G10 Currencies
USD: The fact that the US GDP data for Q1 2011 was not revised upwards, contrary to expectations, and that the initial jobless claims are rising notably again, was not good news for the dollar. In the end that means: the Fed will wait much longer before it begins to consider a normalisation of the currently ultra-expansionary monetary policy. This increases the risk that the exit strategy from the unconventional policy might go wrong. And it extends the period for which the dollar will have a rate disadvantage against most other currencies. The risks for the greenback are not falling.
EUR: Even if EUR-USD is recovering: The FX market still believes in increasing risks caused by the Eurozone debt crisis. There is no other explanation for the fact that EUR-USD risk reversals continue to fall (see chart). That means: unless further news about the debt crisis come over the ticker other factors dominate, and those are dollar-negative (see above). We should not forget though that notable downtrends are always possible when attention returns to the fact that a solution of the debt crisis has still not been reached. See also our FX Hotspot – Visual Neglect which we shall be sending out this morning.
JPY: The bad US data has also had an effect on USD-JPY. If it is not just Japan but also the US who are struggling with notoriously weak growth and if not just the BoJ but also the Fed were unable to plan an end of the zero rate policy, FX market participants will naturally ask themselves whether the comparison between dollar and yen might not have to be re-evaluated. Obviously that is nonsense long term. Contrary to Japan the US have not slid back into recession. For the US economy the only issue is the speed of the recovery, for the Japanese economy the question is whether the country is facing the abyss. At some stage of the cycle the Fed will also normalise its monetary policy cycle and hike key rates. This option seems to be off the agenda for the BoJ for the foreseeable future. Only that even short term changes to the relative attractiveness will have a marginal effect; in particular as the recent yen strength is not motivated by a flight into a safe haven but by the unattractiveness of the dollar. The yen is not suited as a safe haven at the moment. It can only be driven by bad US or good Japanese data. The surprisingly good April retail sales published by the Ministry of Economy Trade & Industry this morning are one step in the right direction.
SEK: The publication of Q1 2011 GDP data is due for today. The analysts cannot agree: some expect a relatively weak result around 0.5% for seasonally adjusted changes compared with Q4/2010, others foresee a notably higher result. Positive data would mean: the Riksbank has reason and opportunity to continue its rate hike cycle unabatedly, as it would then become clear that a normalisation of monetary policy is not sufficient and that it has to be tightened. That would constitute a positive signal for the Swedish krona. The April lows in EUR-SEK (8.8581) would then become the next target.
Emerging Market Currencies
HUF: The IMF remains a toothless tiger. Iryna Ivaschenko, the head of the IMF mission in Hungary, pointed out yesterday that the IMF funds were not really intended for the purchase of assets but for the stabilisation of the current account. The Hungarian government confirmed this week that it used the IMF funds to purchase a 21.2% share in the Budapest energy provider Mol. At the same time the IMF delegate had to admit that the IMF had no right to interfere in the use of the funds provided. That means: The Hungarians can use the public funds in whichever way they see fit. Just under a year after the near-bankruptcy the government obviously feels so certain on the financing side that the funds are invested for profit. The press conference in connection with the pact between banks and government on foreign currency denominated loans was once again postponed. The results will now be presented early next week. As a result the forint was granted a short breather yesterday and benefitted from central bank comments, which considers it possible that the Hungarian budget deficit will fall below the 3% level next year if the government implements the announced savings measures. The risks in EUR-HUF nonetheless remain on the upside.
RUB: The Russian central bank is sticking to its inflation outlook of 6-7% for this year. That is more than sporting as the yoy rates have been above 9% for some months now. Also the seasonally adjusted mom rates are pointing towards a rise in inflation. We therefore expect to see an inflation rate of 9.2% in 2011. Central bank president Sergey Ignatiev nonetheless suggested yesterday that the bank would be “very cautious” about further rate hikes so as not to endanger the fragile economic growth. As a result the rate decision on Monday might turn out to be a close-run thing. Consensus expects unchanged key rates. In the meantime the ruble has been benefitting from the recovery of the oil price and was able to appreciate in particular against the USD. A rate step on Monday might provide further momentum to this movement.
MXN: While the other Latin American central banks are facing the dilemma that monetary policy has to be tightened due to higher inflation, with rate rises increasing the appreciation pressure on the local currencies, the Mexican central bank is in a comfortable position. The economy is recovering without creating inflationary pressure. The inflation rate has fallen from 4.4% in December 2010 to 3.4% in April 2011. The Banco de Mexico’s inflation target is 2-4%. It is therefore likely to leave key rates unchanged at 4.5% once again today. Even if interest rates in Mexico do not rise for the time being, we still see appreciation potential for the peso if the currently pessimistic sentiment on the markets improves. The economic recovery in Mexico, commodity prices on high levels and the weakness of the dollar are supporting the peso. The US economy is an important risk factor, though. Should the indicators in Mexico’s most important export market deteriorate further over the coming weeks, this would put pressure on the peso.
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