EUR/RON: 4.470 - 4.65 (March)
Over the past days, RON benefited from a revival of interest in Romanian debt instruments coming from non-residents. Accordingly, despite our expectations of a softer RON, the local currency gained about 1.2% vs. EUR. For the moment, the comfortable majority of the USL alliance (67% of seats in Parliament) and the appointment of Ponta as Prime Minister eliminated risks that political tension could return. The political scene is likely to remain quiet in the period ahead, as a new cabinet could be voted by the end of this year, clearing the way for negotiations with the IMF on the 2013 budget plan early next year. The elevated yields of Romanian debt securities in a cash-rich environment (yields have decreased by only 10bp over the past week) may continue to support appetite for Romanian government paper. In this context, we do not rule out that the EUR/ RON exchange rate may temporarily drift lower from the current level of 4.47.
EUR/USD: 1.316 - 1.30 (March)
While last Wednesday’s decision by the Fed to expand the current bond purchasing program (additional USD 45 bn starting in January to compensate for the expiration of ”Operation Twist”) was expected, the decision to base the stance of monetary policy on the unemployment rate was a surprise. Such a step has been a topic of discussion for some time within the FOMC but its implementation was expected merely at the start of 2013. The Fed also stuck to its statement that monetary policy would not be tightened for some time even after the economy becomes more dynamic. EUR/USD continued its upward trend that was started at the beginning of last week and is currently trading nearly exactly at our end-of-year target of EUR/USD 1.32. At least until the end of the year, movements in EUR/USD will be determined by negotiations over the ”fiscal cliff”. An agreement should be supportive for EUR/USD on the margin.
EUR/CHF: 1.208 - 1.20 (March)
The latest monetary policy assessment of the Swiss National Bank (SNB) emphasized (once again) that they will hold to the EUR/CHF lower bound of 1.20. Despite the recovery in GDP seen in Q3 (largely carried by public demand), the SNB expects a significant drop in Q4. According to the SNB, the risks for the Swiss economy are still very large. For 2013, the SNB forecasts a drop in inflation by -0.1%; in 2014 an unchanged forecasted inflation rate of 0.4%. Furthermore, the increase in demand deposits of banks at the SNB (an indication of intervention activity) has greatly weakened, which is attributable to the calming storm in the Eurozone. As long as nothing changes in this particular scenario, the CHF will move slightly above the 1.20 mark in the coming quarters. One must, however, keep an eye on the rising risks in financial stability in the Swiss real estate market, a sentiment mentioned by the SNB itself.
EUR/JPY: 110.4- 109 (March), USD/JPY: 83.9 - 84 (March)
After a short but intense election, the LDP was able to win, along with its partner the Komeito Party, 325 of the 480 seats in the House of Representatives. This qualified majority will allow the future government under Prime Minister Shinzo Abe to implement the announced economic measures (expansive financial policy) in a much easier fashion. Leading up to these announcements, the yen lost significantly to the US dollar and the euro in the past weeks and now the public eye will be looking to the implementation of all these previously announced steps. The supplemental budget is expected to total JPY 10 tr with a final result expected sometime at the end of January. A change in leadership at the Bank of Japan will take place in April and the upper house (second chamber in Parliament) will be elected in summer. In current JPY prices there is already a great deal of anticipation, therefore we expect in sideways movement in the immediate future given that the gap between yields (2Y US vs 2Y JP) and USD/JPY rates has not yet been closed. In the course of 2013, however, we expect further devaluation to take place.
EUR/GBP: 0.812 - 0.82 (March)
The GBP is about to give up its safe haven status following S&P’s negative outlook for Britain’s AAA rating. The justification for the change is given as the worsening debt situation, the postponement of debt goals and general economic risks. The likelihood of an actual downgrade is, according to a historical comparison, around 30%. If the British economy can come out of the recession, the downgrade could be avoided. In terms of monetary policy, things will likely remain expansive as deemed needed. If the fires in the Eurozone stay low, the GBP will also likely continue to weaken. Barring a visible weakness in the euro, a significant economic recovery in H2 2013 could greatly help the GBP.
EUR/PLN: 4.087 - 4.15 (March)
After returning to below 4.10 last week, the EUR/PLN rate decreased to the lowest level in 2 months, heading lower than 4.08, supported by the good overall sentiment on the markets. Data from Polish economy on the other hand still do not support PLN, but only seem to be hampering the scope for appreciation and not causing any significant weakening of the currency. As a result, even as expectations for another interest rate cut in January continue to mount, the zloty remains strong. In the short term, a return above 4.11 (100-day moving average) could provide an impulse to retest the recent highs near 4.14. Until then, however, there is still room for some downside moves towards 4.06. In the medium term, it still seems unlikely that EUR/PLN will drop below 4.0 in H1 2013, with the main risks still stemming from the situation (both fiscal and economic) in the Eurozone. Furthermore, if we see any correction of the recently improved risk appetite (visible in the gains of both the Polish bond and stock market), the possible PLN weakening should also not be strong and limited to 4.20 area.
EUR/HUF: 289.4 - 300 (March)
Once again, the interest rate decision was in the spotlight in Hungary, as expected the interest rate was once again cut by 25bp to now 5.75%. It was the fifth consecutive cut since August. Given the recent weakening in EUR/HUF towards 288 (statements by Finance Minister Matolcsy about a strategic alliance with the central bank are likely to have contributed to the depreciation yesterday) we expect the interest rate cutting cycle to slow in Q1 2013 and then stop in Q2 2013 at about 5%. We expect the pressure on HUF to continue rising in the coming weeks. One major event in Q1 2013 will be the replacement of central bank governor Simor and another internal council member. Currently, there are only rumours regarding his successor, but we fear further political influence on the Council, which in return could lead to additional pressure on the forint.
EUR/CZK: 25.22 - 25.10 (March)
The koruna remained very stable against the euro in past weeks at roughly 25.2. Domestic data coming out this week will have rather small impact on EUR/CZK, with only the Monetary Council meeting on Wednesday (19 December) bound to be of more importance. Given the already low interest rate level of 0.05%, we do not see any chances for a further cut, but the verbal intervention we have already seen in recent weeks should continue. Even though we currently do not expect any kind of FX intervention to materialise the Monetary Council could again hint towards such a possibility. We do not see a greater chance of a short-term appreciation possibility for EUR/CZK, but rather expect a more or less sideways movement at the current levels in the coming weeks before a slow appreciation trend could begin in 2013, provided there are signs of economic improvement.
EUR/HRK: 7.534 - 7.55 (March)
After a slow start, the FX market became rather interesting at the middle of last week. At the Treasury Bill auction, the MoF increased the planned amount of EUR-linked T-bills from EUR 60 mn to EUR 95 mn, which triggered EUR selling. Hence, EUR/HRK slipped below 7.52. However, the MoF accepted only EUR 62 mn, which is EUR 49 mn less than the total amount of EUR-linked T-bills that fell due. This resulted in HRK weakening to levels slightly above 7.53. This week’s trading volumes will be rather low, as on the peer markets. Last Friday’s rating downgrade to the junk category might have a temporarily unfavourable impact on the kuna, but the FX rate should remain below 7.59 until the end of the year. Overall, the CNB will stick to its policy of maintaining stable EUR/HRK rate, for which it has enough foreign currency reserves.
EUR/RUB: 40.79 - 39.4 (March), USD/RUB: 31.00 ? 30.3 (March)
After the rouble traded slightly weaker in the second half of last week, the Russian currency surprised at the start of this week with a significant course correction to the dual currency basket of USD and EUR. On Monday, the rouble fell by 1% from slightly below 35 to 35.36 (a high of 35.43 was reached). These levels were last seen in mid-November and there seems to be no clear reason for these movements. Oil prices were weak at the start of trading on Monday and fell in the course of the day but later managed to recover slightly. Today, though, the rouble is holding stable. In the coming week, the rouble should see some support as the next tax payment period begins in which companies will change to roubles to pay their taxes. An strengthening of the rouble is therefore not to be ruled out before the end of the year.
EUR/UAH: 10.650 - 10.9 (March), USD/UAH: 8.100 ? 8.4 (March)
In the course of the previous week, the hryvnia maintained its level of USD/ UAH 8.10 (in the previous month, trading peaked 8.30). The increase in value is attributable to several factors: importers fulfilled their FX demands for the New Year holidays already in October-November and the high expectations for devaluation (and the demand for foreign currency that comes along with it) that surrounded the elections in October faded. Moreover, the recently introduced administrative measures (sale of 50% of foreign denominated revenues) and the deterring discussion over the introduction of a 10-15% fee for private currency exchanges both showed their effects on the market. The exchange rate should remain stable around 8.10-8.20 in the coming weeks. Unfortunately there remain a number of economic imbalances (current account deficit), therefore we do expect a return of tensions to the currency market, especially if the upcoming negotiations with the IMF are delayed and/or no easing in the conditions of gas purchases from Russia is reached.
EUR/CNY: 8.199 - 8.11 (March), USD/CNY: 6.232 ? 6.24 (March)
The renminbi has been showing some rather large fluctuation after the difference to the central rate was at times slightly above 1%. The People’s Bank of China has held to its rate of 6.29 since the middle of November and since then has had to make significant interventions to keep the difference between market price and the central rate in line. Over the weekend, the first economic conference with new leadership was held. The central theme was that the pace of the modification in the demand structure needs to be increased in order to give consumption a more important position in policy and at the same time take some importance away from investments. Monetary policy should also become more flexible and multiple instruments be provided in order to maintain a stable exchange rate (although here it is to be understood that a stiff rate is not desired but rather a rate that remains under PBoC control). Therefore, our forecast of a slight increase against the US dollar with a 12-month outlook lines up perfectly.
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