Daily Market Commentary

ABC
02 February 2015
Sri Lanka
Sri Lanka Markets Update
Daily Market Note
Domestic Markets
HSBC research is available online:
 USD/LKR spot closed at 133.10/40 against an opening level of
133.35/65.
 Spot opened trading today at 133.20/45 and is currently trading at
133.12/32.
 Overnight liquidity was a surplus of LKR 31.1 Bio and O/N Money
averaged at 5.84%
Source : Reuters (24/11/14)
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HSBS
Disclaimer
This report must be read with the disclaimer,
disclosures and analyst certifications on p5
that form part of it.
Issued by The Hongkong and Shanghai
Banking Corporation Limited.
Source : Reuters (24/11/14)
 Regional Currency Performance against USD
LKR
-0.27%
THB
-0.24%
Contacts
-0.05% BDT
INR
0.39%
IDR
0%
0%
0%
0%
0%
0%
Local currency depreciation/appreciation
0.21%
0%
0%
0%
Source : Reuters (01/01/14 to 24/11/14)
 Point to point inflation came at 3.2%, up from 2.1% in December
while annual average inflation came at 3.2% down from 3.3% in
December
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Perry Savundranayagam
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Eraj Rajapakse
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Santhush Weerakoon
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Sri Lanka Markets Update
USD/LKR Spot-closing (27 Jan 2015)=133.15/40
Inter-Bank call money ( 27 Jan 2015) 5.82%
USD/LKR forward Premiums
Treasury Bill Rates – Auction rates - net of
tax
SLIBOR
3 mth 145/175 cents
6 mth 280/320 cents
12 mth 535/595 cents
3 mth
6 mth
12 mth
USD Sovereign Bond
2015
2020
O/Night
1 Month
3 Month
6 Month
12 Month
5.80% (5.80%)
5.90% (5.90%)
6.05% (6.05%)
3.04%
4.62%
5.91%
6.29%
6.57%
6.82%
7.10%
Economic Indicators
All share Price index
S&P SL 20 Index
Daily Turnover
7,180.05 down by 196.46 points (-2.66%)
3,962.24 down by 172.46 points (-4.17%)
Rs. 2,065.17 million
CBSL SDFR
CBSL SLFR
Statutory Reserve Ratio(SRR)
6.50% (January 2014)
8.00% (January 2014)
6.00% (June 2013)
Consumers Price Index
Inflation y-o-y %
Inflation 12m moving ave
180.20 (Dec 2014)
1.6% (October 2014)
3.8% (October 2014)
GDP Growth
Gross Official Reserves
Government Revenue
Government Expenduture
Unemployment
7.70% (2014 3Q)
$ 7.37 Bn (Dec 2014)
$ 8.75 Bn (2013 CBSL Annual Report)
$ 12.84 Bn (2013 CBSL Annual Report)
4.5% (2014 2Q)
Outstanding External debt
$ 39.7 Bn (2013 CBSL Annual Report)
Exports
$ 898.50 mn (Oct 2014)
Imports
$ 1750.20 mn (Oct 2014)
Trade Deficit
$ -851.70 mn (Oct 2014)
Derivatives – IRS (Bid)
USD
0.6950
1.3240
1.8050
2 Year
5 Year
10 Year
Central Bank rates
NZD
3.50%
GBP
0.50%
CAD
0.75%
CHF
-0.75%
GBP
0.8670
1.2621
1.5827
AUD
USD
EUR
JPY
AUD
2.4175
2.6100
2.9020
EUR
0.1088
0.2988
0.7238
2.50%
0.25%
0.05%
0.00%
Stock Markets
International Currency Markets
DJI (USA)
Nikkei 225
FTSE 100
17,813.98 (1.48%)
17,511.75 (1.05%)
6,796.63 (1.02%)
USD/JPY
GBP/USD
EUR/USD
AUD/USD
USD/CAD
Commodity Markets
LIBOR - USD
Gold
IPE brent
WTI
3 mth
6 mth
12mth
$ 1,280.50
$ 49.06
$ 46.79
117.64
1.5078
1.1310
0.7783
1.2734
0.2526%
0.3554%
0.6224%
US Treasuries
Asian Currencies
5 yr
10yr
1.3240%
1.7810%
USD/IDR
USD/INR
12,690
61.84
30yr
2.1420%
USD/THB
32.56
Source: Reuters/Daily FT
*All rates above are for indicative purposes only.
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PUBLIC
Sri Lanka Markets Update
ABC
FX Edge
More central bank easing; the downside of USD strength
Central banks continue to surprise markets with policy easings, including Russia today and
Denmark on Thursday. Dollar strength is getting some blame for downside misses on US
corporate earnings. That has implications for FX hedging, but it could also have political and
monetary policy ramifications down the road.
Russia cuts rates
Central banks continue to surprise with easing measures. Russia's central bank cut its policy rate
200bp to 15%, despite surging inflation which roughly doubled during 2014 to 11.4% and a
persistently weak ruble. The central bank said the cut is due a change in the balance of risks and it
now sees inflation peaking in Q2 and decelerating thereafter. That may well pan out over time but
in the near-term, cutting rates in an environment of still-high inflation and general RUB weakness
would mostly seem to increase risk that each of those respective trends persist. But more broadly,
the rate cut continues the trend of policy easings and/or dovish shifts by central banks around the
world.
Denmark cut again; we expect the EUR-DKK peg to hold
On Thursday, Denmark's central bank cut its rate on certificates of deposit to -0.50% from 0.35%. The cut follows the two previous 15bp cuts on January 19 and 22, as the rate had been
held at -0.05% since last September. The Danish central bank also acknowledged intervening in
the FX market to defend the EUR-DKK peg. EUR-DKK has stabilized above 7.44 in the past
week but that may have been assisted by FX intervention, and with the DKK continuing to trade
on the strong side of the 7.46 peg, the central bank felt the need to take additional measures in the
form of yet another rate cut.
There is measurably increased interest in the DKK since the Swiss National Bank removed the
cap on the CHF, with some speculating that the EUR-DKK peg could break and the krone
appreciate more markedly. We recognize the new risks to EUR-DKK that have materialized on
the back of the SNB policy change as well as the weaker EUR ramifications of ECB QE, and it is
not surprising to see the market put more pressure on the currency pair. But Denmark's position is
different from that of Switzerland's and we expect the DKK peg to hold, for several reasons. The
EUR-DKK peg has much greater longevity than the CHF ceiling, dating to the launch of the EUR
in 1999 as part of ERM-II, which replaced the DKK's previous link to the deutschemark, which
commits it to trade within a 2.25% band on either side of 7.4603. DKK flows and volumes are
much smaller than the CHF which makes it an easier currency for authorities to defend. And it
has the support of Denmark's central bank as well as the ECB, while the CHF ceiling was a
unilateral policy enforced only by the SNB. None of this precludes the potential for markets to
test the resolve of Danish and Eurozone policy makers, but we see a much better chance that they
can collectively hold the EUR-DKK peg.
USD strength and US corporate earnings; motivation to hedge
Dollar strength continues to get attention--and blame--for downside misses in US corporate
earnings. That is not too surprising in hindsight, given the sizeable scope of the USD's rally in the
past year. In essence, even those companies which expected some USD strength in 2014 probably
did not forecast, budget and hedge to sufficiently account for the full extent of the currency's
appreciation. For example, at the end of 2013, a period when many US corporates would have
completed their forecasted FX budget rates for end-2014, the consensus forecasts for EUR-USD
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PUBLIC
Sri Lanka Markets Update
ABC
was 1.2800, compared to its actual 2014 close near 1.2100. For USD-JPY, the end-2014
consensus forecast in December 2013 was 109.00, well below where it finished this past
December at 119.74. There are a variety of implications stemming from the forecast-miss, but we
will highlight just three. First, with the USD remaining strong, and currently trading at
measurably stronger levels against most currencies just since the end of Q3 2014, US corporates
are likely to be more active hedgers, which mostly translates into more USD buying. That could
be more evident during calendar periods such as month-end (this week) and quarter-end. But the
upshot is that, to some extent, USD strength begets more strength.
Strong USD and the political fallout
Second, US industry will not necessarily take USD strength and the associated hit to corporate
earnings lying down, especially if there is the perception that the USD's gains are stemming from
policies abroad that are actively weakening foreign currencies. There has already been stepped up
pressure from Congress on the Obama administration to put more focus on currencies and
currency manipulation in the current negotiations for the Trans-Pacific Partnership trade
agreement. And continued USD strength could well see Congress put broader pressure on the US
Treasury (i.e. beyond specific trade agreements) to take a more active stance against those
countries which are viewed as intentionally driving their currencies down, such as naming them
manipulators in Treasury's semi-annual FX report (the next one is due in April). That seems most
unlikely since no country has been named as a currency manipulator since 1994 (i.e. the bar is
very high). And just last Friday, after the ECB announcement of QE, Treasury Sec. Lew
reaffirmed that "a strong USD is "good for America." But if Treasury won't act, Congress may
take matters into its own hands. Legislation aimed at countering currency manipulation abroad
often has a reasonable amount of support from both Republicans and Democrats, and that could
be the more likely risk going forward. If political pressure and focus on currencies intensifies, it
will be one potentially important development that could create headwinds for the USD.
The Fed is also watching
Third, this week's FOMC statement added "international developments" in the list of items the
Fed will consider in judging the appropriate stance of monetary policy. That makes perfect sense
given the risks from weaker foreign growth and global disinflation pressures. Within that broad
array of issues, USD strength is another factor adding to downward pressure on already-low US
inflation. The Fed does not target the USD but if gains in the currency create too much downside
pressure and risk to prices, it is one condition that would argue for a delay in the start of Fed
tightening. If such a sequence develops--and we have already seen markets push back the
expected start date of Fed lift-off in the past month--that too would potential temper USD
strength.
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Sri Lanka Markets Update
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