Forex Investment and Currency Trading

Argentina In recent days, the USD/ARS move quickly higher from 3.16 to 3.19 on the heels of strikes in the agricultural sector and concern regarding the prospect for a further move higher. Although the government will likely experience on-going challenges, the probability of a sharp move higher is extremely low in the near term. First, USD/ARS has already drifted back to 3.16…thanks to some intervention from the BCRA. Second, the current account should remain in surplus in excess of 2.5% of
GDP. Third, international reserves now represent over 8 months of import coverage. In fact, even if BCRA more actively stepped up the pace of intervention, the central bank could spend roughly $15 billion and keep reserves above 6 months of coverage. Fourth, FX reserves have dipped by only $0.9 billion over the last seven days. This is consistent with the recent move in the currency from 3.16 to 3.1 and the reserves and currency demonstrated a similar temporary disturbance in the middle
of 2007. Finally, the currency remains at least 25% undervalued. Net-net, the macro policy mix is troubling especially with potentially under reported inflation. However, commodity-driven growth will likely postpone any substantial move higher in USD/ARS.

Mexico As anticipated, the central bank kept monetary policy unchanged leaving the overnight lending rate at 7.50% at its May monetary policy decision announcement. In its statement, Banxico noted that although it has revised up its inflation projections recently, downside risks to growth have increased and it still sees the economy slowing in the second half of the year. It appears that Banxico will remain on hold as long as inflation behaves according to its projections. Continued pressures from processed food prices make it a risk that inflation might reach the new upper limit of central bank projections by June. If this scenario materializes, the already difficult situation for the central bank may be further complicated.

Commodities
Energy Crude oil rose to intraday highs on Friday supported by a decline in the US dollar and expectations for higher oil prices in the second half of 2008. Prompt month WTI rallied to $127.82 this morning, but declined some after Saudi Arabia reiterated they would produce as much oil as necessary in order to meet demand from its customers. Saudi Arabia agreed to raise oil output by 300 kb/d, but thinks fundamentals in the oil markets are sound, and that the increase in output will not help to lower oil prices. June WTI ended 1.7% higher, at a record $126.29. Products settled at record highs as well; heating oil rose 2.2% (to $370.28) and gasoline increased 1.8% (to $3.2235). Natural gas continued Thursday’s decline and fell 2.7%, to $11.094, the lowest in two weeks. The US natural gas rig count declined to 1,471 this week. Our preliminary estimates indicate an 80 Bcf injection for the
week ending May 16.