Accordingly, RON gained some 250bp, moving towards 4.36 against EUR. According to Ministry of Finance official, non-residents now hold about 20-21% of domestic debt issues, up from almost 9% at the end of November. We estimate that foreign players bought around EUR bn of RON instruments in December- February.
The Romanian currency was little changed after the announcement of NBR on removing the cap at the weekly repo operation, given that liquidity needs are smaller. Injecting unlimited liquidity is a sign of transparency and could accelerate the decline in short-term rates and yields. Over the short run this might bode well for RON, but the limited downside potential of yields (around a key rate of 5.25%) in the absence of a key rate cut could reduce non-residents’ appetite for Romanian T-bonds and this weaken support for the Leu.
EUR/USD: 1.303 - 1.35 (March)
The depreciation of the euro by 3.5 cent to 1.303 EUR/USD since 20 February is solely attributable to developments in the euro area. The yield differential between two-year German and US government bonds, which significantly determines the Eurodollars since the beginning of 2010, underpins this assumption. Thus, the interest rate differential decreased from -0.09 percentage points to currently -0.20 percentage points since 20 February. During the same period of time, the yield of two-year government bonds decreased by 14 basis points to 0.04%. This means that the yield of its US counterpart is also currently three basis points below the level on 20 February. Despite speculations about an early exit of the Fed from QE3, which came up after the publication of the FOMC meeting minutes!
In our opinion, this means that the Eurodollar’s exchange rate in the short term will solely depend on the developments in Italy. As soon as a government that is capable of acting has been formed, the euro will swiftly increase towards 1.35 EUR/USD. Until then, the common currency will remain close to the current level. In the case of re-elections and the continuing increase in uncertainty involved, rates clearly below 1.30 EUR/USD would be likely.
Analyst: Jörg Angelé, joerg.angele@raiffeisenresearch.at
EUR/CHF: 1.227 - 1.23 (March)
Currently, the Swiss currency is at 1.23, which also corresponds to our forecast. In the near future, the main factors will also come from Europe, namely from Italy; the meeting of the European Central Bank will become the focus of attention again as well.
This means that the Swiss franc will follow path of the euro. Not a lot of new information can be expected from the meeting of the Swiss National Bank (SNB) on 15 March. In our opinion, they are likely to leave their monetary policy stance unchanged. Concerning the interplay between growth and inflation, the deflationary environment has not yet clearly changed for the better for Switzerland: The GDP growth could be increased by 0.2% qoq in the last quarter of the previous year (1.4% yoy). However, the Purchasing Managers’ Index has slightly decreased again (but remains above the expansion mark of 50). Inflation will also record a decline again. For the time being, the CHF is likely to hover around 1.23 against the EUR.
Analyst: Lydia Kranner, lydia.kranner@raiffeisenresearch.at
EUR/JPY: 121,4 - 128 (March), USD/JPY: 93.1 - 95 (March)
Last week, Japan’s Prime Minister announced the nomination of the Central Bank Governor (Kuroda, President of the Asian Development Bank) and his two deputies (Iwata and Nakoso, both also advocate for unconventional monetary policy measures). Kuroda’s statements: The target of 2% should be reached in two years at the latest, changes already decided for the asse purchase programme (no final target, announcement of monthly activities) are supposed to be brought forward and the programme is supposed to be expanded to all bond maturities. Concerning the currency development, he highlights that, in the case of deviations that are not fundamentally justified, interventions would, however, be appropriate. It is a fact that words have to be transformed into actions in order to not risk the credibility of these ideas.
As a result, the next important event will be the Central Bank’s meeting on 3 and 4 April. Until then, the yen will probably also be partly determined by the developments in Italy and the US, the volatility is therefore likely to remain high. Our expectations concerning another surge in depreciation until the middle of the year remain the same.
Analyst: Lydia Kranner, lydia.kranner@raiffeisenresearch.at
EUR/GBP: 0.862 - 0.87 (March)
Great Britain’s rating downgrade to AA barely affected the evaluation of financial assets. Since then, ”business as usual” has set in in again and daily topics have moved to the fore. For GB, those topics are economic developments and the measures, which will be introduced by the BoE (Bank of England) at its next meeting on Thursday. According to statistics of the Bank of England, the extension of credits of British banks does not really gain momentum despite record low interests and the programme ”Funding for Lending” (FLS). Even a decrease in net lending by GBP 2. bn has been recorded in Q4. In addition, negative news also come from the building industry: According to the PMI (manufacturing) survey, the output of this sector has not decreased this strongly since 2009. The Purchasing Managers’ Index (PMI), which is extremely significant to the economic cycle, is also following a decreasing trend again. As long as the economic ”spring” cannot be announced for sure, further expansive monetary policy measures seem to be factored in once more. For the GBP this means a persistent phase of weakness.
Analyst: Lydia Kranner, lydia.kranner@raiffeisenresearch.at
Read the full report on the main currencies’ evolution to EUR in the attached document
