Forex Investment and Currency Trading

Russia The CBR allow the trading band of the ruble against the USD-EUR basket to widen on Tuesday morning, implying a 1% devaluation. Given the sharp drop in oil prices and large capital outflows, the currency had come under strong pressure, forcing the CBR into large-scale interventions. Nevertheless, the move was a surprise to some extent, given that cash flows going forward would have allowed the CBR to defend the ruble well into 2009. However, the decision is good news for policymaking in Russia because it likely implies a further step towards a floating exchange rate that would allow for improved functioning of monetary policy, including the introduction of inflation targeting, possibly in 2010. However, analysts regard the current NDF pricing of 20% devaluation over 12 months as excessive in a scenario of gradually improving risk appetite and a further easing of tensions in the NDF markets more generally.

Hungary Disinflation continues but monetary policy stance will likely stay tight for the rest of the year. CPI inflation slowed more than expected, to a 2-year low of 5.1% yoy in October from 5.7% (consensus: 5.2%). The core rate also eased to 4.6% yoy from 5.0%. However, in view of the IMF program and the upside risks to inflation from FX pass-through, the NBH will likely stay firmly on hold in the months ahead. Market sees the scope for a 50bp rate cut in January 2009.

Czech Rep The strong rebound in September output does not change the bleak outlook for the Czech industries amid a recession in the Eurozone. Industrial production was well above expectations, rising by +9.6% yoy from -2.6% (consensus:+5.8%), partly due to working day effects. Manufacturing output rose by +10.7% yoy from -2.0%, with a surge in petroleum products by 105.4% yoy. The somewhat positive data may keep the CNB on hold this year after the aggressive 75-bp rate cut earlier this month. However, the growth outlook for the Czech Rep remains bleak given its large exposure to the Eurozone’s import demand, suggesting further easing in 2009, to 2% by 2Q.

Romania CPI inflation unexpectedly advanced to 7.4% yoy from 7.3% (consensus: 7.0%). The price pressures from domestic demand remain strong, with service prices up +2.2% mom. The central bank will likely want to wait and see further developments especially the fiscal policy stance after the Nov-30 elections, before cutting rates. As inflation and economic activity slows further into 2009, and conditional on some calm in the global markets, market expects a 50bp rate cut in January.

China October CPI slowed to 4% yoy from 4.6% in September and lower than consensus forecast of 4.2%. Rise in food prices slowed to 8.5% yoy from 9.7% in September and even the slowdown in non-food CPI growth appeared to be gaining traction. January to October CPI averaged 6.7%, well below the peak at 8.7% in February 2008. The slide in prices will likely persist going into next year, allowing the authorities to stay on an expansionary fiscal and looser monetary policy path. On the other hand, October trade balance surged to record surplus of $35.2 billion from $29.4 billion in September. Slide in import growth provided a greater offset over export growth moderation, in part due to lower commodities prices. The former disappointed with 15.6% yoy growth vs 21.3% in September while the latter slowed to 19.2% from 21.5% in September. Nevertheless, the latest data also underscored the risk that slower import growth may eventually translate to export growth slowdown in coming months. Meanwhile, newswire released some sketchy details on China’s spending allocation of its CNY4tn fiscal stimulus and that the bulk will be spent on transport infrastructure is hardly any surprise. The Ministry of Transport has committed to fixed asset investment of CNY1tn in each of 2009 and 2010 to expand road and airport infrastructure. The transport sector will have completed investment of CNY800bn this year, including CNY300bn in the fourth quarter. The other sector that will be a key beneficiary of the stimulus package is the real estate sector and sentiment for property counters in the domestic equity markets received a boost after Premier Wen said the government would seek to correctly guide and adjust the real estate market, which he described as ‘crucially important’ for the stability of the financial sector.

South Korea The Korean Customs Services (KCS) said exports were down 26% yoy in the first 10 days of November, with imports posting a 6% drop in the same period. While official KCS estimates for the month will only be released on December 1, the weak preliminary numbers point to a sharp falloff in external demand that will likely fuel concerns over rising downside risk to growth. Separately, the FSS urged banks to raise fresh capital after reporting a quarterly decline in capital adequacy ratio to a 7½-year low of 10.79% at end 3Q08, down from 11.36% in 2Q08. The decline was due to investment losses and increase holding in risky assets, the FSS said. Bad debt ratio edged up to 0.81% from 0.7% in the same period. The BoK’s weekly USD swap auction for $2bn was fully subscribed at average swap rate of -13.24, down from -11.93 from the previous week, suggesting USD funding remains restrictive.

Brazil The weekly central bank survey showed inflation expectations adjusted upward once again with IPCA expected to end the year at 6.40% (from 6.31% previously) and end 2009 at 5.20% from 5.06% previously. Surveyed economists expect COPOM to remain on hold at the December 10 meeting and cut rates by 50bp in 2009. IGP-M inflation increased 0.80%mom, slightly higher than expectations, bringing the annual increase to 12.34%.

Commodities
Energy December crude oil rose above $65/barrel Monday morning, amid speculation that a Chinese stimulus package would help strengthen the economy and increase oil demand. At the same time, Saudi Aramco announced it will cut crude supplies to Asia in December for the first time in at least a year as demand for naphtha and diesel decline. Prompt month WTI ended just 2.2% higher, at $62.41, on thoughts it will take months for China’s stimulus package to affect oil demand. Gasoline and heating oil followed crude’s moves and each rose 1.4%, to $1.3679 and $2.0056, respectively.