Thursday, May 19, 2016

Forex - Emerging Europe Closing Summary and Highlights 19 May

POLAND

The zloty weakened slightly against the euro on Thursday with the EUR/PLN briefly hitting 4.4106 while government bond yields rose by up to 4bps at the short end of the curve amidst a jump in expectations of a Fed rate hike in June to 32% following Wednesday's relatively hawkish minutes and comments by Fed speakers. Domestically, robust data helped ease expectations of a rate cut by the NBP with industrial output growth accelerating to 6.0% y/y in April from 0.5% y/y in March, coming in well above the consensus forecast of 3.4% y/y. In addition, with the PLN 500+ child subsidy payments now underway, retail sales growth accelerated to 3.2 % y/y in April from 0.8% y/y in March, also coming in above the consensus forecast of 3.0% y/y.

Elsewhere, Finance Minister Szalamacha assured that the government "will not break" the 3.0% of GDP budget deficit, though added that it would not adhere to the European Commission's recommendation to reduce the budget deficit by 0.5% of GDP in both 2016 and 2017 as this could "trigger negative phenomena". The Finance Minister also claimed the constitutional court row was impacting his role and said the weaker-than-expected Q1 GDP growth reading did not warrant a revision of the 2016 Budget.

CZECH REPUBLIC

The koruna was generally stable against the euro on Thursday with the EUR/CZK trading in the 27.006-27.027 range. But the currency weakened further against the US dollar in the aftermath of the minutes from the April 26-27 FOMC meeting, according to which a June rate hike was on the table, as well as the comments by Lacker, who said that he was "comfortable with four Fed rate hikes in 2016", with the USD/CZK rising above the 24.10 level.

HUNGARY

The forint was generally stable against the euro on Thursday with the EUR/HUF trading in the 315.84-316.77 range. Meanwhile, government bond yields rose by 3-6bps across the curve amidst rising expectations of the Fed's tightening with markets pricing in a 32% probability of a hike as early as June. This was prompted by hawkish comments by Fed Lacker as well as Wednesday's FOMC minutes which indicated most members saw room for a Fed rate hike in June. Domestically, Cabinet Chief Lazar said that the disbursement of EU structural funds could accelerate in the second half of the year, adding that the government was mulling measures to stimulate the stock market. A slowdown in EU funds was said to be the main reason for the deceleration in GDP growth to 0.9% y/y in Q1 2016 from 3.2% y/y in Q4 2015. In addition, debt management agency AKK CEO Barcza said he was "not optimistic" on an LTFC rating upgrade to investment grade by Fitch on Friday, though the rating agency could upgrade "lat er".

RUSSIA

Russian assets extended their losses on Thursday with the USD/RUB climbing above the key 67.00 resistance level and government bond yields rising by up to 11bps across the curve (source: Reuters). They were hurt by the more hawkish than expected minutes from the April 26-27 FOMC meeting that markedly raised the probability of the Fed's June rate hike, aggravated by Lacker's comments that he was "comfortable with four Fed rate hikes in 2016", as well as lower oil prices after EIA data showed that US crude stocks rose by 1.3mn barrels last week compared to the expected 2.8mn barrels decrease and Reuters reported that Iranian oil exports were set to rise by almost 60% y/y this month. In addition, data showed that the federal budget posted a deficit of RUB 1233.3bn in January-April, corresponding to 4.7% of GDP, a worse reading than the consensus forecast of RUB -1000.0bn as well as the upwardly revised reading of RUB -638.7bn reported for January-March.

SOUTH AFRICA

The rand weakened against the dollar on Thursday with the USD/ZAR climbing as high as 15.9795 after the SARB left the repo rate unchanged and amidst a broad-based appreciation of the dollar after the April 26-27 FOMC minutes and comments by Lacker raised expectations of a Fed rate hike in June to 32%, prompting a deterioration in global sentiment.

The SARB left the repo rate unchanged at 7.00% in May, in line with the consensus forecast, with 5 members voting for the rate to be unchanged, and only 1 member voting in favour of an increase. It was said that future moves would be data-dependent and that the MPC would not hesitate to act appropriately to combat high inflation. Today's decision was said to be a pause rather than a reversal of the tightening cycle.

During the press conference, SARB Governor Kganyago said the rand's recovery in April was short-lived and that the CPI inflation respite was expected to be temporary, especially given evidence of increased pass-through of the weaker rand to a number of CPI categories. Once again, the Governor reiterated that the weaker rand posed upside risk to the CPI outlook. Food prices also remained a significant upside risk, with the SARB seeing food price inflation peaking at about 12% y/y in Q4 2016, adding that recent food price data has surprised on the upside. In addition, the SARB said that fuel prices posed an upside risk and were likely to increase in June. Overall, the MPC remained concerned about the CPI outlook, but given the slow recovery and downside risks to GDP growth, it decided almost unanimously against a rate hike.

TURKEY

While the local bond market was closed for the Youth and Sports Day on Thursday, the lira continued to depreciate in thin trading with the USD/TRY rising above the 3.00 level. The currency was hurt by the minutes from the April 26-27 FOMC meeting, according to which a June rate hike was on the table, as well as the comments by Lacker, who said that he was "comfortable with four Fed rate hikes in 2016". In addition, the lira was not helped by AKP's announcement that Minister of Transport, Maritime and Communication Yildirim, President Erdogan's close ally would be the only candidate for AKP leadership at an extraordinary party congress on May 22 and was likely to replace Prime Minister Davutoglu, raising concerns about Erdogan's tighter grip on power.


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