no supply disruption was evident now, we keep our 25bps/quarter rate hike
growth continue to be robust at close to and as volatile prices component remain forecast, each in Q1, Q2, and Q3 2019
7% yoy growth, exceeding government manageable even as we enter year-end consecutively to reach 6.75% by the end
spending at 6.3% and household festivities and holiday season. Our inflation of 2019.
consumption at 5.0% despite strong forecast (year-average) of 3.5% remains
imports growth. We remain cautious on unchanged and it is right in the middle of IDR Outlook: The Worst May Be Over
the uncertainty in the external front as the Bank Indonesia’s (BI) inflation target of But Still Expect Gradual Weakness
US-China trade tension continue and the 2.5-4.5%. Bank Indonesia (BI) has thus far Towards 14,800 In 2019
US Fed continue on its hiking trajectory for raised the BI 7-day Reverse Repo Rate by To a certain extent, BI’s pre-emptive, front-
the rest of this year and going into 2019, a cumulative 175bps to reach the current loading, and ahead-of-the-curve strategy
though recent rhetoric suggested less level of 6.00% since May 2018. The series of managing IDR’s weakness has paid
hawkish stance. of rate hikes decision remain consistent off in 4Q18. Since early Nov, IDR has
with BI’s pre-emptive, front-loading, and strengthened abruptly from 15,200 per
We kept our 2018 GDP growth forecast ahead-of-the-curve strategy to anchor the USD to current levels of around 14,400.
unchanged at 5.3% although now we stability of the domestic financial market
may see growth momentum to be stalled against increased uncertainty in the global Notwithstanding the near-term strength,
in 2019 on the back of tighter monetary financial markets. In specific, BI’s decision the macro backdrop behind IDR remains
policy and lower fiscal deficit amidst was made to keep current account challenging next year. Domestically,
consolidation in 2019. We continue to deficit (CAD) from widening further and Indonesia’s current account and fiscal
hold a cautiously optimistic view of the has resulted into more financial stability account are expected to remain in deficit
Indonesian economy in 2019 as domestic in terms of rupiah exchange rate. BI’s albeit some improvements, at -2.5% and
demand remains robust and stability in strategy to keep as minimal a currency -2.0% respectively. This makes the IDR
the external front and the rupiah are more volatility as possible is also complemented vulnerable alongside other Emerging
entrenched. Even though the external by its policy direction in providing domestic Market currencies as the Fed continues its
uncertainty remains, policy mix introduced NDF (DNDF) and FX swap rate at a gradual rate hikes. Externally, Indonesia is
by the government, the central bank, and more competitive pricing as part of its also not spared from trade headwinds due
related policymakers have started to bear ongoing efforts to alleviate spillover from to the protracted trade dispute between
fruits as evident from the capital reversals the external volatility unto the domestic US and China. That said, BI matching of
into Indonesia in the past few weeks in financial market while at the same time the pace of Fed’s tightening in 2019 may
November. Indonesia’s large domestic deepen the financial market further. alleviate pressure on the IDR.
markets and its high private consumption
spending may continue to underpin the Our expectation for the Fed Reserve Overall, we expect the IDR to continue to
growth of the economy, coupled with remains at three 25bps rate hikes in weaken alongside other Asian currencies.
steady investment growth, and a likely 2019 but the Fed policy path is more We forecast USD/IDR at 14,600 in 1Q19,
support from higher exports growth. Our uncertain next year as the Fed shifts 14,700 in 2Q19 and 14,800 in 3Q and
growth forecast for 2019 is currently set at emphasis to data dependence. So our 4Q19. Prevailing spot of USD/IDR is
5.2%. 75bps cumulative rate hike in 2019 may 14,400.

Indonesia Election 2. Presidential Threshold 20% Base 4. Open vote system (Article 168,
Indonesia, world’s third largest population, (Article 222, Chapter IV) Chapter I)
will come yet again to the ballot box in Competing party/parties that bring its This addition is not drastic change
April 2019. This time, it will be for the first presidential candidate must have at compared to last election. The addition
time that voters will vote for both House least 20% of total seat in parliament of open vote system is to include the
Representatives and President (and or 25% vote from total national vote. party that supports the president and
chosen VPs). The incumbent President There is no change in threshold but vice president candidate in the vote
Joko Widodo (Jokowi) will seek re-election the base of the threshold is different. paper.
and will face the same competitor in the In 2014 presidential election the base
2014 presidential election, Prabowo is from legislative elections in 2014 5. Vote Region Seat Magnitude 3 – 10
Subianto - ex general of Indonesia National also because during that time, the (Article 187, Chapter III)
Military. Jokowi is seen as a proletarian legislative elections and presidential In 2014 the seat are based on the
while Prabowo is elite and that is likely to elections are held at different dates proportion of population in each
define each candidate’s value proposition. in the same year. For 2019, the base province. For 2019, the number
The key parties under Jokowi’s coalition is using the last legislative election of seats for every province in the
include PDI-P, Golkar, National Democrat results (2014). legislatives will be a minimum of 3 and
(Nasdem), and National Awakening Party a maximum of 10. It means that even
(PKB) while Prabowo’s coalition include 3. Parliamentary threshold is 4 % though a province is the smallest as a
Gerindra (Great Indonesia Movement), (Article 414, Chapter XI) proportion, they will have a minimum
PAN (National Mandate Party), Democratic Competing parties in national of 3 representatives. At the same
Party, and PKS (Justice Prosperous Party). legislative election should have time, province with larger population
For 2019 government and legislatives minimum 4% vote from the last cannot have more than 10 seats in
agreed to add 15 seat in addition to legislative vote held, which is now the parliament.
560 existing seats on 2014 (see Table) changed from the previous election’s
to account for the under-represented 3.5%. The consequence is there
provinces, such that now there are a could be a fewer parties competing in
total of 575 seats to be contested. Below national levels. However no threshold
subsequently are the campaign schedule for competing in regional legislative
and candidates’ vision and mission, as well board.
as survey results conducted thus far.
Campaign Schedule
Key Difference With
Key Dates Event
The 2014 General Election
The enactment of Law no 7 of 2017 render 17 July 2018 Legislative candidate registration
some differences and important things 4-10 August 2018 Presidential candidate registration
to note compared to the 2014 general
23 September 2018 - 13 April 2019 Election campaign
elections. These are:
14 - 16 April 2019 Quiet period
1. Simultaneous presidential and 17 April 2019 Direct Election
legislative elections (Article no 9 May 2019 Political Parties for City DPRD election result announcement
167, no 3, Chapter VIII) 12 May 2019 Political Parties for provincial DPRD election result announcement
Unlike previous general elections that
15 May 2019 Political Parties for DPR and DPD election result announcement
legislative and presidential elections
held at different dates, 2018 general 6 October 2019 New President and Vice President Inauguration
elections both elections planned to be Source: General Election Commission 2018
held at the same date.

Survey Result Over Time
12 – 19 August 2018 7-14 September 24 September – 5 October
Candidates (In %)
LSI Denny JA Saiful Muljani R & C Kompas Research
Joko Widodo – Ma’ruf Amin 52.2 60.4 52.6
Prabowo S – Sandiaga Uno 29.5 29.8 32.7

Undecided/Swing Voters 18.3 9.8 14.7
Source: Various Survey Institution and News 2018

JAPAN
could still pull the trigger in 2019 to impose increase gradually toward 2 percent” in its
tariffs (of 25%) on automobile imports from 1 Nov policy meeting. We had expected
USD/JPY 113 114 115 115
Europe and Japan under section 232 of inflation to head more decisively to 2%
JPY Policy Rate -0.10 -0.10 -0.10 -0.10 the 1962 Trade Expansion Act (i.e. the in 2019, driven by price pressure from
same provision president Trump used to US tariff implementation and expected
justify steel and aluminum tariffs in March sales tax hike in Oct 2019, That said, the
GDP 1.0 1.7 1.0 0.8
2018). Motor vehicles exports account for recent heavy correction in global crude oil
CPI (average, y/y %) -0.1 0.5 1.2 2.0 15% of Japan’s exports and US is a key prices if sustained or worsened into 2019,
Unemployment rate (%) 3.1 2.7 2.5 2.5 export destination for Japanese cars. could dampen prices and further delay the
Current account (% of GDP) 3.9 4.0 4.0 4.0 elusive 2%.
On the domestic economy, stronger
private consumption remains elusive BOJ Outlook:
despite tight labor conditions as wage More Policy Tweaking In 2019?
growth has been languishing well below Among the G10 central banks, BOJ
Growth Outlook: A Challenging 2% after briefly peaking at 3.3% in Jun continues to be the least likely to normalize
2019 On Various Fronts 2018. And the supposed bright spot of its easy monetary policy anytime soon,
The 2Q (2018) rebound did not last as GDP related-investments in the lead-up to the and it remains premature for the BOJ to
contracted -0.3%q/q (-1.2% annualized 2020 Tokyo Olympics and the disaster- talk about normalizing/tapering its easing
rate) in 3Q from an expansion of +0.7% related reconstruction activity also failed to program too, because Japan is still
(3.0% annualized rate) in 2Q, more or light up domestic demand in 3Q. But the some distance away from its 2% inflation
less in line with market expectations. The upcoming consumption tax hike (from the target. The projected weaker growth
drag on third quarter was both external current 8%) to 10% in Oct 2019 could kill environment and likelihood of downside
demand (-0.1ppt) and domestic demand off any hope of a consumption revival, at price pressures in 2019 adds further
(-0.2ppt). 3Q private spending contracted least in 4Q 2019 and 2020. Recall when challenges to BOJ’s monetary policy next
0.1%q/q (from +0.7%q/q in 2Q) while the tax was last hiked from 5% to 8% in year. We think that the BOJ may still need
capital expenditure (capex) unexpectedly Apr 2014, private spending contracted to do more “tweaks” to monetary policy to
contracted 0.2%q/q (from +3.1% in 2Q and significantly for the subsequent 4 quarters reassert its easy monetary policy position,
missing the projected +0.2% increase), the (-2.6% y/y in 2Q 14, -2.4% y/y in 3Q 14, just like what it did in the July 2018 MPM.
first capex contraction since 3Q 2016 and -1.8%y/y in 4Q 14 and -3.2% y/y in 1Q 15). This may happen again, possibly in early
is certainly not an indication of reshoring Thereafter, even as spending recovered, 2019 although we cannot rule out that the
(i.e. Japanese manufacturers in China the rate of increase has been lackluster “tweaks” may be brought forward to the
relocating part of production back home to even up to the most recent 3Q 18 (at just last meeting of 2018 on 19/20 Dec.
Japan). The government blamed the 3Q 0.5% y/y). After the crippling impact of
GDP decline on a temporary hit to domestic the 2014 sales tax hike on the domestic JPY Outlook: Path Of Least
consumption from natural disasters and economy, the Abe government delayed Resistance Is Still For JPY Weakness
fall in exports. The government enacted a the next round of hike (originally slated To the surprise of many, the correction in
supplementary budget for FY2018 in Nov for Oct 2015) twice. We initially expected global equities across Oct - Nov did not
to aid disaster recovery, and PM Abe has the sales tax to be delayed yet again for spur a sustained flight-to-quality towards
ordered plans for a 2nd supplementary another 2 years (till 2021) but it seems that the JPY. USD/JPY only dropped from
budget to be submitted in Jan 2019. PM Abe has decided to bite the bullet to about 114 in early Oct to a low of 111.38
see this through in 2019. on 26-Oct and has since recovered above
Beyond the temporary disruption caused 113 for most part of Nov even as volatility
by a series of serious natural disasters in With 1H growth coming in at just 1.1%y/y in equities persist.
3Q, we are turning increasingly cautious and a weak 3Q in the bag, we now
about Japan’s growth on two fronts: 1) expect GDP growth to ease lower to The resilience of USD/JPY of late is also
trade and 2) the next sales tax hike in Oct 1.0% in 2018 (from 1.7% in 2017). And seen on how it trades with the US 10-year
2019. growth may moderate further to 0.8% Treasury yield. Usually moving in lock-
in 2019 in view of significant external step, USD/JPY steadied around 113 amid
On the trade front, moderating global and domestic challenges while the the latter retreating to 2.92% from 3.25%
demand in the next few quarters could likely collapse of private spending after in early Nov.
be met with increasing US-led trade 4Q 2018, will likely drive Japan into a
uncertainties. The key downside risk recession in 2020 unless the sales tax With the BOJ likely to stick to its dovish
to Japan’s outlook remains to be trade is deferred again. tone in 2019 due to dimming growth,
policy developments, specifically US- trade-related uncertainties and inflation
China trade disputes and US–Japan Headline CPI inflation rose to 1.4% y/y still far from its 2% target, we maintain the
trade relations. Japan companies face in Oct (from 1.2% in Sep) while core CPI view that the path of least resistance is for
significant negative effects because they (excluding fresh food) held steady at gradual weakness of the JPY. As such, we
are suppliers of parts and components to 1%y/y (unchanged from Sep). The Bank reiterate our USD/JPY point forecasts at
China. And there is the threat to Japanese of Japan (BOJ) was less optimistic about 113 in 1Q19, 114 in 2Q19 and 115 in 3Q
car makers. Even as Trump has put prices even though it still held on to the and 4Q19. Key risk to our view is a deeper
measures on hold for hold for Japan, he belief that Japan’s inflation “will likely to rout in equities which would eventually
trigger safe haven funds back into the JPY.

MALAYSIA
Risk Of Further MYR weakness
USD/MYR 4.19 4.23 4.25 4.25
MYR Overnight Policy Rate 3.25 3.25 3.25 3.25
GDP 4.2 5.9 4.8 4.8

CPI (average, y/y %) 2.1 3.8 1.2 2.0
Growth Moderates On Supply Shocks

Malaysia’s real GDP growth had been
moderating since 2H 2017 to 4.4% y/y in
3Q 2018. The more modest growth was in
line with a trend of slower growth in the
region. Headline growth was hit by supply
disruptions and commodity-specific supply The government has committed to settle ratio (SRR) at 3.50% at its final monetary
shocks which shaved – 0.5% pts in the last all outstanding tax refunds estimated at policy meeting this year. The policy rate has
two quarters. Other key sectors including MYR37bn (MYR18bn due from income been kept on hold since a hike in January.
services, manufacturing and construction taxes and MYR19bn from GST) in 2019. Since then, both growth and inflation have
continued to expand. This will be funded by a one-off special moderated while MYR weakness persists.
dividend from Petronas amounting to The floating of domestic fuel prices (which
Although the tax holiday effect fades going MYR30bn with the balance set off by could be implemented by 2H 2019) and
into 4Q 2018, there would be support from expenditure savings. The tax refunds will the consumption tax policy are expected
the civil servant bonus in December, year- improve cash-flow for the private sector to lift next year’s inflation albeit at a
end spending, positive employment, and and thus support domestic spending. manageable level. Although growth risks
wage growth. The production constraints are tilted to the downside, we think BNM
and supply shocks in the agriculture and Malaysia’s Budget 2019 remains is unlikely to reset the path of policy rates
mining sectors are expected to dissipate expansionary despite the fiscal for now.
by next year, which would help to mitigate constraints and did not sacrifice too much
potential risks in other sectors. A mildly on growth with efforts to improve market MYR Outlook: Staying On Weak Side
expansionary 2019 budget with allocations efficiency, drive higher value-added and The MYR has weakened by – 3.6% against
for tax refunds and supportive measures infrastructure sectors. the USD year–to–date, which is in line with
has also provided more policy clarity. As regional currency weakness amidst higher
such, we maintain our growth forecasts of Despite higher fiscal targets, we see it as US interest rates and stronger USD.
4.8% for 2018 and 2019. a temporary diversion and do not steer
away from the path of fiscal consolidation. Going forward, there is risk of further
Government Re-sets Fiscal Deficit As for Malaysia’s sovereign ratings, we MYR weakness beyond 4.20 against the
In line with the new government’s view the risks to be balanced. Positive USD, particularly if the weakening trend
commitment to greater transparency and ratings factors include efforts to restore in RMB and other regional currencies
accountability, the fiscal deficit was revised public finances despite legacy challenges, resumes. Despite the sudden plunge in
higher to MYR53bn or – 3.7% of GDP in enhance transparency, introduce a more Brent oil from a high of $86.74 / bbl in Oct
2018, before narrowing to MYR52bn or robust tendering process, and potential to current levels of about $60, there had
– 3.4% of GDP in 2019. The fiscal target upside from various new revenue been little pass-through to the MYR. The
for 2018 is above the original projection measures. However negative factors government also reiterated there will not
of - 2.8% as the government recognizes are the higher headline fiscal trajectory, be any recalibrations to the budget at this
additional tax refunds owed, off-budget greater reliance on commodity-based juncture in response to falling oil prices.
commitments, and supplementary revenues, execution risks and revenue
expenditure requirements. These are uncertainties. Overall, we continue to expect modest
deemed to be one-off and non-recurring. USD strength against the MYR. Our
The fiscal deficit is projected to narrow to BNM Keeps OPR At 3.25% revised USD/MYR point forecasts are 4.23
-3.0% by 2020 and -2.8% in 2021. Bank Negara Malaysia (BNM) kept the by mid-2019 and 4.25 by end-2019 (up
Overnight Policy Rate (OPR) steady at from 4.22 and 4.20 previously). Prevailing
3.25% and statutory reserve requirement spot reference is 4.15.

MYANMAR
Oil And Gas Tops Myanmar’s Foreign Direct Investment
USD/MMK 1,560 1,580 1,600 1,600
Source: DICA, UOB Global Economics & Markets Research
GDP 5.9 6.7 6.9 7.0 29.0%

27.2%
CPI (average, y/y %) 6.8 5.1 5.5 5.8
12.9% 12.1%
6.7%
3.9% 3.8% 2.8%
0.8% 0.5% 0.4% 0.1%
Hotel & Tourism
Other Services
Power
Communication
Industrial Estate
Real Estate
Construction
Manufacturing
Oil & Gas
Mining
Livestock &
Agriculture
Transport &
Fishery
Strong Growth Amid Trade Tensions
Myanmar’s economic outlook is still
favorable, with expected growth around
6.9% in 2018. The economic growth is
driven by a recovery in agriculture and
expansion in manufacturing activities.
Looking ahead, the economic expansion The Ease Of Doing Business has To Be Improved To Attract More FDI
is expected to pick up further to 7% for Source: World Bank, UOB Global Economics & Markets Research
2019 on the back of higher public spending
and improving exports in agricultural
172
products, garments and light manufactured
goods. The fiscal spending will focus on
infrastructure development, particularly in
electricity, energy, and transportation, and 171 171 171
improving social welfare in education and

healthcare. As trade tensions between the
US and China escalate, the bilateral trade 170
between China and Myanmar will likely
increase in 2019 since China’s tariffs on
US farm products will make them more
expensive. In the medium-term, the US-
China trade dispute could attract more 2014 2015 2016 2017 2018
Chinese multinational enterprises to set Ease Of Doing Business In Myanmar
up in Myanmar to circumvent the tariffs,

capitalize on cheap labor costs and benefit
from preferential trade treatments under A Step In Banking Reform MMK Outlook: Expect Further Weakness
GSP programs with the US and the EU. According to the Central Bank of Myanmar Due To Large Current Account Deficit
(CBM), foreign banks will be allowed to Despite a moderation of the pace of
Myanmar has achieved solid economic expand their branch networks in Myanmar decline in 4Q18, the MMK is still expected
growth, but its financial sector is still under- next year. They will be able to provide the to weaken next year given that Myanmar’s
developed including its capital markets. As full suite of trade-financing services and large current account deficit is forecasted to
a result, Myanmar cannot hope to attract financing to domestic firms in Myanmar widen further to 5.6% of GDP in 2019 from
sizable portfolio capital inflows in the near kyats as well as in foreign currencies. Kyat 5.4% in 2018. At the current spot level of
future and FDI will remain the main source loans will be permitted if interest rates do 1,550 against the USD, we see the MMK
of financing for the current account deficit, not exceed the maximum bank lending weakening towards 1,560 in 1Q19, 1,580 in
which is expected to slightly widen to 5.6% rate of 13% for local banks. However, 2Q19 and 1,600 in 3Q and 4Q19.
of GDP in 2019 from 5.4% a year earlier. foreign bank branches will not be allowed
to accept immovable property such as land
and buildings as collateral. Also, they are
not allowed to offer retail banking services
such as personal savings accounts, money
transfers and card services.

PHILIPPINES
Inflation Remains Above The Upper Limit of BSP’s Target Range
USD/PHP 53.00 54.00 55.00 55.00
PHP O/N Reverse Repur. Rate 5.00 5.25 5.25 5.25
GDP 6.9 6.7 6.2 6.5

CPI (average, y/y %) 1.3 2.9 5.3 4.0
Still Optimistic On 2019 Outlook

Philippines’ real GDP growth eased to a
3-year low of + 6.1% y/y in 3Q18 from +
6.2% y/y in 2Q18 as the rise in government
spending (3Q18: + 14.3% y/y vs. 2Q18:
+ 11.9% y/y) was unable to offset the
weakness in private demand. Higher in managing rice supply have spurred downside risks to the PHP amidst further
inflation, a weaker PHP, lower remittance headline inflation above the government’s USD strength, we expect the BSP to hike
inflows, and the event of Typhoon target range of 2.0% - 4.0% since March its RRR by another 50 bps in 1H19, in line
Mangkhut were main factors weighing on 2018. Inflation was close to a 10-year with higher US interest rates.
household consumption, which slowed to a high of 6.7% y/y in Sep - Oct this year.
4 - year low of + 5.2% y/y during the quarter To contain inflation and preserve market PHP Outlook:
(2Q18: + 5.9% y/y). This came alongside confidence, the Philippine central bank, Recent Recovery Short-Lived
higher imports of machinery equipment Bangko Sentral ng Pilipinas (BSP), raised In the past month, a short squeeze on
for the public infrastructure development, its reverse repo rate (RRR) five times this oversold EMs currencies such as the
resulting in a negative impact from net year by a cumulative 175 bps to 4.75% as PHP cause the currency to rebound
trade by - 4.1 ppts to overall 3Q18 GDP at end-November. aggressively from a 13-year low of 54.43
growth. Economic Planning Secretary per dollar to current level of 52.70.
Ernesto Pernia said that had inflation not The tightening cycle may continue into
hurt consumption, 3Q18 growth would 1H19 given the resilience of the domestic Despite the rebound, the PHP is still
have been at least 6.5%. economy while inflation is likely to stay nursing losses of about 5% against the
above the government’s 2.0% - 4.0% USD year–to–date, marking the second
We expect growth to hold up at 6.5% forecast range. We project inflation to worst performing ASEAN currency after
in 2019 from a downward revised average 4.0% in 2019, lower compared to the IDR. PHP has been weighed down
estimate of 6.2% in 2018. Domestic an estimated 5.3% in 2018 amidst the rice by fears of contagion risks from other
demand remains the key growth engine, tariffication bill that will help stabilise food emerging markets, twin deficits, and rising
anchored by sizeable infrastructure prices, the suspension of the oil excise US interest rates. Although higher year-
spending programs and supportive labour tax, and the normalisation from high year- end seasonal remittance from Filipinos
market. The government has proposed ago base effects. The rice tariffication bill abroad would help the local currency, this
a national budget of PHP3.76tr or 19.3% was approved on 14 November, whereby will be negated by a 1) wider trade deficit
of GDP, which focuses on investments in changes in the rice import regime is amidst higher imports of capital goods to
infrastructure and education. The share of expected to mitigate price pressures by support the government’s infrastructure
expenditure allocated to public works is around - 0.6 ppts in 2019. The suspension drive, and 2) wider fiscal shortfall given
also set to increase from 13.3% in 2018 of fuel excise taxes is projected to cut lower revenues from the suspension
to 14.8% in 2019. That said, a weaker inflation by - 0.2 ppts in 2019. of oil excise duties and escalation of
external position, potential negative spill infrastructure spending.
overs from US - China trade disputes, Key risks to the inflation outlook include
and unforeseen natural disasters could PHP volatility, global oil prices, as Overall, we expect the recent recovery
impede growth prospects in 2019. well as natural disasters. Upside risks in PHP to be short-lived. With the USD
from imported inflation may continue, underpinned by further rate normalization
Tightening Phase May Not End Yet particularly when the Philippines is by the US Fed, we maintain a modestly
Higher excises taxes, volatile energy anticipated to import 1.2m metric tons higher trajectory for USD/PHP, expecting
prices, the weaker PHP, and challenges of rice in 2019 and more capital goods the pair to trade up to 54.00 by mid-2019
for the infrastructure program. Given and 55.00 by end-2019.

SINGAPORE
Weakening Manufacturing & Services Growth
USD/SGD 1.39 1.40 1.41 1.41
SGD 3M SIBOR 2.05 2.30 2.50 2.50
GDP 2.4 3.6 3.4 2.5

CPI (average, y/y %) -0.5 0.6 0.5 1.5
Fiscal balance (% of GDP) -1.0 1.5 2.2 0.5
Growth Outlook: Steadily Slower

3Q GDP growth was revised lower to
2.2%y/y (from est. 2.6%y/y) due to weaker
manufacturing and services. The slower
services growth was attributed to external-
oriented services clocking in weaker growth
such as wholesale trade, transportation Monetary Authority of Singapore (MAS) first assistant secretary-general, putting
& storage and finance & insurance. maintained its upside inflation bias in him at poll position to be the next Prime
Construction continued to contract for the its outlook and continues to expect core Minister. The next general election needs
9th consecutive quarter from weakness in inflation to rise gradually “in the months to be held by 15 Jan 2021, more than
public sector construction, though pace of ahead” (i.e. exceed 2% y/y soon) and 2 years away, but following the recent
contraction eased in 3Q. average in the upper half of their 1.5-2% change of key appointments within PAP’s
forecast range in 2018 and then higher to CEC, speculation is elections may be
After a strong 1H 2018, manufacturing 1.5-2.5% in 2019. The MAS also expects called earlier in 2019 to pave the way for
activity eased markedly in 3Q. We have a headline inflation to average around 0.5% succession from the current set of leaders
cautious outlook for the sector and project in 2018 and accelerate further to 1-2% (led by PM Lee) to the next generation
further slowdown for manufacturing in range for 2019. We expect headline (4G) likely led by Heng. Whether the
4Q 2018 and into 2019, due to high base inflation to average 0.5% in 2018 and elections will be in 2019 or in 2020, the
effect taking its toll on the electronics 1.5% in 2019, while core inflation may new set of leaders in the 18th general
cluster, the continued global electronics average 1.8% in 2018 and even higher election will likely oversee the next Goods
cycle slowdown and negative impact to 2.2% in 2019. The key downside risk to & Services Tax hike from 7% currently to
from the global trade tensions which may inflation is global crude oil price which has 9% sometime in 2021 to 2025.
add harmful spill-overs to Singapore’s suffered heavy correction since late Oct.
manufacturers both in terms of a slowdown SGD Outlook: Vulnerable To Trade
in export orders and business sentiments. MAS Outlook: Stand-off But Downside Limited By
Expectation of further softening in Tightening Once More In Apr 2019 Further MAS Tightening In 2019
China’s growth will also pose a drag on Following the “measured adjustment” Owing to Singapore’s open economy with
Singapore’s goods and services demand. increase in Oct 2018 MPS and barring “a a clear dependence on trade, a protracted
The manufacturing sector grew 7.5% y/y significant setback in global growth”, we stand-off between US and China on trade
in the first 10 months this year and we keep our view that there is a possibility is a clear negative driver for the SGD.
anticipate full-year manufacturing growth the MAS could further tighten the
to grind lower to 7.0% in 2018, and lower current stance at their April 2019 The SGD is also tightly correlated to the
to 3.0% in 2019. Services sector grew by meeting (via another slight increase in CNY. With CNY poised to weaken past
3.1% in the first 3 quarters of 2018, and the policy slope), due to growth staying 7.00 against USD in 2019, SGD is likely
will likely to slow to 2.9% for the full year above potential (even as it is projected to to follow with a move beyond 1.40/USD,
of 2018, and then further to 2.6% in 2019. moderate in 2019) while core inflation is weakest levels since May 2017. Perhaps
As such, our 2018 GDP growth forecast likely to creep higher to 1.5-2.5% in 2019. the dominant factor limiting excessive SGD
is at 3.4% for 2018 while we downgrade The latest GDP growth projection and MAS weakness is the possible MAS tightening
2019 growth forecast lower to 2.5% inflation outlook do not change our view in April 2019. This is likely to keep the
(from 2.8%), which is still within the of further tightening in 2019. The biggest SGD NEER at the top half of its policy
official forecast range of 1.5%-3.5%. uncertainty for this view is still resting on band, as it had for the most part of 2018,
how US-China trade tensions will evolve in maintaining SGD’s slight outperformance
Core inflation returned back to 1.9% y/y the months leading up to April 2019. against most of its regional trade partners.
in Oct due to significant increases in the
cost of electricity & gas following months Early Elections In 2019? Overall, we keep our view of a gradual rise
of higher global crude oil prices while all- On 23 Nov, the ruling People’s Action in the USD/SGD to test above the key 1.40
items (headline) inflation stayed at a benign Party's (PAP) newly elected Central resistance. Our forecasts for USD/SGD
0.7% y/y, thanks to declines in private road Executive Committee (CEC) appointed are 1.39 in 1Q19, 1.40 in 2Q19 and 1.41 in
transport & accommodation costs. The Finance Minister Heng Swee Keat, 57, as 3Q and 4Q19. Spot reference rate is 1.37.

SOUTH KOREA
Semiconductor And Petroleum Products Were Key Drivers Of Export Growth
USD/KRW 1,130 1,150 1,160 1,160
KRW Base Rate 1.75 1.75 1.75 1.75

Export Growth By Key Products
Total Export 6.2
GDP 2.9 3.1 2.5 2.5
Wireless Comm Device (share: 3.9%) -21.7
CPI (average, y/y %) 1.0 1.9 1.6 1.9 Auto Parts (share: 4.0%) 0.0
Unemployment rate (%) 3.6 3.7 3.9 3.9 Flat Panel (share: 4.8%) -10.5
Current account (% of GDP) 7.0 5.1 4.7 4.2 Steel Pdt (share: 6.0%) -0.4
Petroleum Pdt (share: 6.1%) 36.3
Auto (share: 7.3%) -4.1
Vessel (share: 7.4%) -54.4
Petrochem (share: 7.8%) 13.9
Gen Machinery (share: 8.5%) 11.4
No Strong Growth Catalyst Ahead
Semicon (2017 export share: 17.1%) % change y/y 33.5
South Korea’s GDP growth moderated to
2.0% y/y in 3Q18 from stable growth rate -80.0 -60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 80.0
of 2.8% in each of the three preceding Jan-Nov 2018 2017
quarters. This was also the slowest pace of
growth since 3Q09, due largely to a deeper
contraction in investment in building BOK Delivers First Rate Hike KRW Outlook: Near Term Strength
construction and civil engineering as well For The Year, Extended Pause Ahead Unlikely To Persist
as reduction in machinery investment. The Bank of Korea (BOK) raised its Despite strengthening to its strongest
benchmark base rate by 25 bps to 1.75% levels in 2 months against the USD at about
The lack of a strong growth catalyst in November, a year after its previous hike 1,108, the KRW still faces a long list of
ahead is expected to keep the economic in November 2017. The rate hike was challenges going into next year. Economic
expansion tepid. Private consumption primarily meant to address risk of financial growth has moderated starting 3Q18
is likely to be weighed down by a imbalance and also to narrow the gap with and should remain weak as the negative
fragile outlook in the domestic labour US rates. effects of the protracted trade dispute US
market as the unemployment rate rose and China show up more prominently in
to an 8-year high in 3Q18, averaging Inflation remains contained with the 2019 (barring a significant breakthrough
4.0% from 3.8% in 2Q18. The hike in central bank reiterating in November that in negotiations). A concurrent slowdown
minimum wages which was intended to inflationary pressures on the demand in the global electronics cycle would also
spur demand (under President Moon’s side will not be high for the time being. weigh on the KRW.
signature “income-driven growth” policy) There had been little translation of the
had instead burdened small businesses higher minimum wage to core inflation. In addition, the KRW is not expected to
and contributed to more cautious hiring. Core inflation remained mild at 1.3% y/y in receive any near-term support from the
The minimum wage is set to rise a further November and is expected to rise gradually BoK, which is likely to stay on hold through
10.9% in 2019 after the 16.4% in 2018. in 2019. Meanwhile, headline inflation 1H2019. Overall, we expect KRW to pare
had been driven by higher food prices recent gains and eventually weaken past
The concurrent cyclical downturn in the in the last few months and is expected 2018 low of 1,145 to the USD. We forecast
tech sector (semiconductor exports have to “remain near the target level for some USD/KRW at 1,130 in 1Q19, 1,150 in
been the largest contributor to export time, and then fall slightly and fluctuate in 2Q19 and 1,160 in both 3Q and 4Q19.
growth this year) and weaker Chinese the mid- to upper-1% range.” Our headline Prevailing spot reference is 1,110.
growth as well as trade uncertainties will inflation forecasts for 2018 and 2019 are
also be negative for the external demand. at 1.6% and 1.9% respectively.
On a 3mma basis, exports have remained
in low growth territory, consistent with a While BOK Governor Lee pointed out that
moderate outlook. The temporary 15% the policy rate is not at a neutral level
fuel tax cut, KRW15 tn of financial support yet, the weaker growth and contained
to SMEs and support for companies in the domestic inflation should see the BOK
shipbuilding and auto sectors undergoing retaining its very gradual pace in monetary
restructuring, may only provide a small normalization. We expect the central
respite to growth. bank to stay on hold through 1H2019.
There remains a small chance of a hike
With GDP growth at 2.5% y/y in Jan-Sep, in 2H2019, assuming no major surprises
we forecast that the full-year 2018 growth in domestic economic conditions or rate
will be around 2.5% and the economy is normalization trajectory in the major
likely to maintain growth at 2.5% in 2019. economies.
This is below the BOK’s October forecast
of 2.7% in both 2018 and 2019.

TAIWAN
Electronics And ICT Products Continue To Underpin Taiwan’s Exports To China
USD/TWD 31.20 31.60 32.00 32.00
TWD Official Discount Rate 1.38 1.38 1.38 1.50
Taiwan Exports To China
70.0
GDP 1.4 2.9 2.7 2.3 60.0
CPI (average, y/y %) 1.4 0.6 1.4 1.1 50.0
Unemployment rate (%) 3.9 3.8 3.8 3.8 40.0 % y/y
Current account (% of GDP) 13.7 14.5 11.6 11.0 30.0
20.0
Fiscal balance (% of GDP) -0.3 -0.1 -0.5 -1.0 12.7
10.0
9.3
0.0
-10.0
Uncertain Outlook Ahead -20.0
After four preceding quarters of above -30.0
3.0% growth, Taiwan’s GDP moderated to Jan 13 Sep 13 Jun 14 Feb 15 Nov 15 Aug 16 Apr 17 Jan 18 Sep 18
2.27% y/y in 3Q18 (2Q: 3.29%). The data Total Export Parts of Electronic and ICT Products
showed a sharp slowdown in exports from
its strong expansion pace over the past
quarters while private consumption eased Our 2018 GDP growth forecasts for Taiwan mild domestic inflationary pressures and
and government spending contracted in remains at 2.7% as we foresee further the negative output gap in its September
3Q18. Exports growth has eased sharply moderation in growth to around 2.1% in monetary policy statement, which should
to 1.42% y/y in 3Q18 from 6.29% in 2Q18, 4Q18. We are also keeping our 2019 GDP preclude any urgency to start raising
partly due to a high base effect. US-China forecast at 2.3% which is a shade below interest rate in 1H2019.
trade conflicts have affected sentiment but the government’s forecast of 2.41%.
the direct impact on trade, in particular with TWD Outlook: Still Poised
China is not fully reflected yet. Its exports Surveys pointed to voters’ discontent For Further Weakness
to China continue to be underpinned by with domestic policies (including the The TWD’s close correlation with the
electronics and ICT products (accounting government pension cuts since July) as the global technology stocks is evident in
for nearly half of its total exports to the key reason for Taiwan's ruling Democratic 4Q18. A sudden correction in technology
mainland) which are also under pressure Progressive Party (DPP) crushing defeat and chip-maker stocks in early Oct sent
from a global electronics cycle slowdown. in the November local elections. We do not TWD tumbling almost 2% briefly beyond
expect material implications on economic 31 per USD in days. Since then, USD/
Meanwhile, private consumption growth growth though there may be a modest dial- TWD has broadly stabilized within a range
slowed to 1.80% y/y in 3Q18 from 2.29% down in cross-straits tensions leading into between 30.50 and 31.00.
in 2Q18. On a more positive note, the the general election in 2020.
rebound in gross fixed capital formation Into 2019, our cautious outlook of Taiwan
growth, in particular, private enterprises' CBC To Maintain Rate Hold as discussed above, together with a further
capital investment to 5.21% growth from Until More Positive Signals slowdown in the global electronics cycle
-0.12% in 2Q18 should bode well for the There is little incentive for the Taiwan CBC are likely to underpin further weakness in
economy. The government expects private to raise interest rates at this juncture given the TWD against the USD for the next 4
sector’s capital investment to sustain global trade uncertainties, moderating quarters. However, Taiwan’s strong current
strength in the coming quarters. domestic growth and a mild inflation account balance is likely cushion the local
backdrop. dollar against acute weakness. Overall,
We continue to maintain a cautious outlook with further rate normalization by the Fed,
on Taiwan’s economy until we see further The decline in prices of vegetables and fuel USD/TWD is likely to rise further to 31.2 in
evidence of sustained investment growth brought the headline inflation to 13-month 1Q19, 31.6 in 2Q19 before flattening out
or the translation of the investments into low of just 0.31% y/y in Nov. In the Jan-Nov at 32.0 in 3Q and 4Q19. Prevailing spot
higher exports, bearing in mind that any period, headline inflation averaged 1.48% reference is 30.8.
moderation in China’s demand could y/y, led mainly by higher transportation
also affect the services sector in Taiwan and communication costs. Core inflation
(mainland tourists account for a quarter of which excludes fruits, vegetables and
tourist arrivals). So far, the manufacturing energy rose a more moderate 1.28% y/y.
PMIs for Asian economies have continued Given the weak inflationary trend, we have
to trend lower, casting a pall over the downgraded our CPI forecast to 1.4% and
sector’s outlook ahead as there remains 1.1% for 2018 and 2019 respectively.
significant uncertainty over global trade. The CBC had continued to focus on the

THAILAND
Rising Interest Rates Will Not Affect Financial Sector Thanks To Excess Liquidity
USD/THB 33.00 33.30 33.50 33.50
Source: Bloomberg, IMF, UOB Global Economic Economics & Markets Research
THB 1-Day Repo 1.75 1.75 2.00 2.00
60 6
GDP 3.3 3.9 4.2 4.0 50 5
CPI (average, y/y %) 0.2 0.7 1.2 1.1 4

40
Unemployment rate (%) 0.8 1.0 1.0 1.0 3
30
2
Fiscal balance (% of GDP) -2.6 -3.1 -2.9 -2.9 20
1
10
0
0 -1
The Thai Economy
Reaches Its Potential Output -10 -2
The Thai economy grew slower than 2000 2003 2006 2009 2012 2015 2018F
analysts had expected in 3Q18 at 3.3% Excess Liquidity (USD Billion) Policy Rate (RHS, %)
y/y, below the 4.6% rise in 2Q18, but

showing resilience amid increasing global
trade dispute. For the first nine months to these two countries – computer parts to THB Outlook: Downside Risks
of 2018, the economy grew by 4.3% the US and farm products to China such Limited By Strong Fundamentals
y/y which was above the potential rate. as cassava chips, soybean, seafood, Overall, the THB probably has one of the
The overall economic activity continued processed food and frozen food. best FX supportive factors across the Asia
to gain traction from domestic demand. FX block. Current account surplus is still
Private consumption grew strongly with 2019 General Election forecast to be a strong 9% of GDP in 2018
growth momentum seen in most spending Thailand's King endorsed the last two and 2019. Together with above potential
categories. Private investment slightly bills required for Thailand to hold a growth and low unemployment rate, the
accelerated, mainly supported by the general election, which is now expected THB is also drawing support from an
acceleration of construction investment. to take place between February and May expected interest rate hike from the BoT
Public investment continued to display next year. The earliest date could be 24 in December.
signs of improvement. However, tourism February 2019. The election would help
suffered from the Phuket tour boat incident, restore foreign investors’ confidence, Like the rest of the Asia FX block, there is
and exports decelerated as a result of the given the country's clearer direction. The no hiding from the overwhelming strength
high base effect, the economic slowdown political calm will also accelerate transport in the USD. The baht (THB) weakened 2%
in major trading partners and US-China infrastructure investments and planned to 33.00 per dollar in the fourth quarter
trade tensions. development projects under the Eastern to date, playing slight catch-up with other
Economic Corridor (EEC). These will boost Asian peers in terms of losses against the
The economy is expected to expand private investment and attract greater FDI. USD. Despite the near term weakness and
by 4.2% and 4.0% in 2018 and 2019, trade headwinds facing Asian FX, THB
respectively, assuming that substantial Expect the BoT To Stick is only down a paltry 1.3% year-till-date,
public investment proceed on schedule With A Gradual Rate Hike amongst the least in the region.
and the political climate is calm around The next MPC meeting is scheduled on
the general election proposed for 1H19. 19 December 2018. We expect the BoT to As the Fed continues its gradual rate
The fiscal impetus would continue to increase the policy rate from 1.5% to 1.75% hikes in 2019 (we expect three more 25bp
boost private investment in transportation as the economy would continue to expand increases), the THB is likely to remain
and logistics infrastructure projects going steadily above its potential, thus lessening defensive against the USD but downside
forward. Despite elevated household the need for ultra-accommodative risks will be limited due to the above
debt, private consumption is expected to monetary policy stance. Macro-prudential mentioned strong factors in favor of THB.
show continued expansion on the back tools alone would not be sufficient in Overall, we reiterate mild weakness of THB
of improvements in income, consumer preventing potential risks in the financial against the USD, at 33.0 in 1Q19, 33.3 in
confidence and employment. However, system. Looking ahead, the rate hike 2Q, 33.5 in 3Q and 4Q19. Prevailing spot
exports will likely grow at a slower pace would be followed by a pause to assess reference rate is 32.7.
in part owing to the trade tensions. The economic conditions. We expect the BoT
direct impact will fall on Thai exporters in to slowly raise the benchmark rate from
the supply chain for Chinese exports to 1.75% to 2%, possibly in 2H19. Gradually
the US and the US exports to China; these reducing monetary policy accommodation
include computers, electronics, motor will continue to support economic growth
vehicles, textiles, rubber and plastics. despite greater external uncertainties
Nonetheless, as the US and China slap and help cap financial stability risks in the
heavy tariffs on certain goods, there could future.
also be opportunities for Thailand to export

VIETNAM
Foreign Firms May Respond To US-China Trade Dispute By Relocating Businesses To Vietnam
USD/VND 23,500 23,800 24,000 24,000
VND Refinancing Rate 6.25 6.25 6.50 6.50
Economic Indicators 2016 2017 2018F 2019F 17.5

16.0
GDP 6.2 6.8 6.9 6.7 15.1
CPI (average, y/y %) 2.7 3.5 3.6 3.6 13.3
Unemployment rate (%) 2.4 2.3 2.1 2.1 11.3
9.9
8.4
Fiscal balance (% of GDP) -5.0 -3.5 -3.7 -3.5 6.8
5.1
3.9
1.7
Robust Growth But Challenges Ahead 1.1
In line with market consensus, Vietnam’s

economy expanded 6.9% in 3Q18 and 2016 2017 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
7.0% in the first three quarters of 2018. For FDI Into Vietnam (USD Billion, YTD)
the first three quarters of this year, industry
and construction grew 8.9% and services
rose 6.89%. These are slightly lower 2019 Socio-Economic Development Plan VND Outlook: On Track
than the previous growth rates of 9.1% On 8 November 2018, the National To Weaken Towards 24,000
and 6.9%, respectively. Manufacturing Assembly passed the 2019 socio- The VND has stabilized in a tight range
maintained solid growth at 12.7%, which economic development plan aiming to around 23,300 against the USD since Aug
is lower than the 13% growth in the same achieve annual economic growth of 6.6- even as the trade dispute between US
period last year. In addition, agriculture 6.8% by boosting exports and investment. and China continued to escalate. US and
grew 3.7% compared with 2.8% in the first Export turnover growth is projected at China are both Vietnam’s largest trading
three quarters of 2017. 7-8%. FDI capital that was registered partners and next year, first order effects of
for 2017 and 2018 will continue being the trade spat may cause an further drop
Due to the robust economic expansion, disbursed for production in 2019, thus in Vietnam’s exports, denting sentiments
the economy is expected to expand 6.9% providing momentum for the economic on the domestic currency.
and 6.7% in 2018 and 2019, respectively. growth. Headline inflation is set at 4-5%
High transport and energy infrastructure and unemployment rate will be less than Going forward, amidst on-going broad USD
investments remain significant growth 4%. The National Assembly also asked the strength, we can expect further weakness
drivers. Industrial production will be boosted government to work on its legal framework in the VND in the next 4 quarters towards
by continued opening of new multinational to meet the requirements of the CPTPP 24,000. As such, we reiterate USD/VND
enterprises in labor-intensive, export- agreement, and to sign and approve the point forecasts at 23,500 in 1Q19, 23,800
oriented manufacturing and processing Europe-Vietnam Free Trade Agreement. in 2Q19 and 24,000 in 3Q and 4Q19.
industries. However, unfavorable weather Prevailing spot reference rate is 23,300.
conditions could undermine agricultural Expect SBV To Normalize
output and mining production. The US- Monetary Policy In 2019
China trade dispute could also have a The SBV is expected to maintain
spill-over impact on Vietnam. The exports refinancing rate at 6.25% until June 2019.
are likely to suffer if these two countries Afterwards, it would be time for a gradual
reduce their demand for imported goods normalization of monetary policy. We
such as steel, machine parts, telephones, expect the central bank to hike the policy
mobile phones and parts, and intermediate rate from 6.25% to 6.5% during the second
electrical components. A flood of cheap half of 2019. As the economy would be
Chinese products may also affect local looking in good shape and well able to
industries. Nonetheless, these can be handle a return to higher interest rates,
mitigated if Chinese multinational firms the SBV could start raising its policy rate
relocate their manufacturing to Vietnam. at a slow pace to reduce financial stability
Its geographical proximity to China, risks including over-pricing of real estate
market access to ASEAN, favorable trade and other financial assets. Additionally,
terms with the US, and young labor pool gradually reducing accommodative
stand Vietnam in good stead. monetary policy could help dwindle
inflationary pressure and keep headline
inflation to remain stable next year.

AUSTRALIA
Household Savings Ratio At Lowest Level Since Global Financial Crisis
AUD/USD 0.74 0.75 0.76 0.77
Source: Macrobond, UOB Global Economic Economics & Markets Research
AUD Offical Cash Rate 1.50 1.50 1.50 1.75
GDP 2.6 2.2 3.0 2.8

CPI (average, y/y %) 1.3 1.9 2.0 2.2
Australia Economy:
Weak Spending And Trade To Weigh
Australian economic growth slowed in the
July-September quarter, driven largely
by a slowdown in household spending.
GDP grew by 0.3% q/q in seasonally
adjusted chain volume terms, missing Household Consumption Remains Weak
forecasts for an increase of 0.6% q/q.
It was the weakest quarterly expansion
since the economy contracted in the
September quarter of 2016. The economy
grew by 0.9% q/q in the prior quarter,
unchanged from the previous estimate.
On a yearly basis, GDP expanded 2.8%
y/y in 3Q, again missing expectations for
3.3% y/y, and down from a revised 3.1%
gain in the three months prior. Weaker
household spending and investment
weighed on growth. Private consumption
slowed to 2.5% y/y in 3Q from 2.9% y/y
in 2Q. Private investment fell 1.2% y/y in
3Q following an increase of 9.1% in 2Q.
Whilst net exports strengthened, a sharp
slowdown in imports was seen. Part of
this was due to the lower cost of imported
fuel. Imports of capital goods also slowed. return to target is expected, although this lows of 0.7021 and sustain spot above
Government consumption and investment progress is likely to be gradual. Taking 0.71 ever since. The recent tariff truce
both picked up, but not sufficient to offset account of the available information, the reached between US and China on 1-Dec
the slowdown in private demand. The Board judged that holding the stance of also fueled a further recovery towards
latest result means the RBA’s forecast for monetary policy unchanged at this meeting 0.74.
the economy to grow 3.5% y/y in 2018 is would be consistent with sustainable
unlikely to be achieved. We expect GDP growth in the economy and achieving the Although the macro backdrop both
growth of 3.0% for the year, and then for inflation target over time”. The latest GDP domestic and external remains
the economy to slow further to 2.8% in print is certainly a big miss relative to RBA challenging, it appears that the bulk of
2019. expectations. Whilst the bigger picture of the AUD weakness may be behind us.
a gradually tightening labour market and The negative positioning (as per CFTC)
RBA: To Extend Record Spell a slow lift in wages growth remains intact, against the AUD is already showing signs
Of Steady Rates we see no change in policy until at least of reversing from the most extreme levels
The RBA held its OCR at 1.5% at its last end-2019. The first RBA meeting for 2019 in over 3 years, setting the stage for a
meeting for the year. The concluding is scheduled for 5 February. more sustainable recovery in AUD. Going
paragraph of December’s accompanying forward, we expect AUD to draw support
statement was exactly the same as the AUD: On Track across 2019 from improved pricing for an
one in November, with the central bank For A Modest Recovery In 2019 eventual rate hike by RBA. Our updated
saying that: “The low level of interest rates A “long and very good conversation” forecasts for AUD/USD are 0.74 in 1Q19,
is continuing to support the Australian between President Trump and President 0.75 in 2Q19, 0.76 in 3Q19 and 0.77 in
economy. Further progress in reducing Xi on trade in early Nov was the key 4Q19. The prevailing spot is 0.73.
unemployment and having inflation catalyst that jolted AUD/USD off 32-month

EUROZONE
Public Debt & Fiscal Deficits In EU
EUR/USD 1.15 1.16 1.18 1.20
EUR Refinancing Rate 0.00 0.00 0.00 0.25
GDP 1.9 2.4 1.9 1.6

CPI (average, y/y %) 0.2 1.5 1.8 1.7
Eurozone Economy:
To Slow Even Further In 2019
Growth in the Eurozone slowed
significantly in the third quarter, as Italy’s
economic troubles weighed and car
production in Germany was disrupted.
GDP in the 19-country single currency area Euro Area Inflation Eases As ECB Approaches End Of Bond Buying
rose just 0.2% q/q from July to September,
confirming its earlier preliminary flash
estimate from 30 October. This was the
slowest rate of economic growth since the
second quarter of 2014. The economy of
Germany contracted by 0.2%, France’s
was 0.4% stronger, whilst Italy’s was
unchanged in the quarter. It was also
confirmed that the year-on-year GDP
growth rate was 1.7% y/y, the lowest level
since the fourth quarter of 2014. Overall,
GDP growth in the Eurozone is likely to
be slower in 2019 than this year. Whilst
monetary policy will continue to remain
supportive of domestic demand, factors
that may slow down economic growth in
the region include the lack of structural
reform in the Eurozone, including fiscal
fragilities, and in some countries, public for policy rates, we are not anticipating any Nov, said the recent weakening in euro-
and private debt overhang. rate increases until much later in 2019 – area growth momentum is likely to be
which will lift the deposit rate to 0% (from “temporary” and unlikely to scupper the
ECB: Policy Moves To Be Gradual -0.4% currently) and the refi rate to 0.25% withdrawal of monetary stimulus.
At its 25 October meeting, the ECB (from 0% currently) by the end of 2019.
reaffirmed that its asset purchase scheme With policymakers still largely confident
will end in December 2018 and that EUR: Ingredients For A Sustained that they would weather the slowdown,
interest rates could rise after next summer, Recovery Are Falling In Place discussions by the ECB about its maiden
sticking to guidance first unveiled in June EUR/USD continues to drift lower for a rate hike would eventually begin in 2019.
and repeated at every meeting since. third straight quarter in 4Q18, weighed by This is likely to a key upside catalyst for
At the press conference, Draghi did not worries about Italy’s fiscal sustainability the EUR especially where pricing for a
answer the question of what the ECB and a slowdown in euro-area growth. rate move higher is very modest now.
would do in the event that no consensus However, these negative factors seem According to Bloomberg, markets are only
on reinvestment policy could be reached to be abating. Recent news report said pricing in a 6 bps hike in ECB’s deposit
in December. We are of the view that the Italian Deputy Premier Matteo Salvini rate to -34 bps from -40 bps currently.
ECB will not be in any rush to give clearer seek to reach an accord with the EU on
guidance, especially given the uncertain the country’s budget that will avoid an Overall, with easing headwinds against the
economic backdrop. In fact, we think excessive deficit procedure against Italy. EUR and the gradual pricing of monetary
that economic forecasts will be revised As a result, the BTP-Bund spread has tightening in Europe, a sustained recovery
down in December, which will offset an stopped widening and is steady just below in EUR is our conviction view within G10
earlier rate hike expectation than what is 300 bps (high of 326 bps on 20-Nov) currencies. Overall, we see EUR/USD
currently priced in (around October 2019). and a further stabilization in 2019 could bottoming and rising gradually across next
Nonetheless, we still expect net asset conversely benefit the EUR. In addition, year from 1.15 in 1Q19 to 1.20 in 4Q19.
purchases to end in December 2018. As ECB President Draghi, as recent as 26- Prevailing spot of EUR/USD is 1.13.

NEW ZEALAND
Unemployment Rate Drops To Decade Low
NZD/USD 0.69 0.70 0.71 0.72
NZD OCR 1.75 1.75 1.75 1.75
GDP 4.2 2.7 2.8 2.8

CPI (average, y/y %) 0.6 1.9 1.6 2.0
Fiscal balance (% of GDP) 1.2 0.9 1.1 1.0
New Zealand Economy:

To See Slower Growth Ahead
New Zealand’s economy grew at the
fastest pace in two years during the second
quarter. GDP expanded a seasonally
adjusted 1.0% q/q, beating forecasts for a
gain of 0.8% q/q and was up from 0.5% q/q Inflation Picks Up
in the three months prior. On a yearly basis, Source: Macrobond, UOB Global Economic Economics & Markets Research
GDP expanded 2.8% y/y, also exceeding
expectations for 2.5% y/y and up from
2.7% y/y in the first quarter. Gains in the
second quarter were broad-based but led
by agriculture as the dairy industry bounced
back with gusto from bad weather that had
hampered production. That helped propel
growth in agriculture to 4.2%, the sector's
largest gain in almost four years.
Nonetheless, the outlook for growth

remains benign. So far, the New Zealand
economy has held up relatively well in the
face of two major uncertainties – stubbornly
weak business confidence and escalating
trade tensions. Repeated business surveys
during the past four months have reflected
falling confidence in businesses' future next move could be "up or down". However NZD: Recent Strong Gains
outlook, largely in the face of uncertainty RBNZ Governor Orr did say "there are both Likely To Moderate In Pace
over the effects of government policies. upside and downside risks to our growth The NZD had a solid quarter-to-date in 4Q
We are also watchful of escalating trade and inflation projections. As always, the and jumped almost 5% against the USD,
tensions between the US and China, timing and direction of any future OCR to 0.6940 from about 0.66, reversing all
especially because China is New Zealand's move remains data dependent". the losses sustained in the 3Q. The gains
largest trading partner. On that note, came amid challenging external conditions
markets will scrutinize New Zealand's The central bank's forecasts for where of trade uncertainties and volatilities in
third quarter GDP data closely when it is it expects the cash rate to be were global equities. The shift of RBNZ’s stance
released on 20 December, as the RBNZ unchanged. It still sees the OCR at 1.9% from dovish to neutral across the quarter
has said it is focused on that quarter, when in September 2020 and a full-rate hike is probably underpinned most gains in NZD
it wants to see evidence of fiscal stimulus still signaled by December 2020 when the though a rate hike is not expected until well
boosting growth. benchmark rate is forecast to be 2%. We get into 2020.
the sense that the RBNZ is moving towards
RBNZ: On Hold For 2019 a more neutral stance now, whilst remaining With the recent move, the NZD/USD looks
The RBNZ kept the OCR steady at 1.75% accommodative, especially following recent over-extended in the near term. Absent
in November. The accompanying press positive data on inflation, and the labour a new positive trigger, further gains in the
release did not include the line from the market. We keep to our view that the OCR currency pair are likely to moderate in pace.
previous statement in September that the will remain on hold until at least the end of Overall, we forecast NZD/USD at 0.69 in
2019, before rising slowly thereafter. 1Q19, 0.70 in 2Q19, 0.71 in 3Q19 and 0.72
in 4Q19. Prevailing spot of NZD/USD is
0.69.

UNITED KINGDOM
and financial markets”. We see the BoE putting it to a second Commons vote,
sitting on the sidelines for now as it waits probably in January. However, this strategy
GBP/USD 1.25 1.25 1.26 1.27
for greater clarity given the wide and will only work if May loses by a small
GBP Repo Rate 0.75 0.75 1.00 1.00 complicated range of Brexit outcomes. We margin. If the deal is defeated by a bigger
have penciled in a rate rise around mid- margin, May will likely face and could well
2019, but nonetheless, remain very mindful lose a vote of confidence. From there, a
GDP 1.8 1.7 1.3 1.5
that rates could go in either direction. managed no-deal, “Norway plus”, another
CPI (average, y/y %) 0.7 2.7 2.5 2.1 referendum or general election all become
Unemployment rate (%) 4.9 4.5 4.1 4.0 GBP: Brace For Volatility possible scenarios; and the odds of an
Current account (% of GDP) -5.2 -3.7 -3.5 -3.2 As Brexit Day looms, implied volatility in Article 50 extension would also increase.
the GBP/USD options has risen to the
highest levels since July 2016, reflecting Yet the passage of Dominic Grieve’s
the overhang of uncertainties heading into amendment (4 December) — which will
the crucial 11 December vote, and this is allow MPs to amend the Government
UK Economy: To Slow Down In 2019 likely to persist. Positioning in both spot and motion on what happens next if no deal
GDP advanced 0.6% q/q in 3Q after options have also gradually deteriorated is approved — may yet help May salvage
expanding 0.4% q/q in 2Q. The growth against the GBP in the recent few months. her deal. She can now present the choice
rate matched expectations, and was the We are maintaining our negative view facing MPs in the vote as between her deal
highest quarterly growth since 4Q16, when on GBP/USD, forecasting the pair at — the hardest form of Brexit on offer —
the economy grew 0.7% q/q. On a yearly 1.25 across 1Q and 2Q19 before a slight and “no Brexit”. This might well persuade
basis, GDP grew 1.5% y/y, also in line recovery to 1.26 in 3Q19 and 1.27 in 4Q19. some Eurosceptics to reluctantly vote for
with expectations, and higher compared to her agreement to “get Brexit over the line”
1.2% y/y in 2Q. We believe the stronger Brexit: Commons Vote rather than risk it being blocked. The size
growth recorded in 3Q is a one-off for Will Determine What Comes Next of the rebellion is likely to come down.
the UK economy, with persistent Brexit Now that the European Council has
uncertainty and the financial squeeze on approved the Withdrawal Agreement Both "Norway plus" and a second
consumers and businesses likely to weigh and political declaration on future EU-UK referendum seemingly looks more likely
increasingly on economic activity in the relations, the spotlight turns to whether UK now, as a result of the Grieve amendment.
coming quarters. PM Theresa May can secure the backing But the Norway plus option appears to be
of MPs for her deal. The consensus has winning more support among MPs in all
BoE: Holds Rate As Brexit Looms been that if the government suffered a parties. It would be a challenge for May to
The BoE kept rates at 0.75% again when heavy defeat at the 11 December vote, the adopt it though, as it would cross her line
it met in early November. The quarterly probability of a ‘no deal’ outcome would of ending free movement of labour. This
Inflation Report, which accompanied increase, since the EU is unlikely to offer might require her removal. Yet, this is an
the rate decision, stated: “The economic much scope for change. easier route than a second referendum, as
outlook will depend significantly on the MPs fear that would prolong the country’s
nature of EU withdrawal, in particular the We think it is unlikely May will secure a divisions and provoke a backlash from
form of new trading arrangements, the Commons majority. For now, our base-case angry voters that the 2016 decision was
smoothness of the transition to them and remains that she will go back to Brussels being overturned.
the responses of households, businesses and seek some tweaks to her deal, before
11 December 2018
UK Parliament Vote
Early 2019
EU Withdrawal
YES Agreement
Introduced
NO
REJECTED PASSED
21 days for UK
Government to put
forward new plan
European EU Council 29 March 2019

Parliament Votes Approval UK leaves EU
Potential Scenarios Needs simple 20 countries Transition period
» Leave with no deal majority to pass representating at begins, scheduled to
least 65% of them end Dec 2020 but
» Re-negotiate must agree could be extended
» General Election
» 2nd Referendum
» Delay Article 50
Source: Various newswires, UOB Global Economics & Markets Research

UNITED STATES OF AMERICA
hurting mortgage market and weakening FOMC: Keeping To 3 Hikes In 2019
affordability. If the weakness persists into US inflation continued to hover near the
US Fed Funds Rate 2.75 3.00 3.25 3.25
2019, that will be another negative to US Fed Reserve’s 2% goal with the core
Economic Indicators 2016 2017 2018F 2019F economy. Meanwhile, we are also mindful PCE (which excludes food and energy)
that bad weather may take a toll on growth – the Fed’s preferred price index tied
GDP 1.6 2.2 2.9 2.0
in 1Q of 2019 (as with some of the recent to personal spending – easing slightly
CPI (average, y/y %) 1.3 2.1 2.5 3.0
years) although the impact is almost to 1.8% y/y in Oct (from 1.9%) even as
Unemployment rate (%) 4.7 4.1 3.7 3.5 always transient. wage growth went above 3% y/y. Going
Current account (% of GDP) -2.4 -2.4 -2.1 -2.0 forward, the tight labor market conditions
Fiscal balance (% of GDP) -3.1 -3.4 -3.8 -4.5 The biggest risk to the US is the rising may translate into more material upward
trade tensions between US and its biggest wage pressures while more trade tariffs
trading partners (especially China), will also drive import prices higher, but the
potentially leading to higher prices in the downside could come from weaker crude
US economy while US manufacturers and oil prices. Fed Vice Chair Clarida (3 Dec)
Growth Likely To Ease To 2% In 2019 exporters will be at the receiving end of warned downside risk to CPI exceeds that
The 2nd cut of 3Q GDP saw US growth tit-for-tat trade retaliation. And while the of upside risks.
unchanged at 3.5% q/q SAAR (from recent G20 earned both US and China a
4.2% in 2Q and 2.2% in 1Q). Personal temporary 90-day truce and negotiation We continue to expect another rate hike
consumption spending expanded a slower period, scant details from US and lack from the Fed at the 18/19 Dec FOMC to
3.6% (from 3.8% in 2Q) but still accounted of corroboration on these details so far bring the FFTR range to 2.25%-2.50%
for the lion’s share of 3Q GDP growth from the Chinese authorities suggests a by end-2018. We also maintain our 2019
at 2.45ppts. US consumer confidence rocky road ahead for trade discussions in rate hike expectation at three 25bps
slipped slightly to 135.7 in Nov but remains 2019. We expect a long-drawn negotiation hikes which now implies that we expect
close to the 18-year high of 137.9 in Oct process well into 2019 but there is still the Fed to exceed their long run FFTR
and personal spending & income growth a significant risk that both sides could at 3.0% by mid-2019. That said, Fed’s
are healthy (+0.6% m/m and 0.5% m/m fail to overcome their differences. While likely shift from the well communicated
in Oct respectively). The US jobs market the worsening trade relations will weigh “gradual rate trajectory” to more emphasis
continued to be robust with employers negatively on global trade outlook, a silver on data dependency, will make the
adding 250,000 jobs (averaging 212,500 lining is that it may actually translate to policy path more uncertain. If there is a
per month YTD) and unemployment stronger investments inflows into US. significant weakening of US economic
rate at 3.7% in Oct while wage growth Trade policy will be a key US political & data or a significant escalation of trade
exceeded 3% y/y, first time since Apr economic issue in 2019. tensions in 2019, then that could warrant
2009. Another factor that contributed to a more cautious Fed and the risk could
a consumption-driven 3Q growth was the As for domestic politics, after the mid- be lesser hikes, from 3 to probably just 2,
expansionary US fiscal policy, specifically terms the next major US political event but not zero. In the meantime, the Fed’s
the US tax reform bill which was passed will be the campaigning for 2020 US balance sheet reduction (BSR) program
in late 2017. That said, the positive effects Presidential elections. The threat of is expected to continue as scheduled and
of fiscal stimulus are likely to fade next another government shutdown before that implies the FOMC will not add more
year, weighing on growth. In addition, the the end of 2018 is still on the table but rate hikes (beyond what is implied in the
loss of the House to the Democrats in the the impact should be manageable. We dot-plot chart) unless we get a sharp
Nov mid-term elections means that there also think that the potential impeachment inflation surprise.
will be no chance of Trump’s pledge for proceedings against Trump is unlikely to
10% tax cuts for the middle income, i.e. no be successful under a divided Congress Rates & UST Yields
more fiscal boost in 2019. unless Mueller’s investigations turns up Still Likely Higher In 2019
incriminating evidence against Trump Notwithstanding some bouts of risk
Business spending which has been but nothing so far. A potential silver ling aversion, our expectations for ongoing
expanding sequentially since 2Q 2016, under a Democrat-controlled House is twin tightening, i.e. rate hikes and BSR
slowed markedly to just 2.5% in 3Q, that Trump’s infrastructure spending makes it possible that short rates and UST
after an exceptional 1H 2018 (expanding proposals may gain favor with Democrats yields will continue to head higher. We
8.7% in 2Q and 11.5% in 1Q). While it will and moderate Republicans. expect to see 3M Libor at around 2.95% at
remain constructive to growth this year, the end of 1Q 2019. Libor vs. OIS spread
the waning investment trajectory may Despite expectations of a slower 4Q 2018 is expected to remain wider than normal
spell further downside to 2019 growth. (likely at 2.5%), we revise higher our US due to tighter liquidity. The US widening
Domestically, another source of weakness GDP growth forecast higher to 2.9% in fiscal deficit and the Fed’s balance sheet
could come from US housing market where 2018 (from 2.2% in 2017 and previous outlook will weigh negatively on UST (i.e.
activity seemed to be digging deeper into forecast of 2.7%) due to much stronger higher yields), and we expect to see 10Y
a soft patch with Oct new home sales growth for first 3 quarters. Taking into UST at 3.25% by the end of 1Q2019. And
(-8.9% m/m to 544,000 units, lowest level account all the factors and uncertainties while the yield curve continues to flatten,
since Mar 2016) and pending home sales listed here, we expect growth to slow to we also highlight steepening pressures
(-2.4% m/m, -6.7% y/y the 10th straight 2% in 2019. due to deficit financing & asymmetric
month of y/y declines) falling short and inflation risk which may be more apparent
suggesting that rising borrowing costs is after the Fed reaches its cyclical peak in
its policy rate (likely by mid- to late-2019).

FX TECHNICALS
USD/SGD: 1.3700
USD/SGD touched 1.3872 in mid-October and retested the level in early-November with a high of 1.3873. In view of the overbought
condition and waning upward momentum, the inability to break clearly above the strong 1.3880/1.3900 resistance zone was not exactly
surprising. At the time of writing in early-December, USD/SGD just broke below the strong rising trend-line support at 1.3685. The break
of this support does not bode well for USD/SGD as it suggests that the 1.3873 high is a significant peak. Going into the first quarter of
2019, USD /SGD is unlikely to threaten the 1.3880/1.3900 zone. However, any weakness is considered as a corrective pull-back and
USD/SGD is unlikely to accelerate lower. That said, there is scope for USD/SGD to move below the late-August low of 1.3607 but the
prospect for a sustained move below the next support at 1.3530 is not high.
EUR/USD: 1.1350
After failing to break above the strong 1.1850 resistance in in late-September (high of 1.1815), EUR/USD dropped to hit a year-to-date
low of 1.1213 in mid-November. Despite the relatively rapid decline, we do not detect a significant improvement in downward momentum.
That said, there is room for EUR/USD to extend its weakness to 1.1150. At the time of writing in early-December, a sustained move below
the next support at 1.1000 within the first quarter of 2019 seems unlikely. On the upside, only a move above the declining trend-line
resistance at 1.1620 would indicate the weakness in EUR/USD has stabilized.

50 UOB Global Economics & Markets Research FX TECHNICALS
GBP/USD: 1.2770
The rebound in GBP/USD from the mid-August low of 1.2662 touched 1.3295 in mid-September. The subsequent price action since mid-
September has been choppy but at the time of writing in early-December, downward momentum has picked up and a break of 1.2662
would not be surprising. A break of this level could pressure GBP/USD further even though the next support near 1.2450 may not yield
so easily. Resistance is at 1.2930 but only a move above 1.3000 would indicate the weakness in GBP/USD has stabilized.
AUD/USD: 0.7370
The round-number 0.7000 support level remains intact as AUD/USD staged a robust rebound after touching a low of 0.7021 in late-
October. AUD/USD has likely found an intermediate bottom at 0.7021 and a move back below this level within the first three months of
2019 seems highly unlikely (0.7140 is already a strong support level). At the time of writing in early-December, the strength in AUD/USD
is deemed as a corrective rebound and for the next 2 to 3 months, any further up-move could be limited to a test of major resistance near
0.7580 (0.7578 is the 50% retracement of the drop from 0.8136 to 0.7021, see chart above). Looking further ahead, AUD/USD could
strengthen further to 0.7680 but this level is unlikely come into the picture within the first quarter of 2019.

FX TECHNICALS UOB Global Economics & Markets Research 51
USD/JPY: 113.60
USD/JPY rose to a high of 114.54 in early-October but failed to make a clear break of the November 2017 high of 114.72. The rapid pull-
back from 114.54 and the subsequent ‘listless’ price action suggests USD/JPY is still trading within a broad consolidation range. At the
time of writing in early-December, there is no indication that USD/JPY is ready to embark on a directional move. In other words, USD/JPY
is expected to trade sideways in the first quarter of 2019 even though the underlying tone has improved slightly and this could translate
into a higher trading range of 111.50/115.50.
EUR/SGD: 1.5530
EUR/SGD traded in a choppy manner in Q3 as it rose to a high of 1.6112 in late-September before dropping swiftly and sharply. At the
time of writing in early-December, EUR/SGD appears to be poised to move below the June’s 2018 low of 1.5495. Downward momentum
has improved and not only would a break of 1.5495 not be surprising, we also see chance of EUR/SGD moving below the 1.5400 level.
The next major support at 1.5200 is however, likely out of reach. All in, we expect EUR/SGD to stay under pressure in the first quarter
of 2019 and only a move back above 1.5750 would indicate that the weakness has stabilized.

GBP/SGD: 1.7470
At the time of writing in early-December, GBP/SGD just edged below 1.7445 and hit a fresh 2018 low. The break of the strong 1.7445
level coupled with the rapid pick-up in downward momentum suggests further GBP/SGD weakness in the first quarter of 2019. Barring
a move above 1.7750, GBP/SGD is expected to move below the next support at 1.7300. Further decline to the next support at 1.7105 is
not ruled out but at the time of writing, the prospect for a break of this level is not that high.
AUD/SGD: 1.0070
AUD/SGD attempted but failed to break below the 2016 low near 0.9700. The relatively sharp and swift rebound from the late-October low
of 0.9706 suggests AUD/SGD has likely found a bottom and in the first quarter of 2019, we do not expect 0.9700 to come into the picture
(0.9800 is already a strong support level). At the time of writing in early-December, AUD/SGD just broke above the strong declining trend-
line resistance near 1.0070. Further AUD/SGD would not be surprising even though any strength is viewed as a ‘corrective recovery’ and
the major 1.0240 resistance is unlikely to break so easily. The next resistance above 1.0240 is closer to 1.0330.

FX TECHNICALS UOB Global Economics & Markets Research 53
JPY/SGD: 1.2040
JPY/SGD just broke below the major rising trend-line support at 1.2040 at the time in early-December. While the break of the trend-line
suggests further JPY/SGD weakness in the coming few months, no significant improvement in downward momentum is detected and
the 2016 low near 1.1708 is unlikely to come under threat. That said, JPY/SGD is expected to stay under pressure and only a break of
1.2300 would indicate that downward pressure has eased.

COMMODITIES TECHNICALS
SPOT GOLD: $1,235/oz
The recovery in spot gold touched a high
of $1,243.32 in late-October. Despite the
subsequent lackluster price action, the
underlying tone remains positive and the
bias for the first quarter of 2019 is on the
upside. That said, spot gold could dip
towards the $1,205.00 support first but
barring a break of $1,195.00, we expect
spot gold to move the $1,243.32 high but
the next resistance at $1,262.63 could be
just out of reach.
LME 3-MTH COPPER: $6,295/mt

Copper touched a low of $5,773 in mid-
August but has since rebounded off the
low. The recovery clearly lacks momentum
and is viewed as part of an on-going
‘correction’ phase. In other words, copper
is expected to grind higher in the next 2
to 3 months but lackluster momentum
suggests that a break of the strong $6,532
resistance is unlikely. On the downside,
the rising trend-line support at $5,880 is
likely strong enough to hold any weakness
in the next few months.
BRENT CRUDE: $62/bbl

After touching a high of $86.74 in early-
October, Brent crude staged a sharp and
outsized plunge that hit a low of $55.30
in late November. The ‘dramatic’ 2-month
plunge is severely over-extended and while
further weakness below $55.30 is not ruled
out, the probability for a move towards the
next major support at $50 within the first
quarter of 2019 is deemed as low. That
said, after such a big drop, any recovery is
expected to be tentative and is unlikely to
move above the major $70.30 resistance.

COMMODITIES TECHNICALS UOB Global Economics & Markets Research 55
CONTACTS
Global Economics & Markets Research
Suan Teck Kin, CFA

Head of Global Economics & Markets Research
(65) 6598 1796
[email protected]
Alvin Liew Julia Goh Heng Koon How, CAIA

Senior Economist Senior Economist (Malaysia) Head of Markets Strategy
(65) 6598 1797 (60)3 2776 9233 (65) 6598 1798
[email protected] [email protected] [email protected]
Lee Sue Ann Loke Siew Ting Quek Ser Leang

Economist Economist (Malaysia) Market Strategist
(65) 6598 1792 (60)3 2772 6221 (65) 6598 1795
Ho Woei Chen Manop Udomkerdmongkol Peter Chia

Economist Economist (Thailand) FX Strategist
(65) 6598 1793 (66)0 2343 4330 (65) 6598 1754
Enrico Tanuwidjaja Victor Yong

Economist (Indonesia) Interest Rate Strategist
(62)21 2350 6000 ext. 81618 (65) 6598 1799
[email protected] [email protected]
Disclaimer
This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever
purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or
regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in
this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability
of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs.
The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing
conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of,
including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The views
expressed within this publication are solely those of the author’s and are independent of the actual trading positions of United Overseas Bank Limited, its
subsidiaries, affiliates, directors, officers and employees (“UOB Group”). Views expressed reflect the author’s judgment as at the date of this publication
and are subject to change.
UOB Group may have positions or other interests in, and may effect transactions in the securities/instruments mentioned in the publication. UOB Group
may have also issued other reports, publications or documents expressing views which are different from those stated in this publication. Although every
reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this publication, UOB Group makes
no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating
to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this publication.
United Overseas Bank Limited
Company Registration No.: 193500026Z
Head Office
80 Raffles Place
UOB Plaza
Singapore 048624
Telephone: (65) 6533 9898
Facsimile: (65) 6534 2334
www.uobgroup.com
MCI (P) 092/04/2018

Uob Q1 2019

Uploaded by

Copyright:

Available Formats

Uob Q1 2019

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Uob Q1 2019

Uploaded by

Copyright:

Available Formats

Quarterly Global Outlook

SINGAPORE FOCUS COMMODITIES STRATEGY

MYANMAR FOCUS US FOCUS

Information as of 07 December 2018

Scan the QR Code for a list of all our reports [email protected]

Synchronized Slowdown In 2019 Emerging Markets Markit Manufacturing PMI, SA

Quarterly Global Outlook 1Q2019

Quarterly Global Outlook 1Q2019

Quarterly Global Outlook 1Q2019

Quarterly Global Outlook 1Q2019

Quarterly Global Outlook 1Q2019

Real GDP Growth Trajectory

Quarterly Global Outlook 1Q2019

JPY Policy Rate -0.10 -0.10 -0.10 -0.10 -0.10

USD/HKD 7.81 7.80 7.80 7.80 7.80

PHP O/N Reverse Repo 4.75 5.00 5.25 5.25 5.25

GBP/SGD 1.75 1.74 1.75 1.78 1.79

Quarterly Global Outlook 1Q2019

Quarterly Global Outlook 1Q2019

United States, Foreign Trade, Census Bureau,

Quarterly Global Outlook 1Q2019

Top 10 Trading Partners With ASEAN (2017)

2017 Average Monthly Wages (US$)

Quarterly Global Outlook 1Q2019

Thailand 1. Harley Davidson shifted part of its processes to Thailand.

Source: Bloomberg, Newswires, UOB Global Economics & Markets Research

For full report, please refer to our website: www.uobgroup.com/research.

Quarterly Global Outlook 1Q2019

2018 Supply Announcement 2019 Supply Announcement

Growth In SGS Bonds Outstanding (2008 to 2018) What’s Coming Up In 2019?

Quarterly Global Outlook 1Q2019

what had transpired this year in terms of mini-auction utilization.

Longevity tweak for 2Y benchmark

Quarterly Global Outlook 1Q2019

How does the 2019 SGS calendar play into this?

1.20-1.70 1.70-2.20 2.20-2.70 2.70-3.20 0.00

Notably, market confidence in the domestic currency versus its

Quarterly Global Outlook 1Q2019

Exhibit 1: Rapid Economic Growth Has Relied

Zone The MIL 2016 The FIL 2012

Quarterly Global Outlook 1Q2019

Ease of Doing Business Index 2019

Cambodia Laos Myanmar Vietnam Thailand

Exhibit 6: Low Wage Costs Attract Exhibit 7: Myanmar-Thailand Border Trade

Minimum Wages (USD/Month)

2013 2014 2015 2016 2017 1H18

For full report, please refer to our website: www.uobgroup.com/research.

Quarterly Global Outlook 1Q2019

Inversions In Parts Of Yield Curves

While the 5- and 2-year or the 5- and

As such, while inversions parts of the

Quarterly Global Outlook 1Q2019

To put it into context, the likelihood for 40% Threshold

In addition to the level of the recession

the subsequent business and consumer

At the current juncture, the slow climb up

For example, if the current US-China trade

Quarterly Global Outlook 1Q2019