■ December FED rate hike likely but history shows USD weakens post rate hike: Technical USDSGD downside risk 1.36, USDMYR 4.0 over next 2 months
■ 3 implications of a USD decline –Respite for STI/S&P500 relative underperformance, USD strength beneficiaries underperform (Venture and Riverstone), weak dollar is positive for oil price-related stocks (Ezion and Sembcorp Industries)
Focus remains on the FOMC meeting in mid-December as trading activity stays low in the midst of the year-end lull. Consensus expectation for the FED to initiate its first rate hike has been strengthened after Friday’s November nonfarm payrolls. Markets are well prepared for a FED rate hike in Dec; what is still uncertain is how fast interest rates will rise after that. Consensus expectation is for 2 more rate hikes next year that lifts the FED funds rate to 1% by end-2016. DBS Research sees a more aggressive rate increase that lifts the FED funds rate to 1.25% by 3Q16.
A December FED rate hike is likely but history shows USD weakens post rate hike. Technically, we see downside risk for USDSGD to 1.36 over the next 2 months despite the impending US rate lift off. If the correction goes deeper, the decline could subsequently extend further to 1.335 before ending.
We see 3 implications from a possible decline in the USDSGD. Firstly, a falling USDSGD helps cushion the STI against potential US market weakness following the initial FED rate hike.
Next, companies that rode on the strength of the USD in recent months should underperform. Examples are Riverstone and Venture Corp, which are seen as recent beneficiaries of the strong USDMYR. Technically, we see a decline in USDMYR to support at 4.0. On charts, we see Riverstone shares heading lower to S$1.93. For Venture Corp, a pullback towards S$8.10 is possible but the prospect of DPS of 50cts to be declared near end-Feb offers bargain hunting opportunities at that level.
Finally, a weakness in the dollar is positive for oil price. Brent fell on Friday post OPEC meeting as the supply glut is likely to continue. We think further technical downside in the short-term should be limited at USD38pbl at worst. Post inflexion, there is the likelihood for a counter-trend rally that lifts Brent to USD58pbl (23.6% retracement) or even USD69pbl (38.2% retracement) in 1H16. (Read Report)
Source : DBS Group Research