Forex Investment and Currency Trading

South Africa The current account deficit worsened to a 26-year high in the first quarter, while a robust headline financial account balanced masked underlying weakening that increases concerns about financing going forward. The annualized current account deficit rose to 9.0% of GDP, much worse than in Q4 and than expected by the consensus. While manufacturing benefited from the weaker rand, the volume of mining exports dropped by 9% qoq due to power shortages, although rapidly rising commodity prices still allowed an 8% in export value. However, high world energy prices boosted imports even more, by 12% qoq. The financial account remained robust on surface, with a net inflow of $48bn exceeding the current account deficit. However, this figure is inflated by a single ZAR 40bn FDI transaction (Standard Bank), without which FDI flows would have been negative (as were portfolio flows), and the overall balance of payments would have been in deficit. The only positive and growing item was bank flows, reflecting the large interest rate differential. USD/ZAR rose to 8.07 on impact but bounced back quickly. The torrent of bad news from South Africa seems to have worsened ZAR sentiment to a point where negative data surprises have only a limited impact. However, market sees substantial further upside in USD/ZAR towards 8.50 if the underlying external financing problems of the current account worsen, global liquidity gets tighter, or commodity prices soften.

Hungary April wage growth surprised on the upside, rising to 10.6% yoy from 9.9% (consensus 9.1%). In the breakdown, the closely watched private sector ex bonus reading accelerated to 9.1% yoy from 7.7%, while public sector wages picked up slightly to 12.8% yoy from 12.7%. Overall, the data underline the elevated wage pressures, supporting the case for 25bp rate hike this month (June 23) by the NBH, and another 25bp in July likely to bring the base rate to 9.0%. A hawkish NBH should support HUF gains in the near-term. EURHUF was down nearly 1% after the strong wage report.

Malaysia The ruling Barisan Nasional coalition will hold an emergency meeting at 0630GMT on Thursday. The meeting came after its coalition partner Sabah Progressive Party (SAPP), which has two seats in the 222-member House of Representatives, announced on Wednesday that it will support a no-confidence motion against PM Badawi when the Parliament sits on June 23. While the SAPP and opposition parties (with 84 seats in total) will unlikely garner enough support for the motion, the censure debate will likely heighten concerns over the stability of the 14-party coalition.

Thailand The IMF concluded its Article IV consultation with Thailand on Wednesday. In the statement, the IMF noted the resilience of the economy against the background of political uncertainties and global financial markets volatility. Economic fundamentals remain favorable, and growth should return to potential of around 6% in the medium term. Near term, GDP growth is projected to accelerate to 5.3% in 2008, with inflation edging higher to 3.5% from 2.3% in 2007. However, the projections are likely outdated, as the review was completed on May 21, before the sharp rise in June CPI to 7.6% yoy. On monetary policy, the Fund agreed that a neutral policy stance remains appropriate, but recommended that the BoT review its policy stance on an ongoing basis in response to evolving macroeconomic conditions. Maintaining the credibility of the inflation-targeting framework should remain a “high priority”. On exchange rate, the IMF opined that the managed float exchange rate regime has served the economy well, but FX interventions should be limited to smoothing out FX volatility.

Brazil In a television interview Wednesday, Central Bank of Brazil (BCB) President Meirelles reiterated that BCB was “ready to act” to contain inflation. He noted that high domestic demand growth increased upside inflation risks and that the central bank would have to slow demand to balance the growth/inflation equation. These comments reiterate the hawkish, yet controlled and consistent rhetoric regarding monetary policy and inflation. Remarks were essentially in line with previous statements by Meirelles, preserving a consistent and steady approach to monetary management. He noted that BCC was “alert, but not surprised by inflation levels” and that rate increases were already taking effect on the economy. He added that markets considered the possibility of above target inflation by year end a “low-probability event”. Inflation continues to accelerate as evidenced by the most recent inflation readings. Market believes BCB will preserve its proactive approach to addressing inflation and hike another 50bp at the upcoming July 23 meeting. FIPE CPI remains at high levels (1.26% mom in June from 1.23% in May) and IGP-10 accelerated to 12.71% in June from 10.71% in May. The combination of a strong economy and high interest rates is likely to continue to push USD/BRL towards a test of strong support at 1.60 in coming days.

Mexico President Calderon announced a price control program that will freeze the prices of 150 items through the end of the year. The timing of the announcement was interesting as it comes a few days before the Banxico monetary policy meeting on Friday June 20 at which some market participants are now expecting a 25bp hike amid continued upward price pressures. USD/MXN had traded below 10.28 on the back of rate hike expectations, but the announcement of price controls pushed the currency pair back up above 10.31. USD/MXN is likely to continue to trade towards 10.30 leading into Friday’s decision, but an announcement of unchanged rates (as we expect) may lead USD/MXN to bounce back towards 10.35.