G10 Currencies
USD: The small camp of hawks remains undeterred. Richard Fisher, President of the Dallas Fed, once again explained what corresponds with our view: The Fed has done “enough if not too much” to support the economy. And indeed, the attempts of the dovish FOMC majority to pursue labour market policy with means of monetary policy have failed spectacularly. But rather than admitting the failure the doves majority is just getting more tenacious: “I think actually our focus right now really should be getting back to full employment” insisted Eric Rosengren, President of the Fed Boston yesterday. The difficulty is: Rosengren and his fellows do not share the view of the FOMC hawks, of the ECB and of most other central bankers around the globe. Those believe that a central bank’s contribution to full employment consists in creating an environment of price stability. The FOMC doves, on the contrary, think their contribution should be to create further monetary stimuli. “At some point it will have to work”, they seem to think. But it won’t. Regardless of how high the dosage becomes, if it is the wrong medicine it is not likely to cure the patient. The only thing that remains are the side effects. Conclusion: It is impressive that the hawks have still not given in, even at the end of the second successive weak quarter, but it is irrelevant for the monetary policy as the doves draw the wrong conclusions from the failure of their policy approach. So no signals pointing towards an end of the dollar weakness.
EUR: Is Trichet back pedalling? So far ECB president Jean-Claude Trichet spoke out very clearly against any form of restructuring of Greek bonds. Yesterday he stated that a voluntary obligation of the private sector to maintain its Greece exposure was “appropriate”. A gentlemen’s agreement with the large investors rather than a restructuring? An agreement of this nature might fail due to the “free rider phenomenon”. If everyone else goes along with it, it might be advantageous for the last investor to use the relative stability to get out (to sell their GGBs). If everyone thinks along these lines and wants to be the last investor no agreement will be reached. It might work, but it does not have to.
What is more important is that Trichet once again – as was the case in 2010 – seems to change his views to bring them in line with the positions of EU politicians. It was probably no more than the ECB clarifying its position. But in view of the frequent “about turns” the ECB president made in 2010 this comment once again nibbles away at the credibility of the central bank.
AUD: As expected by the majority of analysts the RBA left key rates unchanged at 4.75% this morning. However: governor Glenn Stevens’ statement was quite moderate: the reference to the medium to long term inflationary dangers which had taken a prominent position in the last statement had been omitted. The evaluation of the economy outside the primary sector was also more pessimistic. So hardly surprising that the markets reacted with disappointment and the Australian dollar suffered. But: a more cautious RBA implies that rate hikes might be taken at a slower pace than the optimists had so far priced in. The qualitative difference towards the US monetary policy will however persist. This is likely to prevent any major losses in AUD-USD. Should AUD-USD really ease into the area below 1.06 this would constitute an opportunity to buy, targeting 1.0750 with stop losses at 1.0450.
Emerging Market Currencies
CZK: Even if April’s data on industrial production (4.7% yoy instead of the expected 8.0%) and construction output (-6.0% yoy) were more than disappointing there is no need to turn into a EUR-CZK bull. As production data in spring surprised notably on the upside the recently weaker PMI data had already suggested that the recovery is losing some momentum. The trade balance data remained below expectations with a surplus of CZK 12.6bn. in April and fell short of the big surpluses recorded in previous months. But that is no reason for concerns. In all probability the fall in exports and production is mainly a consequence of a global soft patch in demand in Q2. By regional comparison the Czech Republic is likely to get off lightly. Rate expectations were already postponed following the central bank’s last inflation report in May. As we do not expect yesterday’s data to mark the beginning of a period of economic weakness current EUR-CZK levels still constitute good selling levels.
RUB: In May the Russian inflation rate was still at 9.6% yoy. The vice president of the Russian central bank, Alexei Ulyukayev, by his own admission nonetheless feels comfortable with current key rate levels and sees little reason for further adjustments. This attitude is more than problematical. If the ruble is weak with the central bank sounding increasingly dovish at the same time there will be little to prevent further price pressure. Not good news for the ruble.
HUF: The reward for the Hungarian government’s structural reform plan put forward in March is Fitch’s upgrade of Hungary’s rate outlook from negative to neutral. As a result the forint was able to appreciate again slightly. The upgrade of the outlook was hardly more than a formality though as Hungary’s rating still remains only one notch above junk status. That is likely to remain the case until it becomes clear that the Hungarian government wants to implement the targets it has set itself. Even if the forint is being supported by improved market sentiment an underlying risk of temporary setbacks remains – above all if risk aversion becomes an issue again.
TRY: Prime Minister Recep Tayyip Erdogan made it no secret so far that he was dissatisfied with the three large rating agencies. So far they had refused to upgrade the country’s rating to investment grade. Moody’s and Standard & Poor’s evaluation is only two notches below the desired rating and Fitch only one notch. According to Erdogan this is impossible to understand as the country had left the financial markets crisis behind it with an impressive growth rate of 9% last year and was in a much better fiscal position than many of the developed countries particularly in Europe. Erdogan seems to forget the fact which according to the rating agencies prevents an upgrade: the high current account deficit. Moody’s pointed that out once again yesterday ensuring that the lira retraced its gains recorded against the US dollar on Friday. This time round Moody’s went one step further and even suggested that the credit rating would be under threat if the country did not get on top of its difficulties and struggle financing its high deficit (we expect to see 9% of GDP this year). This is more than bad news for the lira.
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