G10 Currencies
EUR: This morning during Asian trading hours a press release caused EUR-USD to recover notably. Klaus Regling, CEO of the EFSF, announced that the regime in Beijing was interested in investing into the new tranche of EFSF bonds which would have to be issued in the near future to finance aid payments to Portugal. Of course it is positive that there is demand for the EFSF bond issue, the relatively strong reaction of the EUR-USD exchange rate (it peaked at almost 1 cent to 1.4173) is probably due to a misunderstanding though.
There was never a real risk that the demand for EFSF bonds would dry up. The EFSF had a successful issue at the beginning of the year (EFSF 2 ? 07/16). Regling and his staff did a good job marketing the new bonds and are likely to be successful again this time round. It is quite right that he talks about the matter. By underlining the fact that Beijing is interested he might be able to gain other investors for the bond. However: that is not Chinese aid for Portugal. Why?
(1) The bond is being issued by the EFSF. The fact that the money is now being used for the Portugal bailout is irrelevant for investors.
(2) The bond is secured with Eurozone country guarantees. This is structured in such a way that only the guarantees of the AAA rated countries constitute an economic risk for the EFSF (the rest of the issues is held in cash and is not paid out to the recipient countries). That means the Chinese regime does not include Portuguese or Irish risks on its books by buying EFSF bonds. It buys German, French, Dutch, Austrian, Finnish and Luxembourgian risk. So therefore it is not a show of confidence in the stricken peripheral countries.
So from a fundamental point of view this morning’s EUR-USD move is not justified. It would only continue if it developed further momentum. As long as the resistance level at 1.4200 (identified by our technical analysts) has not breached, we still see no arguments for self-propelling EUR strength. As long as EUR-USD stays below this level, we assume that this morning’s move is likely to be corrected once it becomes clear that Regling’s comments say nothing about the main driver of the EUR-USD move – the debt crisis in the peripheral countries.
GBP: Yesterday we received Q1 private consumption data which disappointed posting a -0.6% drop versus expectations of a +0.1% gain. This follows April’s unexpected increase in public sector borrowing; 7.7 billion GBP versus 4.4 billion expectation GBP. The only bright spot was the increase in Q1 exports, which posted a 3.7% increase versus expectations of 2.1% If ever there was a clear picture of the UK economy rebalancing then this was surely it. GBP breached the important technical level of 0.8670. Expect further GBP gains to the downside, the next level to watch is the 200 dma at 0.8580.
Emerging Market Currencies
CZK: The Czech government yesterday finally paved the way for a VAT increase. Parliament passed the increase of the lower VAT rate from 10% to 14% as of 1st January 2012. As of 2013 a uniform VAT rate of 17.5% will replace the lower and basic VAT rate (currently 20%). Anyone now expecting the koruna to receive support from the inflation and rate speculation will be disappointed though. A glance at the Czech central bank’s (CNB) latest inflation report illustrates that the central bank (wisely) already investigated an alternative scenario which is based on the agreed 4% rise for the lower VAT rate. The immediate effect of the inflation rate is estimated to be 1.1 percentage points. As the immediate effects of indirect tax rises are not to be taken into consideration for the monetary policy, interest policy will then be determined by the “monetary policy relevant rate” (a favourite trick among central bankers). The central bank expects second round effects, i.e. an adjustment of inflation expectations, to be limited due to the continued weak local demand. As a result the rate outlook is unlikely to change. We do not expect the first rate hike before the end of the year. As a result EUR-CZK will probably continue to trend sideways.
TRY: The Turkish central bank (CBRT) unsurprisingly left key rates unchanged at 6.25%. Also minimum reserve requirements remained unchanged – for the time being. That does not however mean that the CBRT might not increase the minimum reserve rate in the days following the rate meeting, as it has done on previous occasions. The latest data suggests that the rises in the minimum reserve requirements up to date did not help in notably reducing the rise in borrowing in the country. However the CBRT had pointed out at the last rate meeting already that the scope for further minimum reserve hikes was already limited. The lira is only likely to recover once the unconventional monetary policy really has ended. Until then it remains at the mercy of rising and falling risk perception.
RON: The Romanian central bank is concerned about the strong appreciation of the leu and has announced its intention of dampening the exchange rate volatility with the help of “unorthodox measures”. This is likely to refer to interventions which the central bank had already used in 2006/2007 to weaken its own currency. In May historic 3 month volatility reached an annual high and since January the leu has appreciated by 3.4%. The central bank is facing a new era of rising short-term capital inflow while at the same time long term direct investment is falling. Against this background the fragile economic climate should not be exposed to portfolio investments. In times of the European debt crisis the country is not exactly exposed to acute pressure due to capital inflow though. We consider concerns in the current environment to be exaggerated and view the leu as being on a downward slope against the euro.
HUF: The Hungarian Banking Association and the government will present the details of their plans for foreign currency denominated loans during a press conference at 14:00 CEST in Budapest today.
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