Focus FX - Exchange rate forecasts

On Friday, the Finance Ministry borrowed another EUR 342 mn on the local market in a 17-month T-bond. This was the second step to rollover a local EUR 800 mn T-bond which reached maturity on 10 November

EUR/RON: 4.532 - 4.65 (Dec)


In the first step in October,the Finance Ministry borrowed EUR 422 mn. In September and October,the Finance Ministry also tapped external markets, raising EUR 2.25 bn. Whilethe issuance in foreign currencies has no impact on the exchange rate in theshort term, we think it is positive in the medium term. The public budget deficit(near 3% of GDP in ESA-95 terms) contributes to the country’s current accountdeficit (near 4.2% of GDP). In the context of very weak inflows of foreign capital,the Finance Ministry must not only take care to fund the budget deficit, but alsoto bring hard currency into the country. Issuance in Eurobonds and local FCYbonds is an effective way to achieve this, especially given the poor absorptionof EU Structural Funds. The debt raised in FCY by the Finance Ministry allows thecentral bank’s FX reserves to remain at an adequate level relative to short-termexternal debt and imports, which should be perceived as positive by investors.


EUR/USD: 1.269 - 1.32 (Dec)


In regards to Greece, a certain calmhas taken hold as market participantsassume that the path for the accumulatedaid packages will be cleared duringtoday’s Eurozone finance ministermeeting. The euro made gains of onecent over the dollar up until yesterday,coming in at over 1.28 EUR/USD. Alldoes not seem well, though. Especiallywhen considering the long-term sustainabilityof carrying so much debt, therehas been little to no progress made.The typical tactic of the EU Commissionof polishing up the numbers doesnot seem to work this time. The IMF isfirmly against the postponement of the120% of debt against nominal GDParbitrarily set by EU politicians from2020 to 2022 and feels that a haircutis necessary. Germany among others,though, categorically rejected his proposal.The number of voices forecastinga failure of today’s negotiationsand a delay of payment of the aidpackages is growing and if they turnout to be right, the euro will likely comeunder pressure in the short-term. Onlywhen all things Greek are solved is thepath beyond 1.30 EUR/USD clear.


EUR/CHF: 1.205 - 1.21 (Dec)


EUR/CHF moved once again closeto the 1.20 mark and Swiss centralbankers are still not missing any opportunityto show their determinationin maintaining this lower bound ofEUR/CHF 1.20. This time Vice PresidentDanthine was up to bat with hisemphasis that the limit will be maintainedso long as is necessary. Regardingthe monetary policy meetingon 13 December, we do not expectmuch new to come of it. The current state of the Swiss economyalso supports this demand. After a seriesof negative economic reports, anegative drop in real exports of -7.7%is also being reported for October.The strong CHF is likely only part ofthe reason, while the drop in alreadyweak global demand is largely responsible.Possible demands that theSNB should raise the limit will be ignored,as to cater to them would destroythe SNB’s credibility.EUR/CHF should therefore remainin calm waters and also continue tomove around the 1.20 mark into thenew year 2013.


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