Forex Investment and Currency Trading

Thailand The BoT released its quarterly Inflation Report on Monday. The Central Bank raised the full year CPI forecast sharply. The revised forecast implies inflation will likely reach double-digit levels in 3Q08. The core inflation was also raised with annual core inflation readings expected to stay above the target zone in the near term. Growth forecast was lowered due to slower than expected recovery in domestic demand. Overall, the forecast revisions were in line with market expectation of a significantly higher CPI trajectory and moderately lower growth in 2008. Substantial upward revisions to 2009 core and headline CPI point to risks of a faster-than-expected pace of monetary tightening in 2H08.

China In its 2Q08 monetary policy report, the PBoC maintained that containing price rises and curbing inflation remain high on its policy agenda, but it omitted the reference to tight policy stance. Instead, the central bank stated that it will work to “create a good monetary environment for steady and rapid economic growth”. On the CNY, the PBoC reiterated that it will keep the CNY basically stable around reasonable levels, but dropped the earlier reference to bolstering the role of market forces in setting the exchange rate and increasing exchange rate flexibility. Separately, the Communist Party’s top decision making body the Politburo indicated that China’s top leaders are mostly concerned about international and domestic factors that affect China’s growth and inflation outlook. However, it failed to provide a clear indication of policy direction for 2H08, apart from stating that it will treat ensuring steady and fast economic growth and controlling excessively rapid price increases as the key tasks of its macro policies.

India The RBI is expected to raise CRR by another 25-50bp to maintain restrictive liquidity conditions and signal its resolve to anchor inflation expectations. The rupee will likely come under pressure from the July policy decision, but market expects USD/INR upside to be limited on recent improvements in the inflation outlook and political stability.

South Korea Current account posted the first surplus in 7 months on improvement in the trade balance. The BoK expects July current account to remain in surplus due to lower oil and commodity prices. Separately, the June BoP data showed a substantial rise in net FX borrowing. The increase came after the MoSF eased regulations to allow branches of foreign banks to increase foreign borrowing from parent banks.

Malaysia The BNM delivered a surprise by keeping the overnight policy rate unchanged late on Friday July 25. While the central bank acknowledged that both risks to higher inflation and slower growth have increased considerably, it also opined that the recent structural changes to fuel prices are expected to have a deflationary effect on the economy in 2H08 and into the early part of 2009. More importantly, it views avoiding fundamental economic slowdown in Malaysia as the immediate concern. With the key shift in monetary policy focus from inflation fighting to supporting growth, market now expects the BNM to hold the OPR unchanged at 3.50% for the rest of the year. Accordingly, the impetus to use MYR appreciation as an inflation fighting tool has diminished, though the central bank is expected to continue to ward off significant volatility. While USD/MYR broke above the 200-day moving average at 3.2538 during Monday Asian session, market expects the recent peak at 3.2855 to be a firm resistance.

Colombia Friday evening, the Colombian Central Bank (BanRep) hiked the one-day minimum repo rate by 25bp to 10.00%. Of the economists surveyed by Bloomberg, roughly half were expecting a 25bp hike while the rest were expecting no change. BanRep reiterated its concern with moderating domestic demand and production, but noted that given the recent jump in inflation and inflation expectations, a hike was warranted in order to anchor inflation expectations. The central bank noted that future monetary policy would depend on the development of upcoming economic data.

Mexico Friday afternoon, the central bank announced it would be suspending completely its planned USD sale program of $40mn per day that was scheduled to begin on August 1. Although the amount is tiny compared to daily USD/MXN spot trading volume of more than $14bn, the move sends a strong signal that the government is not comfortable with the current exchange rate and represents a potential policy shift. Recent MXN strength had likely been driven by investors in search of “carry”, as well as those targeting key option barrier levels at 10.10 and 10.00. The move on Friday is likely to squeeze out these short positions and given that fundamental factors (mainly, declining oil prices and uncertain prospects for the US economy) argue for a weaker MXN, USD/MXN is likely to drift higher in coming days.

Commodities
Energy The energy complex ended last week lower for the third time in a row. The price of crude oil remained soft on Friday amid signs of greater OPEC production in July and weaker fuel demand from the US and Asia. The prompt month WTI contract, once again, tested its 100-day moving average (at $122.68) but was unable to establish a close below that next key level of support. The September contract erased Thursday’s gain and ended 1.8% lower at $123.26. Products declined as well, and settled at their lowest points since early May. Heating oil slid while gasoline fell. Data released late on Friday showed that as of July 22, non-commercial traders reversed net long positions in light sweet crude oil futures to net short 3,640 contracts. This is the first time since February 2007 that the net position has been short. August natural gas declined for the fifth consecutive day on Friday.