The zloty weakened against the euro over the week with the EUR/PLN climbing from as low as 4.3645 on Monday to as high as 4.4358 on Friday amidst a decline in global risk appetite following weaker-than-expected China manufacturing PMI data as well as an increase in expectations of a Fed rate hike in June. Domestic factors also contributed to the zloty's decline; data wise, the manufacturing PMI declined to 51.0 in April from 53.8 in March, coming in below the consensus forecast of 53.2. Moreover, investors were alarmed by indications that the government may be attempting to conceal the magnitude of the constitutional court crisis, after Constitutional Tribunal Chief Rzeplinski said the court had been asked to keep quiet in advance of the May 13 rating review by Moody's. In response to Rzeplinski's comments, Finance Minister Szalamacha claimed the request was "driven by concern over rising borrowing costs" and said he was displeased with the decision to make the request p ublic.
President Duda named ex-MPC member and current NBP management board member Glapinski as current NBP Governor Belka's replacement when his comes to an end in June, confirming what has been largely been expected since early this year. At the NBP's May rate-setting meeting, the central bank kept the key rate unchanged at 1.50%, as widely expected. The statement contained nothing new with the MPC reiterating that GDP growth would pick up in coming quarters, driven by robust consumption growth, and as a result the current policy rate was suited to the economy despite persistent deflation. Similarly, during the press conference Belka said that despite the weak domestic data for March, this meeting had not indicated an increased propensity to change rates. He also said he did not expect a "tsunami" after the May 13 rating review by Moody's, as according to him the possibility of a rate cut has been priced in.
The koruna was generally stable last week with the USD/CZK and the EUR/CZK trading in the ranges of 23.28-23.735 and 27.007-27.062, respectively. At the May 5 meeting, the CNB kept its main interest rate unchanged at all-time lows of 0.05% as expected while maintaining the unconventional FX intervention regime and reiterating its one-sided commitment to keep EUR/CZK floating freely above 27.00. Furthermore, the central bank indicated further delay in the exit from the regime, saying that it was likely "in mid-2017" compared to "nearer to mid-2017" seen previously, adding that it was ready to raise the EUR/CZK target level "if there were to be a systematic decrease in inflation expectations manifesting itself in nominal variables, especially wages."
The forint strengthened against the euro on Monday with the EUR/HUF dipping as low as 310.40 after the manufacturing PMI rose to 52.2 in April from 51.7 in March, thereby continuing to signal expansion in the sector. However, this appreciation was short-lived and the forint weakened over the remainder of the week with the EUR/HUF climbing as high as 313.99 amidst a decline in global risk appetite after weak Chinese manufacturing PMI data prompted a resurgence of global growth concerns, while comments by Fed officials indicating markets were underestimating the likelihood of a June rate hike triggered a decline in EM sentiment. Domestic data was also less than constructive, with retail sales growth decelerating to 4.2% y/y in March in working and inflation adjusted terms from 6.6% y/y in February, coming in below the consensus forecast of 5.1% y /y. Somewhat worryingly, industrial production fell by 2.4% y/y in March after growing by a downwardly revised 1.6% y/y in February. The o utcome was well below the consensus forecast of 2.5% y/y and also the first negative reading since May 2013.
Meanwhile, it was reported that the government plans to link the fuel levy to Brent crude oil prices; if they fall below a threshold, the fuel levy would increase. Furthermore, there are also plans to raise the tax on tobacco products by 29% by the end of 2017. Finally, the NBH unveiled plans to stimulate lending to SMEs by reducing capital requirements on banks if they increase lending to SMEs by more than 50% compared to the lending growth they had previously pledged to the central bank. However, there would be a floor on capital requirements to avoid "extreme risk taking".
Russian assets weakened in thin trading last week because of the public holidays, with the USD/RUB temporarily climbing to 66.8468 and most government bond yields rising by 2-9bps on lower oil prices in the aftermath of the Reuters survey showing that OPEC's oil production rose to 32.64mn barrels per day (bpd) in April from 32.47mn bpd in March while EIA data revealed that US crude inventories rose by 2.8mn barrels last week compared to the expected 1.7mn barrels increase. Data wise, headline consumer prices were up 0.4% m/m in April, below the consensus forecast of 0.6% m/m with inflation of 7.3% y/y, unchanged from March and also below the consensus forecast of 7.4% y/y.
The rand weakened significantly against the dollar over the week with the USD/ZAR climbing as high as 15.1685 by Friday from as low as 14.1765 at the start of the week. Assets were hurt by a decline in risk appetite on the back of global growth concerns as well as a broad-based appreciation of the dollar following comments by Fed officials indicating a Fed rate hike in June was a possibility. The rand also weakened after the Reserve Bank claimed there was a medium to high risk of an LTFC rating downgrade to junk status, warning that a downgrade could trigger capital outflows, raise the cost of funding government debt and reduce lending to the private sector. In addition, the IMF warned that the budget targets could be difficult to achieve, adding that South Africa "faces a challenging economic environment". This move in assets was despite much stronger-than-expected domestic data with the Barclays manufacturing PMI rising to 54.9 in April from 50.5 in March, arriving well abov e the consensus forecast of 50.2 and the highest reading since August 2013.
Meanwhile, SARB Governor Kganyago said "fiscal consolidation will arrest any deterioration in our debt metrics", and claimed stress tests carried out on banks had shown the sector could cope with significant credit losses. Elsewhere, Finance Minister Gordhan assured that the government's fiscal targets would be met, adding that he expects an increase in GDP growth and a moderation in CPI inflation in the second half of the year. He also claimed expenditure over the 2015-16 fiscal year was in line with estimates, thereby bringing the budget deficit to 3.9% of GDP, and reiterated that the budget deficit would fall to 2.4% of GDP over the next three years. Lastly, Gordhan acknowledged that ensuring strong GDP growth would be one of South Africa's main challenges.
Turkish assets registered heavy losses last week with the USD/TRY briefly rising to 2.976 and government bond yields increasing by 25-62bps across the curve. They were hurt by political uncertainty in the aftermath of Prime Minister Davutoglu's announcement of resignation following the reports that AKP would hold an extraordinary congress on May 22 to replace him as the party leader amid his alleged rift with President Erdogan, raising concerns about the latter's authoritarianism.
In addition, the lira was not helped by comments from chief advisor to Erdogan Ertem, who said that the present USD/TRY level was "not a problem" and that he saw the CBT cutting its overnight lending rate further, even though he added that the US dollar might "have correction" and that he was not expecting an early election or changes in domestic economic policies after Davutoglu's replacement. But several sources close to AKP said that an early election in the autumn was the most probable scenario as the party was aiming for a two-thirds majority in parliament to establish a presidential system without a referendum.
Furthermore, a parliamentary committee agreed to remove the immunity of MPs from the pro-Kurdish HDP party from prosecution for supporting terror while party co-leader Demirtas rejected the authority of government courts and warned that the Kurds might establish a separate parliament. Data wise, several releases raised the probability of further monetary easing by the CBT in the aftermath of the 75bps cuts in its overnight lending rate since March. In particular, headline CPI inflation decelerated for the third successive month in April, to a near-3-year low of 6.57% y/y from 7.46% y/y in March, below the consensus forecast of 6.90% y/y while PPI inflation also slowed for the third consecutive month in April, to 2.87% y/y from 3.80% y/y in March.
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