G10 Currencies
EUR-USD: With a bank holiday in the US and the UK and due to a lack of news on the debt front EUR-USD traded sideways yesterday. This was however not more than a short breather. The news of the German government considering to not stand in the way of further aid loans to Greece any longer helped the currency pair to jump over the 1.43-mark this morning. The debt crisis however continues to simmer and still poses a risk which could affect the currency pair at any moment. The fact that the Eurozone debt crisis remains an issue also becomes obvious from the risk premiums of the peripheral bonds which remain around their all-time highs (chart). Comments such as those by ECB executive board member Lorenzo Bini-Smaghi that a restructuring of the Greek debt would constitute a ”major economic, social and even humanitarian disaster” do little to end uncertainty on the markets. Therefore, any progress made during the talks between Greek government and its lenders about further aid remains decisive for the euro.
Eurozone consumer price data for May due today might provide some momentum. Due to lower energy prices we expect a small improvement as regards inflation and therefore forecast a slightly lower number than consensus. A significantly lower rate is likely to put renewed pressure on EUR-USD as it would affect speculation about an imminent ECB rate hike. But even a slightly smaller rise in prices would not change the difference in the ECB’s and Fed’s monetary policy approach. One thing is obvious: the ECB will continue its rate hike cycle while a rate reversal on the part of the Fed still seems a long way off. This supports the euro medium term while putting pressure on the US dollar so that EUR-USD has further potential for a recovery if all remains quiet on the news front.
CAD: Q1 GDP data was unable to create much movement in USD-CAD yesterday. The economy grew by 3.9% qoq (annualised), which was only slightly below expectations of 4.0%. As a result the last glimmer of hope for a rate hike today was destroyed. Today’s rate meeting is therefore unlikely to provide any major surprises. The analysts polled by Bloomberg – including us – are in agreement that the BoC will keep key rates unchanged again today. First of all it will not want to endanger the economic recovery and secondly the core rate remains below its target value of 2%. For some days now USD-CAD has been trading in a narrow range and is likely to remain largely unaffected by the rate decision.
Emerging Market Currencies
PLN: Today attention in Poland will turn to the Q1 GDP data. Government members as well as central bankers had pointed out in the run-up to the publication that GDP growth in Q1 would be close to the growth rate of the previous quarter of 4.5%. As a result a growth rate of between 4.3 and 4.7% is likely be to have been priced in and unlikely to cause a significant market reaction. It would probably require a much stronger result to rekindle rate hike speculation which might support the zloty. According to MPC member Elzbieta Chojna-Duch the central bank’s previous rate hikes were aimed at controlling inflation expectations. As economic growth is likely to weaken over the coming quarters the extent of further rate hikes was limited and at present it did not see any signs of the high inflation rate having knock-on effects. At the same time Chojna-Duch pointed out that the ECB decision was decisive for its position. We stick to our view that the next rate rise will take place in July when the ECB will also continue its rate hike cycle.
ZAR: The picture of the South African economy remains unclear and has so far meant that the central bank (SARB) stuck to its dovish rhetoric. Q1 GDP on the agenda for today is unlikely to change that. Growth rates are expected to have slowed compared with the previous quarter. So no reason for the SARB to bat an eyelid.
PEN: We are on the final straight: the run-off election in the fight for the President’s office in Peru will be held on 05th June. Over the past few weeks the Peruvian sol had decoupled from the general events on the world financial markets and was driven mainly by internal events. That is unlikely to change this week in particular as the outcome of the election remains quite uncertain. The polls suggest that it will be a close run between the two candidates Keiko Fujimori and Ollanta Humala. Over the past few days Fujimori’s small lead has been reduced even further. Should this trend continue the sol might come under pressure, as the financial markets prefer Fujimori over the left-wing populist Humala. Humala’s victory in the first round of the elections in April had put considerable pressure on the sol. As Fujimori caught up the sol was able to retrace these losses. Against this background the GDP data for Q1 is likely to attract hardly any attention.
RUB: The Russian central bank raised the deposit rate by 25bp to 3.50% in a surprise move yesterday. Key and repo rate remained unchanged at 8.25% and 5.50% respectively. The central bank’s dovish statement following the rate decision was the main reason why the ruble was nonetheless unable to benefit. Bank Rossii still expects inflation to amount to 7%-8% this year. The only risk is the imminent lift of the export ban on wheat, which might lead to a rise in food prices. As a result markets have lowered rate hike expectations with the ruble easing slightly against the euro and the US dollar. Once it becomes clear though that the central bank was slightly over-optimistic regarding inflationary pressure the ruble is likely to make notable gains once again.
HUF: Now we are in the clear. The Hungarian government and banking sector yesterday presented the key elements of the plan to support debtors with foreign currency denominated loans. It was clear in the run-up to the presentation that the plan would only provide temporary relief. As a result the forint was little impressed (you will find the details of the agreement in today’s FX Hotspot: “Quick fix “).
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