Forex Investment and Currency Trading

South Africa Private sector credit growth unexpectedly rose by 22.6% yoy in March after 20.8%, well above market expectations for 20.5%. M3 money supply also rose to 21.0% yoy from downward revised 20.9% (consensus 20.7%). Following SARB Governor’s recent hawkish comments, an emergency rate hike cannot be ruled out given the sharp deterioration in inflation development. Market sees a 50bp rate hike likely in the run up to the prescheduled June 12 meeting, unless the ZAR recovers strongly – a function of improved international market sentiment.

Hungary March PPI was on the strong side of expectations, advancing to 5.7% yoy after 4.9% previously. The continued sharp uptrend in PPI since September 2007 suggests strong pipeline inflationary pressures, justifying the case for the NBH tightening bias. In raising rates by 25bp to 8.25% at the April meeting, the HUF left the door open to further monetary tightening as it strives to achieve the inflation target (3%) by 2009. Market continues to expect another 25bp rate hike in May before the NBH goes on hold, with the scope for rate cut in the final months of the year.

Turkey Comments from CBT Governor Yilmaz on Wednesday tilt towards the hawkish side, suggesting that a near term CBT rate hike cannot be ruled out. Yilmaz said that the upward impact of exchange rate on inflation to continue in short term, while risks related to secondary effects of supply shocks have increased. The worsening inflation expectations has also raised risk of pricing behavior. With food price inflation seen at an elevated 13% by end of 2008, 8% in 2009 and on the assumption of monetary tightening, year-end 2008 inflation is expected around 9.3%, well above the upper band of the medium term target (4% +/-2%). Inflation will unlikely return to the target range until 2009-2010. The Governor also noted that the CBT discussed changing the inflation target, although no decision was made. He concluded that the CBT may tighten monetary policy if pricing behavior worsens. Meanwhile, the arguments for disinflation seem to be weak, including supportive supply & demand conditions, rising in long-term rates, and still tight credit conditions.

China A local think-tank forecast above 10% full year food CPI, which suggests at least 3.3 percentage points increase in full year CPI. This is another affirmation that inflation will overshoot the 4.8% target. Market is expecting full year CPI to average 6%. Note that 1Q08 food CPI averaged 21%, so the think tank’s forecast implied the assumption that food CPI will moderate to single digit growth in 2H. Going ahead, market does not expect the recent rebound in USD/RMB to persist but maintain that RMB will likely Global Rates, Currencies, and Commodities strengthen once the USD starts to weaken, albeit at a more gradual pace, to 6.65 at the year end.

South Korea March current account posted a deficit for the fourth consecutive month, but the shortfall narrowed sharply to $54 mn from $2.35 bn in February. The goods balance reversed the deficit in January–February to a small surplus of $531 mn; monthly services deficit also narrowed to $680 mn from just above $2 bn in the two preceding months. A smaller services deficit in March is expected due to seasonal decline in outbound travel, but the reduction was unusually large, suggesting that a weaker KRW may have contributed to the improvement in March. Separately, BoK’s manufacturing sentiment index rose to a four month high of 87 from 83 in April despite recent concerns over a sharp moderation in growth momentum. The improvement mirrored a separate FKI survey on large firms released on Tuesday. Industrial output also maintained pace at 10% yoy, almost unchanged from the 10.1% reading in February. However, the leading index eased for the fourth straight month to 3.7% yoy from 4.7%, pointing to a moderation in economic activity in the months ahead.

Indonesia Local daily reported that domestic fuel prices may be hiked in June by approximately 25-33%. Energy Minister Purnomo was quoted as saying that such a discussion is taking place and another unnamed source disclosed that all key economic ministers had approved a proposal on fuel price hikes. The plan entailed raising prices of gasoline (octane 88) to IDR6,000 a litre from IDR4,500, diesel to IDR5,500 a litre from IDR4,300 and socially-sensitive kerosene to IDR2,500 from IDR2,000. Fuel, electricity and water accounts for 5.8% of total CPI basket and such a hike could potentially add 1.5-1.9% point to overall CPI. The overall impact may be exacerbated if transport costs are also raised in response and could push BI to adopt a more aggressive monetary tightening stance by hiking interest rates in 2H08.

Brazil The April IGP-M inflation index (which covers the Mar21-Apr20 period) showed price increases of 0.69% mom, higher than expectations of 0.48%. The consumer price subindex increased 0.76%, much higher than the previous print of 0.19% due mostly to food prices which increased 1.76% mom, compared to a -0.02% decline previously. Wholesale (12.17% yoy from 11.69%) and raw material inflation (7.05% yoy from 6.97%) also accelerated and remain at elevated levels suggesting further inflationary pressures ahead. Market continues to expect COPOM to hike the Selic target rate by 50bp to 12.25%, at its June monetary policy meeting.

Commodities
Energy The petroleum complex sold off on Tuesday as the US dollar rebounded. Heightened supply fears subsided, as well, after workers at the Grangemouth refinery returned to work, which allowed BP to initialize a restart of the Forties Pipeline System. The prompt month crude contract retreated from a record high, and experienced its largest single-day decline in four weeks, down 3.1% (to $115.06). Products followed crude’s move lower and declined as well. Gasoline decreased 3.0%, to $2.9392, while heating oil lost 1.6%, to $3.2465. On Wednesday, market expects the EIA to report that crude stocks build 950 kb, while gasoline inventories fell 1.0 mb and distillates experienced a 400 kb draw. The natural gas contract for June delivery took the lead Tuesday and retraced recent gains, following weakness in the petroleum complex. The contract dropped 5.3%, to $10.842, while the continuous prompt month fell 3.9%.