Forex Investment and Currency Trading

South Africa Retail sales grew by 2.5% yoy in February from upward revised 0.7% in January. February gains were probably driven by the leap year effect. However, the trend in consumer demand has clearly weakened since early 2007, with the 6-month moving average at a subdued 1.0%. Retail sales will likely remain soft in the months ahead, consistent with a 4-year low consumer confidence and rising interest rates environment.

China The National Bureau of Statistics (NBS) announced that 1Q08 GDP rose by 10.6% yoy, stronger than our forecast but a moderation from 4Q07 growth at 11.2%. The NBS attributed the slower growth to the direct effect of continued macro-tightening policy and highlighted that assessing the economic situation is an increasing challenge. While external risks have elevated the need to prevent a sharp economic slowdown, curbing price rises will likely be a key policy priority going ahead. Economic momentum remained strong in 1Q08, reflected by the brisk fixed asset investment growth at 24.6% yoy and steady domestic consumption performance at 12.5% yoy. In addition, March industrial production rebounded to 17.8% yoy from 15.4% in February, though there are signs that this could be peaking in view of rising input prices adversely impacting industrial profits. March M2 growth slowed to 16.3% from 17.5% in March, but remained above the central bank’s target at 16%. CPI averaged 8% in the first quarter, with the firm trend continued to be driven by higher food prices and rising labor costs and significantly above the official forecast for 2008 at 4.8%. In the near term, consumer price rises may be exacerbated by higher producer prices, with PPI growth accelerating to 8% in March from 6.6% in February. Shortly after the GDP release, the PBoC hiked the reserve requirement ratio (for the third time this year) by 50bp to 16%, effective April 25. The central bank said the move was aimed at strengthening liquidity management and securing reasonable money supply and credit growth. In other news, local daily reported that China’s FX regulator SAFE has resumed the approval of the additional $20 billion QFII quota applications after a one-year suspension, signaling the policy intent to gradually liberalize its capital account.

South Korea Rate cut expectations are on the rise following an unexpectedly dovish BoK last week, reinforced by series of pessimistic statements on growth from senior officials in the past days. Market now expects a 25-bp rate cut in 2Q08, likely on May 9. Vice FinMin Choi said on Wednesday a shift in policy response is needed as “all economic indicators are pointing to a (growth) downturn,” suggesting that the government will likely switch focus to growth supportive measures going forward. Choi’s comments echoed statements by FinMin Kang, who said on Tuesday that the weakening domestic demand is the biggest concern for the government. Kang’s comments on current account balance “should take priority in economic policy,” and the government has the responsibility to dampen FX speculation point to increasing prospects of strong actions to weaken the KRW. While government officials have refrained from commenting outright on interest rates, FinMin Kang noting that the authorities will “manage monetary policy rationally, taking into account the interest rate gap between South Korea and the US” signaled strongly the preference for BoK to adopt a more accommodative policy stance. The risk of a sustained breach in BoK’s inflation target in 2008 has increased significantly on accelerating import prices, reinforced by recent KRW weakness. Headline CPI will likely ease within the 2.5%–3.5% target zone only in 4Q08. GDP growth is also likely to be weaker than the initial forecast of 4.9%. Market now expects the economy to slow to 4.7%. Rising rate cut expectations and growing concerns over downside risks to growth will likely see an upward bias to USD/KRW in the weeks ahead.

Malaysia Local think tank Malaysia Institute of Economic Research (MIER) said Malaysia’s economic growth will remain sound in 1H08 but conditions could deteriorate in 2H08. It sticks to a 5.4% growth forecast for this year for now and expects BNM to keep the OPR unchanged at 3.5%. It added that the impact of stronger MYR on exports is mitigated by strengthening regional currencies. It views the MYR as undervalued at current levels and expects USD/MYR to trend toward 3.0 by end 2008 and 2.8 by end 2009.

Mexico Banxico announced plans to increase USD daily sales for the May-July period to $32mn from the current $20mn. The increase is consistent with long-term policy to reduce holdings of FX reserves. It is a well-understood policy that allows relatively easy forecasts of future sales sizes. As such, and because the amounts are relatively small, the impact of the upcoming increase in daily USD sales to the FX market should be negligible. In the short term, wide Mexico-US rate spreads are likely to continue to drive USD/MXN lower with a likely test of the December 2005 low at 10.39.

Brazil Retail sales increased 12.2% yoy, the fastest pace since June 2004. On a seasonally adjusted basis, sales fell 1.5% mom, but this follows three strong months of positive gains. The upward trend in retail sales is likely to continue in the near term. Expect COPOM to hike the Selic rate by 25bp at its monetary policy meeting April 16, to restrain demand-driven inflationary pressures and contain rising inflation expectations.