Forex Investment and Currency Trading

Russia Industrial production grew 9.2%yoy in April, that is 200bps higher than consensus and 270bps higher than the last reading. Even this extremely healthy growth, however, understates the strength of the Russian economy: manufacturing was up 14.5%, while the large mining sector expanded barely at all. In sum, Russia remains one of the few bright spots in the global
economy. Likewise, both growth and inflation look likely to exceed our present projections.

China A senior economist with the National Development and Reform Commission assured that the earthquake will not shake economic confidence and urged the government to stay on the current policy course of curbing inflation. This is in line with the assessment that the overall impact from the earthquake on overall GDP growth will be limited, given the small share of the quakehit province to the overall economy (4.2% of GDP). In addition, the disruption to production activities will likely be temporary and likely will be more than offset by a rebound in FAI growth to finance reconstruction.

Taiwan 1Q08 current account surplus fell slightly to $8.66 billion from $9.4 billion a year earlier, but the overall BoP surplus improved tremendously to $11.3 billion from $0.37 billion a year earlier. The financial account outflows reversed for the first time in ten quarters and registered $0.39 billion worth of net inflows, reflecting the positive investment sentiment post presidential elections. This will likely sustain and barring a significant deterioration in the current account performance due to slowdown in global demand, the overall BoP performance is expected to revert to a surplus this year after registering a $4.0 billion deficit last year. In other news, the newly elected President Ma Ying-jeou was sworn in on Tuesday, May 20. His first speech after the inauguration ceremony included a repeat of his previous pledge to foster historic trade and transit ties with China and will pursue cross-Straits peace and regional stability. He reiterated his plan to introduce weekend charter flights between
Taiwan and China to allow more Chinese tourists to visit Taiwan from July. Market continues to expect improvement in cross-Straits trade ties to outpace progress on political relations. Separately, Council for Economic Planning and Development Chief Chen Tain-jy said he aims to maintain CPI growth at around 3%. This is significantly higher than the central bank’s forecast at 2.1% and will likely sustain rate hike expectations going forward. Market expects a 12.5-bp hike in the rediscount rate to 3.625% when the CBC meets in June.

South Korea The finance ministry clarified on Tuesday that the government is not considering direct measures to curb short term FX borrowings, but will instead advise exporters and asset management companies to refrain from excessive hedging activities. The comments came after a senior official and Vice FinMin Choi said the government is studying measures to tackle the rising external borrowings, triggering concerns over more administrative controls to stem capital inflows. The volatility in the FX swap market also prompted verbal intervention from the BoK. A senior official said the BoK will inject USD into the swap market if necessary, adding that short-term market fluctuations are undesirable and global funding conditions have improved. While the rapid rise in foreign borrowings and dwindling net external asset position were triggers for the heightened policy focus on the external debt situation in the past year, further administration measures are unlikely in the near term. With global funding conditions yet to normalize and the government increasingly concerned about near-term growth prospects, additional measures will tighten domestic liquidity conditions and aggravate growth risks. However, the ineffectiveness of measures introduced in 3Q07 to stem the rise in external borrowing has increased the likelihood of additional controls in the months ahead.

Mexico March industrial production was -4.9%yoy, weaker than expectations of -0.4%. However, the headline number is misleading given that Holy Week fell in March this year, but occurred in April in 2007. On a month-on-month basis, production actually increased 0.26%. Overall, the Mexican economy appears to have performed well in 1Q08.

Brazil The central bank’s weekly expectations survey showed a big jump in inflation expectations. IPCA inflation in 12 months is now expected to be 4.65%, up from 4.41% the previous week. This is the first time that IPCA inflation projections 12 months out are above the 4.5% central bank target since September 2006. End 2008 and end 2009 IPCA inflation expectations were also upwardly revised (5.12% from 4.96% and 4.50% from 4.47% previously). Local market analysts still expect an end-year Selic target rate of 13.25%, but continue to front load rate expectations as suggested by the average 2008 Selic rate forecast of 12.38%.

Commodities
Energy Crude oil ended a volatile day of trading at another all time high on Monday. Prices were supported this morning by OPEC president Chakib Khelil’s announcement that the group is unlikely to increase oil supply at their September meeting. June WTI was later pressured by a fall in natural gas prices, but ultimately settled 0.6% higher (at $127.05). Gasoline followed a similar path, up 0.4% to a record $3.2366, while heating oil declined 0.7% (to $3.6751). This week market expects to see a build in crude oil, gasoline, and heating oil inventories. Natural gas fell 1.3% on Monday, to $10.954, pressured by expectations for mild temperatures in the US this week. Market expects Thursday’s storage report to show an 80 Bcf injection of natural gas into underground storage.