|  2013-01-09

Focus FX - January 2013

The Romanian currency gained ground vs. the euro, moving to 4.41 per euro, a level not seen since May 2012. Driving this positive momentum was the appetite of non-residents for Romanian T-bonds, spurred by lower political risk and speculation about inclusion in a popular EM LCY index.


EUR/RON: 4.407 ---- 4.55 (March)


The RON is likely to continue to benefit from this over the short run, given the attractive yields levels and as the looser liquidity conditions signaled by the NBR at Monday’s monetary policy meeting (“adequate” instead of “firm” liquidity management) bodes well for bond prices. We believe the monetary policy stance is likely to remain prudent, given the risks to the inflation outlook (“developments in the external environment, capital flows, administered prices and some volatile prices”). On Friday, we expect the December annual inflation rate to be almost unchanged at 4.5%, a touch below the previous reading of 4.6%, driven by a stronger RON (by 0.8% on average). Still, annual inflation is likely to print in the region of 5% during the first half of 2013.

EUR/USD: 1.312 --- 1.30 (March)

The „agreement“ over the fiscal cliff between Republicans and Democrats and the meeting minutes from the Fed’s interest rate meeting in mid-December both gave the dollar a boost at the start of the year. At slightly above 1.30 EUR/ USD, the exchange rate remains just above the exchange rate that one can infer from the difference between interest rates for two-year German and American government bonds. By the end of Q1 2013, the EUR/USD should continue to hover around this level. There certainly remains room for movement around the 1.30 mark depending on the current states of the European debt crisis and the fight over the US budget. As the deficit numbers for the various Eurozone member states come in over the course of the next few weeks, there are likely to be some negative surprises along the way and could increase the burden already being carried by the euro. On the other side of the Atlantic, the next two months will most certainly not be filled with fun and games as negotiations over spending cuts and a sustainable plan to consolidate the US budget. Moreover, the debt ceiling will have to be raised again at the start of March and that is definitely going to be a sight to see. Should the situation escalate as it did in the summer of 2011, this would present a short-term negative factor for the US dollar.

EUR/CHF: 1.209 --- 1.20 (March)

The Swiss franc is able to start the new year without any earth-shattering news. According to the Swiss National Bank (SNB), currency reserves fell slightly to CHF 427.17 bn in December. The weekly data for demand deposits that domestic banks hold at the SNB also fell, to CHF 282 bn. Both of these are indications that the SNB will be able to hold back from defending its 1.20 lower bound for the EUR/CHF rate and the Swiss franc will continue to trade above this mark.

Following statements from central bank member Zurbruegg, a reduction in interest rates in the near future is unthinkable, although at the same time he warned that there is potential for the Swiss real estate market to  overheating. There is, however, some economic light at the end of the tunnel coming from flash indicators: the PMI has stabilized but is still slightly below 50. More promising is the index for the subcomponent of order backlog, which is at 54.7 and well above the threshold of 50. We expect the EUR/ CHF rate to remain in the coming year close above the intervention limit of 1.20.

EUR/JPY: 114.7--- 109 (March), USD/JPY: 87.4 ---- 84 (March)

Since the start of December, the yen has lost approx. 7% against the dollar and approx. 6.5% against the euro. The devaluation was especially stronger over the Christmas holidays than we expected. The USD/JPY rate has now moved even further away from the level justified by two-year yield differences. This means that the market is betting on Abe’s new government’s planned reflationing of the economy. Therefore, the Bank of Japan’s (BoJ) meeting on 22 January will take center stage. The result of the monetary loosening from the most recent meeting December is thus at the end of the scale: an expansion of the Asset Purchase Program by JPY 10 to JPY 101 tr by the end of 2013 was already calculated into things. At the next meeting, the inflation goal is only going to be “checked”. In terms of fiscal policy, Abe seems to have put a number of gears in motion in order to support the economy. A supplementary budget is also going to be decided upon on 15 January. Since currencies rarely ever move in only one direction, the next weeks should see a change in direction and depending on how large this change is will show whether or not a revision to our forecasts is necessary.

EUR/GBP: 0.815 --- 0.82 (March)

Economic data is divided and refuses to signal a green light for a change in the economic trend. Especially disappointing is December’s services PMI, which fell below 50 points for the first time in two years. Retail sales have also been unable to pick up the pace following a weak Christmas shopping season. Compared to last year, there was only an increase of +1.5% and in real numbers this plus becomes a minus. Great Britain is therefore standing at the edge of a renewed plunge into a recession and with or without a change in the trend, all of these are aspects, which are closely monitored by rating agencies. S&P, as one recalls, has already put Great Britain’s AAA rating on negative outlook. Thursday’s central bank meeting is also unlikely to bring with it any stimulation measures as considerable hope is being put on the effects from FLS (Funding for Lending Scheme), although these are only to be seen in the course of 2013. The GBP is therefore likely to tend weaker against the euro in the coming months and in the second half should regain some of its strength.

EUR/PLN: 4.122 --- 4.15 (March)

As we expected, another wave of PLN strengthening in December was followed by a correction in the first days of January. EUR/PLN returned from 4.06 to 4.12, which was supported not only by weaker market sentiment, but also by expectations of more interest rate cuts in Poland. Monetary policy will probably be the main event for PLN this week, but the most probable outcome, a cut of 25bp, is already priced in. Therefore, the commentary after the meeting and hints at decisions in the following months may be more important (we see the chance of a pause in easing until March when the new inflation projection will be published). Meanwhile, the upward move in EUR/PLN also came after the Ministry of Finance said that too much PLN appreciation would not be good for the economy, which is yet another argument suggesting it is still too early to see a break below 4.0.

EUR/HUF: 291.1 --- 300 (March)

From mid-December 2012 onward, the forint started to depreciate against the euro. In our opinion, a great deal of external positive sentiment was priced into the Hungarian market in the past months and therefore this latest depreciation appeared overdue to us. Given the weak macroeconomic picture, which is not likely to improve in 2013, and the uncertainties regarding the successor of MNB governor Simor, there is little positive news that could support HUF in the coming weeks (aside from external risk sentiment). We therefore continue to expect further pressure on EUR/ HUF in the course of Q1 2013. The next monetary council meeting is set for 29 January, when we are likely to see another 25bp interest rate cut. The (external) council members will most likely only stop the cutting cycle when they see stronger movement on the HUF market. This strategy could turn out to be risky.

EUR/CZK: 25.52 --- 25.10 (March)

The year 2013 started with some depreciation of CZK vs. EUR towards 25.5. The industrial production figures for November which were released yesterday disappointed at -3.9% yoy and indicate ongoing weakness in economic activity. More data will be released later this week with CPI and retail sales likely attracting the most attention. The weak economic data as well as the wording of the central bank will keep pressure on EUR/CZK. On the other hand, risk sentiment and the healthy fundamentals, which give the Czech Republic its safe haven status, should prevent stronger depreciation tendencies in the coming months.

Therefore, we expect no sustained appreciation trend below 25.1, but on the other hand we see support at levels of 25.8. The first direct presidential elections on 11-12 January will have no effect on CZK in our view.


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