G10 Currencies
EUR: On Monday evening hope emerged that German government representatives and the head of the Eurogroup Jean-Claude Juncker would put an end to the public speculation about the enforced restructuring (i.e. a default). But following a meeting of the Benelux heads of government in The Hague Juncker explained once again last night that an extension of maturities and a reduction of the coupons might be an option under certain conditions. Also EU Commissioner Olli Rehn followed Juncker’s view. Under these circumstances it is hardly surprising that EUR-USD has already ended its temporary recovery. While this discussion continues it is likely to put permanent pressure on the euro. A default would probably lead to further stress for the European financial system – without helping the Greeks even one iota as the unavoidable debt reduction would still be outstanding.
From a psychological point of view EUR-USD is touching an important level: The 200 week moving average (currently located at 1.4002) and Monday’s low are important support levels. Were they to be breached this would leave downward scope.
CHF: At the start of the week the Swiss franc recorded a new all-time high. So there is renewed speculation on the markets about possible SNB interventions. Comments on the part of the Swiss central bank do not exactly contribute towards dispelling this speculation. The members of the SNB are concerned about the strong franc. These are well-known concerns but in the current market environment they attract greater attention. Moreover the SNB repeated that it would take action in case of a rising risk of deflation. It would however also react should inflation risks be on the up. All this means that the SNB bases its policy on the target of price stability. When it intervened against an appreciation of the franc in 2009/2010 it did so in view of rising deflationary risks. Risks of this nature are currently not discernible. On the contrary, the SNB is likely to adjust its inflation outlook upwards at the next rate meeting in June. As a result we consider SNB interventions to be unlikely at present. The strong franc might have an effect on monetary policy though, should the franc remain at the current high levels or rise even further the SNB might use this as a reason to postpone a first rate hike. At present we expect to see a first rate step in September.
NOK: The Norwegian krona was clearly supported by the oil price yesterday. Q1 GDP data was disappointing for the markets and EUR-NOK rose to almost 7.88 as a direct consequence of the publication. Instead of the expected 0.8% the mainland economy only recorded a rise of 0.6% qoq. In Q1 momentum was created mainly by activity in the service sector. Investments rose and private consumption remained almost unchanged but due to falling exports and rising imports the trade balance was negative. However, markets were particularly shocked by the result of the overall economy: following +2.3% qoq in Q4 the overall economy shrank by 0.4% in Q1. The sector “petroleum activities and ocean transports” had however been very volatile in recent quarters due to extraordinary effects so that the data should not be over-interpreted. Moreover Norges Bank’s monetary policy is determined by the development of the mainland economy – which continues to grow in a satisfactory manner. The strong recovery in the oil price supported NOK yesterday so that the resistance area at 7.88 in EUR-NOK was not breached. If sentiment on the financial markets remains more optimistic with the upward trend in the oil price continuing EUR-NOK is likely to test the lower end again. The next level here is located at 7.83.
Emerging Market Currencies
HUF: Quiet before the storm? Contrary to prior announcements, the banking sector and government will only announce details surrounding the agreement on foreign currency denominated loans during the course of the week. Until then we will have to wait and see. The forint was able to take a short breather benefitting from yesterday’s risk appetite. The publication of the rescue packet is however likely to create some upward movement in EUR-HUF again.
BRL: While the rating agencies tend to hit the headlines with downgrades at present, there are some positive rating activities to report. S&P has given Brazil’s rating a positive outlook, which increases the likelihood of the country’s rating being upgraded from the current BBB-. From an investor point of view the country therefore remains attractive, which is likely to benefit the real as well. But short term external factors are dominating. While uncertainty on the markets is elevated it will probably be difficult for USD-BRL to ease back below the level of 1.60.
TRY: Turkey’s Monetary Policy Council is meeting today and will decide on key rates. The majority of market participants expects the central bank (CBRT) to once again leave rates unchanged at 6.25%, as the inflation rate remains low (April: 4.26% yoy) and the CBRT is attempting to keep speculative capital out of the country. It is likely to be of more interest whether the CBRT will raise the short term minimum reserve requirements again. It had raised the latter considerably at its last meeting, in an attempt to reduce local borrowing – so far unsuccessfully. So what next? Local liquidity remains high and inflation is also likely to have bottomed now. So the central bank will be unable to postpone a rate hike for much longer. Should it leave the minimum reserve requirements unchanged this time it would signal the imminent end of the unconventional monetary policy. In that case the lira is likely to continue its small recovery.
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