The debate about Dominique Strauss-Kahn’s successor as the head of the IMF is in full swing. Sadly all sides seem to be more interested in the origin of the candidate than his or her qualifications. It is overlooked that the IMF needs an expert who not only gets the IMF out of the headlines but also back on track. Terms such as conditionality (in the end this refers to the implementation of reforms by states receiving aid) have become increasingly insignificant over the past years. As a result the IMF seems to be turning into some sort of fire brigade which only puts out fires short term without trying to find the cause for the fire. In that respect finding a new head of the IMF is also an opportunity which will hopefully not be wasted.
G10 Currencies
EUR-USD: To put it briefly: there is no news. EUR-USD continues to trade around the 1.43 and the data calendar is also empty today. We will not bore you with meaningless information and wish you a good Friday, but for those who really want to know: since yesterday the Jamaican dollar (+0.63% against the euro) followed by the Guatemala quetzal (0.55%) and Madagascan ariary (0.47%) are the best-performing currencies.
JPY: In a unanimous decision the Bank of Japan last night left key rates (overnight rate) unchanged at 0.1%. Nobody had expected anything else. The loan and bond purchasing programme were also left unchanged. There was some speculation recently that the bank might take further stimulating measures as yesterday’s GDP data painted a very disappointing picture of the economy. The economic picture drawn by the BoJ is also pessimistic. The economy is under strong downward pressure. Moreover the central bankers assume that this is likely to remain the case for the time being. The BoJ only expects to see a certain rebound in the second half of the year once the reconstruction begins to kick-start the economy. But even that will not be the time for a significant rate hike. We expect that the overnight rate will not be raised significantly this or next year. There is still no inflation in Japan and moreover a rate rise would make it increasingly difficult for Tokyo to service the exorbitant debt. For investors with long term perspectives the current levels in USD-JPY (this morning around 81.70) constitute attractive buying levels.
Emerging Market Currencies
HUF: The Hungarian government confirmed yesterday that without the transfer of the private pension funds into the treasury the budget deficit would reach a staggering 7%. It is obvious that this is not exactly creating confidence in the sustainability of the Hungarian fiscal policy. EUR-HUF remains at high levels and there is still no end in sight for this phase of weakness.
PLN: The NBP’s meeting minutes published yesterday demonstrated that the surprise rate step at the beginning of the month was mainly a pre-emptive measure against rising inflation expectations. The wage data for April which was published the day before confirmed that the central bank’s timing was correct. The currently high inflation rates are already finding a reflection in notable wage rises. The Monetary Policy Council agrees that in view of the current economic and inflation outlook further rate hikes will be necessary. On the whole good news for the zloty but nothing that we did not know beforehand. As a result attention focuses on April’s core inflation data on the agenda for today. A small rise from 2.0% to 2.1% is expected, which is still not within the central bank’s comfort zone. Therefore, should the data come in well above expectations renewed rate speculation is likely to help the zloty gain ground against the euro.
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