Forex Investment and Currency Trading

The USD gained a stunning 5.3% versus the Colombian peso (COP) last Thursday, largely on the heels of remarks by President Uribe that the government is working to stem the gains in the COP and create a more ‘competitive’ peso. The movement of the currency reflects more than Presidential rhetoric and the drop in the S&P alone. The Central Bank moved its originally scheduled monetary policy meeting from this Friday, June 27 to the prior Friday, June 20. At the meeting last Friday, the Central Bank maintained the policy rate at 9.75% relative to mixed expectations regarding the potential for a hike. The urgency to move a meeting early with inflation running just below 7% relative to a target of 3.5%-4.5%, would suggest a move. The market was disappointed, as the Central Bank is maintaining a more dovish stance in the face higher inflation. Since Friday, June 20, USD/COP is nearly 17%. The pair broke substantial trend resistance at 1,905 and the government will work to ‘stem’ the gains in COP. However, Colombia remains an exporter of oil and energy, so USD/COP will likely drift lower in the near-term.

On Tuesday the Reserve Bank of India (RBI) raised rates inter-meeting for the second time this month on the heels of a threatening push higher in inflation. The wholesale price index (WPI) reached a 13-year high of 11.42% yoy as reported this week. In an unprecedented move, the RBI moved the repo rate up to 8.5% from 8.0% and raised the cash reserve ratio (CRR) by 50bp to 8.75%. The inter-meeting tightening of the repo rate came as a surprise. Overall, the back-to-back inter-meeting rate hikes (the repo rate was raised 25bp only on July 11) reinforces recently hawkish rhetoric by RBI Governor Reddy and represents a strong signal that the authorities are prepared to back words with action. A substantially more hawkish stance suggests USD/INR will likely shift to a new and lower trading range. Market expects USD/INR to trade in a 42.00-42.50 range near term. Downside may be limited on terms of trade deterioration and market uncertainty over RBI’s next policy move. Nearterm support exists at 42.272 (23.6% retracement of spike in the pair since the US financial crisis) and before 41.7465 (55d ma). With the CRR hikes, interbank liquidity should remain restrictive into July; overnight interest rate will likely stay at the top end of the 6%-8.5% rate corridor in the coming weeks.

The central bank of Hungary (NBH) caught markets by surprise on Monday by keeping rates on hold. All 20 economists polled by Bloomberg had expected a 25bp hike given strong inflationary pressures and a series of hawkish statements from Governor Simor. The Governor mentioned after the announcement that monetary conditions were already quite tight due to recent HUF strength (EUR/HUF down 6% ytd). Continued inflation pressures and a likely hike by the ECB in July lead us to expect one more NBH hike.