Forex Investment and Currency Trading

Iceland The Nordic central banks (Sweden, Norway and Denmark) announced on Friday that they would enter into a swap facility with the Icelandic central bank. The agreement is for up to €500mn, which gives Iceland the right to buy EUR with ISK. Riksbank Governor Ingves said that the arrangement is aimed at supporting the Iceland central bank to safeguard macro and financial stability. While the facility would not solve all the concerns, the positive news should help to restore some confidence in
Icelandic financial system. The ISK surged by almost 5% vs. the EUR after the news.

Hungary Wage growth slowed more than expected to 9.9% yoy in March after 13.1% in February, with improvements in the breakdown. Indeed, private sector wages slowed to 9.0% yoy from 14.0%, while the ex-bonus figure - closely watched by the NBH - grew by 7.7% yoy vs 10.4% in February. Real wages subsequently fell by 0.7% yoy in 1Q. The encouraging developments in March wages could provide the NBH some comfort. However, wage data could be noisy as suggested by NBH Deputy Governor Kiraly, who also pointed out that inflation expectations in Hungary are “more persistent” than in other countries. She said that the central bank is ready to defend its inflation goal and credibility by hiking rates further, but also added that the NBH needs to pause at some point to assess the impact. This is consistent with the call for one final rate hike of 25bp in May, taking rates to 8.50% before the NBH goes on hold for the rest of the year.

Czech Rep The PPI slowed to 4.7% yoy in April from 5.3% in March, weaker than 5.1% expected. Separately, the CNB released the minutes of its May 7 meeting when it voted 6-1 to keep rates on hold at 3.75%. The Board sees CPI risks broadly on the upside, but expects CPI to decline in 1Q 2009 due to CZK strength, fiscal policy and external demand, creating room for meeting the 2% target effective from 2010. The upside inflation risks and still robust economic growth should leave room for one final CNB rate hike this year.

 
China China will not see galloping inflation due to its strong growth momentum and well-shaped fiscal position/enterprises profits, according to a deputy Central bank governor in a forum after the earthquake. The latest rhetoric is not likely an indication that the PBoC will be shifting its tight monetary policy stance. After all, the earthquake is likely to exacerbate near term inflation
expectation due to the temporary transportation disconnection and disruption of some production activities. Despite allowing temporary flexibility to aid earthquake relief (it reported that the recent 50bp RRR hike would not apply to six cities in the earthquake-hit Sichuan province), it is expected that the PBoC to maintain its tight monetary policy stance. Separately, the impact of macro-tightening continued to show in the real estate sector. April real estate climate index declined slightly to104.07 from 104.72 in March, sustaining its moderating trend since December 2007. In addition, the credit growth to real estate sector decreased to 24.7% in the first four months from 33.8% in 1Q. The recent warning from the head of banking regulator of lending risks to real estate developers will likely lead to further tightening of loans to this sector and further slowdown of real estate performance.

South Korea April import prices rose to 31.3% yoy from 28%, the fastest monthly pace of increase in almost a decade. The rise is consistent with the stronger April PPI released a week ago. Monthly import prices rose +3.8%, down from an 8.2% gain the month before. However, the slower increase is likely due to a smaller KRW depreciation during April. Average USD/KRW rate rose 0.5% mom, down from 4.1% in March. With the won weakening further in May, import prices could rise close to 40% yoy.
Despite moderating domestic demand, the pass through from import prices should keep CPI well above BoK’s target range of 2.5%–3.5% in the months ahead.

 
Singapore April non-oil domestic exports (Nodx) rose by 5.4% yoy, reversing the 5.9% decline in the previous month. Improvements were broad based. While electronics exports continue to contract, the pace of decline slowed to a marginal 0.4% yoy from -8.5% in March. Non-electronics shipments also rebounded to 9.8% after a brief contraction in March. In contrast with recent trend, the reversal was largely due to strong petrochemical shipments during the month. Pharmaceutical exports posted
another double-digit contraction, but the sharp rebound in pharmaceutical output in March suggests shipments will likely rise in the coming months.

Turkey As expected, the CBT hiked rates by 50bp to 15.75%, citing measured rate hikes ahead if required to curb the passthrough from food and oil prices. Indeed, with the latest inflation reading near double-digit reading of 9.7% yoy and continued deterioration in inflation expectations (2008 inflation seen at 9.55% from 8.44% in previous survey), risks of second round impact is meaningful. Another 75bp is expected to be added to the borrowing rate to 16.50%, while still seeing the scope for CBT rate cuts towards year-end. As the CBT resumes rates tightening, USD/TRY downside to 1.231-1.229 (100- and 200-DMA) looks possible given the current benign EM sentiment.

Brazil Retail sales were strong overall in March increasing 11.4% yoy and 1.8% mom. This result brought 1Q08 growth to 12% yoy, the strongest quarter on record since IBGE began tracking the data in 2001. Persistently strong domestic demand and high capacity utilization levels are likely to continue to exert upward pressure on prices in coming months.

 
Commodities
Energy Crude oil rose to $126.64 Thursday morning, but dropped as low as $120.75 a few hours later. The prompt month WTI contract ultimately settled relatively unchanged, down just 0.1% (to $124.12) as crude oil options expired. Products followed a similar path during the day, with gasoline ending 0.5% lower (at $3.1658) while heating oil rose 0.1% (to $3.6224). Trading on the ICE Futures exchanges stopped for a few hours on Thursday due to an emergency power outage. Natural gas fell 1.7% on Thursday (to $11.399), pressured by a stronger than expected injection into storage. The EIA reported that inventories rose by 93 Bcf last week to 1,529 Bcf. While the injection was stronger than the market expectation of 88 Bcf, total storage is still 286 Bcf lower than last year at this time, and right around the 5-year average.