Forex Investment and Currency Trading

Slovakia Both 1Q GDP and April HICP were on the strong side of expectations, supporting the case for a strong SKK conversion rate. 1Q GDP slowed from 14.3% yoy (one-off upside bias) to a still impressive 8.7% yoy. The full breakdown will not be released until June 3, but robust growth rates should continue to be underpinned by both strong domestic demand and net exports. Meanwhile, the HICP advanced more than expected to 3.7% in April from 3.6% in March, driven by food prices that rose by 1.2% mom from 0.3%. Continued rising prices justify for ECB’s concerns about the sustainability of low inflation in Slovakia after EUR adoption. This is expected to translate into a lower EUR/SKK central parity rate, likely at the low end of the 32.0-31.0 range.

Czech Rep 1Q GDP was a touch below forecast at 5.4% yoy from 6.6% in 4Q. The moderation was partly attributable to the scaling back of health consumption after the front loading in 4Q. Nevertheless, growth momentum will likely slow into 2008 as private consumption — a major driver of growth — will likely moderate amid higher interest rates, deteriorating consumer confidence and fiscal austerity measures. Moreover, net exports contribution will likely slow on strong import demand while external demand is weakening. To be sure, March current account unexpectedly posted a deficit of CZK0.6bn vs. expectations for a surplus of 10.1bn, as goods trade surplus narrowed significantly to CZK10.9bn from CZK17.7bn. Both the services and income account balances also deteriorated to +CZK3.8bn and -CZK15.1bn, respectively.
Hungary 1Q GDP was above expectations at 1.6% yoy after 0.8% (consensus 1.6%). Details are not available in the preliminary reading. Market expects the contribution from domestic demand to remain soft, as the recovery after the fiscal austerity measures is delayed by high interest rates. Indeed, the NBH will likely need an additional 25-bp rate hike this month (May 26) to bring rates to a three-year high of 8.50% before it goes on hold, as inflation pressures remain elevated.

Indonesia 1Q08 GDP bettered expectation with 6.28% yoy growth and even showed a slight improvement over 4Q07’s 6.25% growth. Private consumption led the way with 5.5% yoy growth and contributed to half of the overall GDP performance. In addition, investment growth sustained its firming trend and rose 13.3% yoy vs 12.1% in 4Q07. Export growth also outperformed with 15% yoy rise vs 7.3% in 4Q07 on the back of firm demand for commodities such as palm oil, rubber and minerals. The latest data will likely be supportive of the central bank’s monetary tightening stance and allow room for more rate hikes going forward. Market expects BI to hike the SBI rate by 50-75bp for the rest of the year from 8.25% currently. Shortly after the GDP release, the Information Minister announced that the government will raise subsidized fuel prices by as much as 30%. This was
within expectations and there were no further details at time of writing but there has been wide speculation that the hikes could be implemented end May or in June. Government ministers have to report back to President Susilo on May 23 about preparations for cash handouts for the poor and only after that will President Susilo make a formal announcement on when will fuel prices be hiked and by how much exactly.

China Jan-Apr FAI growth slowed modestly to 25.7% yoy from 25.9% in Jan-Mar, but nonetheless still reflected robust performance. Apparently, the implementation of tight monetary policy has not significantly cooled brisk investment activities. Instead, the latest data affirmed sustained risk of investment rebound going ahead, and this risk is fortified by still rapid loan growth and reconstruction activities after the earthquake. However, in its latest monetary policy report, the central bank has lightened its emphasis on overheating prevention but ranked inflation as the most imminent problem. Food prices will likely stay high in the near term despite seasonally adjusted CPI staying on a smooth trend and likely to trend down from here. The potential for a rebound in FAI growth could potentially trigger higher cost of production, and on balance could be a greater concern than overheating risks and, hence, lead the PBoC to conclude that tight monetary policy should be sustained. Market believes that the PBoC will likely prefer to tighten monetary conditions via quantitative measures rather than interest rate hikes. Notably, hiking interest rates may stoke more capital inflows and the Fed’s rate cut has limited the room for the PBoC to adopt this route. Its re-emphasis on improving CNY exchange rate flexibility to help with reducing imported inflation reflects an ongoing signal of allowing gradual CNY appreciation. Meanwhile it called for fiscal adjustments to boost domestic demand (in particular consumption) and to defend unfavorable external changes.

Singapore March retail sales rebounded from a revised 0.8% yoy contraction in February to 5.6%, above consensus of a 3% rise. Calendar effect in February was a dominant factor for the weak print in February. Ex-vehicle sales surged 12.5% in March, up from 10.2% % in the first two months of the year. The faster pace of increase was in part due to higher retail prices; price effect accounted for slightly more than half the rise in March retail spending. Volume growth was also slightly stronger than recent trends at 6.1%. The outsized rise in supermarket and departmental sales volume growth could be partly due to stockpiling of food products following the surge in rice prices. Strong sales growth in consumer durables suggests underlying demand conditions remain robust.

Philippines Overseas remittances rose 9.4% to the highest monthly level recorded so far at $1.4 billion. 1Q total remittances rose 13.2% yoy to $4 billion, well on track to reach the official forecast of 9% growth to $15.7 billion for 2008. Separately, President Arroyo announced a PHP20/day hike in salary for minimum wage workers in Manila. The move, while expected, will likely stoke rate hike expectations in the run-up to the next monetary policy meeting on June 5. However, the hike was PHP5 less than the threshold, which would have forced the BSP to revise its inflation goals from the recently raised forecast of 5.5%-6.5%, and hence there is still a more than even chance that the BSP may still push off rate hikes as growth concerns are equally important.
Commodities

Energy The petroleum complex settled lower on Wednesday after the inventory data showed a stronger-than-expected build in distillate stocks. June WTI settled 1.3% lower Wednesday (at $124.22) even though inventories grew just 176 kb last week and the expectation was for a 2.25 mb build. The smaller-than-expected build occurred as total imports declined 4.9 mb, to 9.9 mb/d, and PADD5 inventories fell by over 1.0 mb. On a similar note, gasoline stocks saw a larger-than-expected draw of 1.7 mb (BBG:-0.2), while imports fell 4.1 mb; however, the contract declined 0.6% (to $3.1804). Demand for gasoline rose 0.3% compared to the prior week, but on a four-week average basis demand is depressed at -0.3% y-o-y. Days of demand cover fell for the ninth consecutive week, to 22.5, the lowest so far in 2008. Heating oil fell 2.2% (to $3.6178) while distillate inventories built 1.34 mb
(BBG: +1.0) and ULSD stocks increased 1.29 mb of that. Overall distillates are 12.7 mb below last year’s levels, but just 2.0 mb below the 5-year average. Refinery utilization improved 1.63%, to 86.6%, but remains 2.9% below last year’s levels.

Natural gas reached another 29-month high Wednesday as it rose 1.5%, to $11.598. The increase came after Enterprise Products Partners pushed back the completion date for repairs to the Independence Trail pipeline, therefore postponing the restart of the Independence Hub to mid-June. Thursday it is expectd to see an injection of 83 Bcf (BBG: +88). While an injection of this size would raise total storage to 1,519 Bcf, it would still be at a deficit to 2007’s level at this time.