Forex Investment and Currency Trading

Israel Over the weekend, May CPI rose to a 5½ year high of 5.4% yoy from 4.7% in April, a touch weaker than expectations. Food price was the main driver, up by 1.9% mom/ 12.5% yoy, while housing costs advanced by 0.1% mom/ 2.4% yoy. Upside pressures from food and fuel prices, coupled with receding disinflation impact from the strong ILS vs. USD (as rental contracts are increasingly priced in ILS rather than USD), require further monetary tightening, with a 25bp hike to 3.75% at the June 23 BoI rate-setting meeting likely, in our view.

China May industrial production grew by 16% yoy, slightly stronger than 15.7% in April. However, the higher reading does not necessarily imply acceleration of industrial production, as this year’s removal of May Golden Week holiday extended three more working days than in 2007. In fact, the breakdowns suggested that six out of nine major industries registered slower yoy growth than in April. Markets expects a gradual moderation of industrial production growth in the coming months, on the prospects of negative impacts of firm inflation trend and slower exports growth. Separately, the PBoC published 2008 Financial Stability Report, which suggested adopting forceful measures to prevent excessive prices hikes, improving balance of payments and at the same time intensifying monitoring of cross-boarder capital flows. This provided the same rhetoric supporting a stronger CNY to tame imported inflation and reduce current account surplus.

Malaysia Governor Zeti said the BNM would access the impact of rising inflation before deciding whether to raise interest rates. GDP forecast of 5%–6% during the next policy meeting will be reviewed, but growth of around 5% is seen as “achievable”. The BNM will indicate on July 25 if a revision to its neutral policy stance is required. Market expects the overnight rate to be raised by 25bp to 3.75% in July, and a further 50bp increase to 4.25% before year end.

South Korea Construction workers went on strike on Monday, extending the truckers’ work stoppages last Friday. A major union umbrella with 500k members is also due to announce the voting result on strikes on Monday. Port operators are reportedly handling only 20% of average shipping volume following the 4-day long transport workers’ strike. Shipment delays will likely lead to a significant drop in trade volume in June. Separately, FinMin Kang hinted over the weekend that the government could cut its 6% growth target in early July. The previous forecast was released when global oil prices were around $90, but oil and agricultural prices have deviated significantly from projections since. Kang reiterated that rising external debt is undesirable at a time when the current account has weakened, and that the government is prepared to intervene if necessary to curb borrowings. On the exchange rate, Kang acknowledged that won weakness has contributed to the rise in inflation, but noted that it is “undesirable to artificially lower USD/KRW just because of inflation concerns”. Growth risks are seen to be higher than inflation, in contrast with BoK’s policy assessment in June. FinMin Kang also downplayed prospects of a BoK rate hike, noting that the MPC will factor growth and financial market conditions in rate decisions.

Thailand The BoT called an unscheduled press briefing on inflation on Monday. During the press conference, Governor Tarisa repeated her warning last week that monthly inflation readings could reach double-digits in 2008, noting that higher interest rates may not hurt economic growth. However, she added that the comments on inflation are not meant to signal a rate hike, and
dismissed speculation of a special inter-meeting MPC session before the next policy review scheduled on July 16. Recent baht weakness was in line with regional currency movements, and the Central Bank will intervene to curb “excessive” FX volatility.