Macro Commodities Forex Rates Equity Credit Derivatives 27 August 2010 27 August 2010 27 August 2010 27 August 2010 Fixed Income & Forex Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation Emerging Markets Weekly www.sgresearch.com Key questions driving EMEA FX fundamentals ■ Editorial A look at macro-fundamentals driving EMEA FX suggests that our preference lies with countries exhibiting a stronger growth performance, mounting inflation risks, and possibly a credible central bank. This is particularly the case for PLN. In Russia, where we also hold a bullish view on the FX, growth is viewed as a key driver, along with the strong external sector, the low level of debt, and the more hawkish central bank. In contrast, the widening of the current account deficits in Turkey and South Africa mirrors our more cautious view on the FX. In addition, so far we have not been impressed by South Africas economic activity performance. ■ FX trade summary Our trade recommendations have recorded mixed performances since our last publication, as EM FX has lacked a clear trend. In the near term, G10 developments will be key to get a sense of the global risk backdrop. We reiterated our recommendation to go long RUB versus the basket at 34.65 earlier this week. We think that the RUB may return to the 34 area when the risk environment normalises. We exited our short BRL-MXN recommendation, as we hit our stop of 7.30 earlier this week. This mainly reflected the poor performance of the MXN. However, we think that the recent MXN sell-off above 13.00 vs USD is overdone, and we would expect a bounce back, as long as the newsflow from the US does not deteriorate further. ■ FX technical analysis EUR/CZK - We expect the 25.02 pullback level or, at most, the Fibonacci retracement at 25.17 to cap the upside until EUR/CZK resumes its LT downtrend towards 23.70 and the July 2008 low of 22.89. CHF/HUF Any down-move from the 217.95/218.20 resistance zone would be an ST corrective move before CHF/HUF rises towards 230.00. Most PMIs remain above 50 Most PMIs remain above 50 Most PMIs remain above 50 Most PMIs remain above 50 30 35 40 45 50 55 60 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Poland Hungary Czech Rep Russia South Africa Source: SG Cross Asset Research, Reuters Government debt Government debt Government debt Government debt ratios ratios ratios ratios 10 20 30 40 50 60 70 80 90 Israel Hungary Poland Turkey Czech Rep EMEA average South Africa Russia % of GDP Notes: average is GDP weighted; IMF forecasts for 2010 Source: SG Cross Asset Research, IMF Contents Contents Contents Contents View and Trade Summary View and Trade Summary View and Trade Summary View and Trade Summary EM Research Team EM Research Team EM Research Team EM Research Team View and Trade Summary 2 19 19 19 19/0 /0 /0 /08/10 /10 /10 /10 26 26 26 26/0 /0 /0 /08/10 /10 /10 /10 Coming week Coming week Coming week Coming week Co Co Co Coming month ming month ming month ming month Benoit Anne Benoit Anne Benoit Anne Benoit Anne (44) 20 7676 7622 Weekly Calendar 3 EUR/PLN EUR/PLN EUR/PLN EUR/PLN 3.9650 3.9830 Gaëlle Blanchard Gaëlle Blanchard Gaëlle Blanchard Gaëlle Blanchard (44) 20 7676 7439 Central Bank Watch 6 EUR/HUF EUR/HUF EUR/HUF EUR/HUF 278.17 283.74 Murat Toprak Murat Toprak Murat Toprak Murat Toprak (44) 20 7676 7491 Editorial 7 EUR/CZK EUR/CZK EUR/CZK EUR/CZK 24.857 24.829 Esther Law Esther Law Esther Law Esther Law (44) 20 7676 7396 FX Strategy 11 USD/TRY USD/TRY USD/TRY USD/TRY 1.5109 1.5230 Jan Vejmelek Jan Vejmelek Jan Vejmelek Jan Vejmelek (420) 2 2200 8568 Technical Analysis 13 USD/RUB USD/RUB USD/RUB USD/RUB 30.508 30.766 Anne Anne Anne Anne-Francoise Blüher Francoise Blüher Francoise Blüher Francoise Blüher (420) 2 2200 8524 Issuance Calendar 14 USD/BRL USD/BRL USD/BRL USD/BRL 1.7555 1.7619 Jiri Skop Jiri Skop Jiri Skop Jiri Skop (420) 2 2200 8569 Rates Quantsight 15 USD/MXN USD/MXN USD/MXN USD/MXN 12.728 12.987 Alejandro Cuadrado Alejandro Cuadrado Alejandro Cuadrado Alejandro Cuadrado (1) 212 278 7313 Economic Data Preview 17 PLN 5Y PLN 5Y PLN 5Y PLN 5Y 4.83 4.87 Jaroslaw Janecki Jaroslaw Janecki Jaroslaw Janecki Jaroslaw Janecki (48) 2 2528 4162 HUF 5Y HUF 5Y HUF 5Y HUF 5Y 6.15 6.49 CZK 5Y CZK 5Y CZK 5Y CZK 5Y 2.12 1.96
21
Embed
Key questions driving EMEA FX fundamentals€¦ · Macro Commodities Forex Rates Equity Credit Derivatives 27 August 2010 Fixed Income & Forex ... (44) 20 7676 7439 Gaëlle BlanchardGaëlle
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
27 August 201027 August 201027 August 201027 August 2010
Fixed Income & Forex Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation
Emerging Markets Weekly
www.sgresearch.com
Key questions driving EMEA FX fundamentals
n Editorial
A look at macro-fundamentals driving EMEA FX suggests that our
preference lies with countries exhibiting a stronger growth
performance, mounting inflation risks, and possibly a credible central
bank. This is particularly the case for PLN. In Russia, where we also
hold a bullish view on the FX, growth is viewed as a key driver, along
with the strong external sector, the low level of debt, and the more
hawkish central bank. In contrast, the widening of the current account
deficits in Turkey and South Africa mirrors our more cautious view on
the FX. In addition, so far we have not been impressed by South
Africa�s economic activity performance.
n FX trade summary
Our trade recommendations have recorded mixed performances since
our last publication, as EM FX has lacked a clear trend. In the near
term, G10 developments will be key to get a sense of the global risk
backdrop. We reiterated our recommendation to go long RUB versus
the basket at 34.65 earlier this week. We think that the RUB may return
to the 34 area when the risk environment normalises. We exited our
short BRL-MXN recommendation, as we hit our stop of 7.30 earlier this
week. This mainly reflected the poor performance of the MXN.
However, we think that the recent MXN sell-off above 13.00 vs USD is
overdone, and we would expect a bounce back, as long as the
newsflow from the US does not deteriorate further.
n FX technical analysis
EUR/CZK - We expect the 25.02 pullback level � or, at most, the
Fibonacci retracement at 25.17 � to cap the upside until EUR/CZK
resumes its LT downtrend towards 23.70 and the July 2008 low of
22.89. CHF/HUF � Any down-move from the 217.95/218.20 resistance
zone would be an ST corrective move before CHF/HUF rises towards
Government debtGovernment debtGovernment debtGovernment debt ratiosratiosratiosratios
10
20
30
40
50
60
70
80
90
Israel Hungary Poland Turkey Czech Rep
EMEA average
South Africa
Russia
% of GDP
Notes: average is GDP weighted; IMF forecasts for 2010 Source: SG Cross Asset Research, IMF
ContentsContentsContentsContents View and Trade SummaryView and Trade SummaryView and Trade SummaryView and Trade Summary EM Research TeamEM Research TeamEM Research TeamEM Research Team
FX Views and RecommendationsFX Views and RecommendationsFX Views and RecommendationsFX Views and Recommendations
n Our trade recommendations have recorded mixed performances since our last publication, as EM FX has lacked a clear trend. In the near term, G10 developments will be key to get a sense of the global risk backdrop. We reiterated our recommendation to go long RUB versus the basket at 34.65 earlier this week. We think that the RUB may return to the 34 area when the risk environment normalises. The main risk to our bullish call on the RUB scenario is lower oil prices triggered by a reassessment of global economic growth prospects. Should the depreciation risks build up, we think the central bank will likely stand ready to smooth the volatility.
n We exited our short BRL-MXN recommendation, as we hit our stop of 7.30 earlier this week. This mainly reflected the poor performance of the MXN, as the BRL has been relatively resilient in the face of a challenging market environment. However, we think that the recent MXN sell-off above 13.00 vs USD is overdone, and we would expect a bounce back,
as long as the newsflow from the US does not deteriorate further.
FX spot strategies
CrossCrossCrossCross Posi t ionPosi t ionPosi t ionPosi t ion DateDateDateDate En t ryEn t ryEn t ryEn t ry Targe tTarge tTarge tTarge t S topS topS topS top Cu rre n tCu rre n tCu rre n tCu rre n t P /L we e k *P /L we e k *P /L we e k *P /L we e k * P /L to talP /L to talP /L to talP /L to tal
New posi t ions th is we e kNew posi t ions th is we e kNew posi t ions th is we e kNew posi t ions th is we e k
O ld posi t ionsO ld posi t ionsO ld posi t ionsO ld posi t ions
USD/KRWUSD/KRWUSD/KRWUSD/KRW short 28-Jul 1184 1145 1210 1194 -0.62% -0.87%
Events and dataEvents and dataEvents and dataEvents and data EMEAEMEAEMEAEMEA
DuriDuriDuriDuring the weekng the weekng the weekng the week PeriodPeriodPeriodPeriod PreviousPreviousPreviousPrevious SG ForecastSG ForecastSG ForecastSG Forecast ConsensusConsensusConsensusConsensus
Russia Consumer Prices (MoM) AUG 0.40% na na
Consumer Prices (YoY) AUG 5.50% na na Consumer Price Index Core MoM AUG 0.40% na na
South Africa SACCI Business Confidence AUG 84.3 na na
Egypt Unemployment Rate 2Q 9.10% na na Israel Unemployment Rate 2Q 7.20% na na
6:00 South Africa Private Sector Credit (YoY) JUL 0.92% na na 6:00
M3 Money Supply (YoY) JUL 2.41% na na
7:00 Hungary Producer Prices (YoY) JUL 6.90% na na 7:00
Producer Prices (MoM) JUL 1.40% na na
7:00 Turkey Trade Balance JUL -5.6B na na 8:00 Czech Republic Money Supply (YoY) JUL 5.20% na na 12:00 South Africa Trade Balance (Rand) JUL 5.6B na na
Czech Republic Budget Balance (Koruna) AUG -69.0B na na
Hungary PMI (SA) AUG 53.5 na na
4:00 Russia Manufacturing PMI AUG 7:00 Hungary Trade Balance (Mln Euros) JUN F 566.9M na na
7:00 Poland August Manufacturing PMI AUG na na na 7:00 Romania GDP (Total) 2Q F -0.50% na na 7:00 Turkey Manufacturing PMI AUG na na na 7:30 Czech Republic Manufacturing PMI AUG na na na 9:00 South Africa Kagiso PMI AUG 49.5 na na
4:00 Russia Services PMI AUG 7:00 Czech Republic Avg Real Wage (YoY) 2Q 1.50% na na 7:00 Romania Retail Sales (MoM) JUL 3.10% na na 7:00 Retail Sales (YoY) JUL 3.20% na na 7:00 Turkey Producer Prices (MoM) AUG -0.16% na na 7:00
Producer Prices (YoY) AUG 8.24% na na
7:00 Consumer Prices (YoY) AUG 7.58% na na 7:00 Consumer Prices (MoM) AUG -0.48% na na
12:00 Brazil Industrial Production sa (MoM) JUL -1.00% na 0.50% 12:00
Industrial Production YoY JUL 11.10% 9.60% 9.50%
13:00 Chile Unemployment Rate JUL 8.50% 8.30% 8.60% 16:00 Colombia Unemployment Rate JUL 12.80% na 12.50% 19:00 Argentina Construction Activity (YoY) JUL 10.10% na na
12:00 Brazil GDP (IBGE) 4Qtrs Accumulated 2Q 2.40% na na 12:00 GDP (IBGE) QoQ 2Q 2.70% 0.80% 0.70% 12:00
GDP (IBGE) YoY 2Q 9.00% 8.1% 8.00%
14:00 Mexico Consumer Confidence AUG 87.4 na na 17:00
IMEF Non Manufacturing Index AUG 53.7 na na
17:00 IMEF Manufacturing Index AUG 53.5 na na 21:00 Colombia Producer Price Index (YoY) AUG 1.81% na na 21:00 Producer Price Index (MoM) AUG -0.61% na na
During the weekDuring the weekDuring the weekDuring the week PeriodPeriodPeriodPeriod PreviousPreviousPreviousPrevious SG ForecastSG ForecastSG ForecastSG Forecast ConsensusConsensusConsensusConsensus
Indonesia Danareksa Consumer Confidence AUG 85.6 na na
South Korea Ext Trade - Balance in US$ Mln AUG 5674 2613 2613
0:00 South Korea HSBC Manufacturing PMI AUG 53.2 na na 1:00 China PMI Manufacturing AUG 51.2 52.0 51.6 2:00 Taiwan HSBC Taiwan Manufacturing PMI AUG 50.5 na na 2:30 China HSBC Manufacturing PMI AUG 49.4 50.5 na 4:00 Indonesia Total Trade Balance JUL $580M na $1180M 4:00 Core Inflation (YoY) AUG 4.15% na 4.10% 4:00
Inflation NSA (MoM) AUG 1.57% na 1.00%
4:00
Inflation (YoY) AUG 6.22% na 6.70% 7:00 Thailand Core CPI (YoY) AUG 1.20% na 1.20% 7:00
Consumer Price Index NSA (MoM) AUG 0.20% na na
7:00 Consumer Price Index (YoY) AUG 3.40% na 3.20%
Malaysia Current Account Balance 2Q 30.4B na na 10:00
Overnight Rate Sep.02 2.75% na na
10:01
Trade Balance JUL 6.04B na na 13:30 Singapore Electronics Sector Index AUG 55.7 na 52.5 13:30 Purchasing Managers Index AUG 52.2 na 51 23:00 South Korea GDP at Constant Price (YoY) 2Q F 7.80% na na 23:00 GDP at Constant Price (QoQ) 2Q F 1.80% na na
EditorialEditorialEditorialEditorial –––– KeKeKeKey questions driving y questions driving y questions driving y questions driving EMEA FX fundamentals EMEA FX fundamentals EMEA FX fundamentals EMEA FX fundamentals
� Favouring strong growth, mounting inflation risksFavouring strong growth, mounting inflation risksFavouring strong growth, mounting inflation risksFavouring strong growth, mounting inflation risks and and and and credible central bankscredible central bankscredible central bankscredible central banks
A look at macro-fundamentals driving EMEA FX suggests that our preference lies with countries exhibiting a stronger growth performance, mounting inflation risks, and possibly a credible central bank. This is particularly the case for PLN. In Russia, where we also hold a bullish view on the FX, growth is viewed as a key driver, along with the strong external sector, the low level of debt, and the more hawkish central bank. In contrast, the widening of the current account deficits in Turkey and South Africa mirrors our more cautious view on the FX. In addition, so far we have not been impressed by South Africa’s economic activity performance.
� Is EMEA on the way to growth recovery?Is EMEA on the way to growth recovery?Is EMEA on the way to growth recovery?Is EMEA on the way to growth recovery?
EMEA faces multiEMEA faces multiEMEA faces multiEMEA faces multi----speed economic recoveries. speed economic recoveries. speed economic recoveries. speed economic recoveries. Most EMEA countries are enjoying a strong industrial recovery after the sharp drop in activity in 2008-2009. Russia and Turkey have recorded V-shape recoveries and the pace of manufacturing output growth is now slowing to more sustainable levels in both countries. Russia’s performance will also be undermined by the impact of the drought (we expect it to withdraw 0.5 point of GDP growth this year). South Africa is lagging the move with manufacturing output growth below 10% yoy despite a very large output contraction in 2009. The inventory cycle and then the recovery in world trade led the rebound.
The key question is whether this export-led recovery is – or will be shortly - relayed by domestic demand, as concerns are growing about the outlook for economic growth in the US and EU. The very open economies (the Czech Republic, Israel and Hungary to a lesser extent) would be the most affected by a slowdown in external demand. Poland, which does not rely as much on exports, would be less affected. Most EMEA countries have very close trade links with the eurozone, with the Czech Republic the most exposed (67%
of its exports go to the euro area) and South Africa and Israel the least exposed. Concerning PMIs, the outlook for industrial activity remains positive despite the fading momentum. Furthermore, order books are still strengthening in all countries, while recent German data and leading indicators have been very strong. Only South Africa’s PMI stands below 50, raising concerns about the sustainability of the recovery, especially as the industrial sector has to cope with a strong currency.
The recovery is clearly more broad-based in Turkey, Israel and Russia, where domestic demands have been strengthening significantly. In Poland, private consumption has been resilient during the crisis but there is no strong momentum, while investment has yet to recover. Domestic demand remains fragile or even weak in other countries. Tight fiscal policies and credit conditions as well as a weaker HUF (meaning increased burden for households who borrowed in FX) will continue to weigh on consumption in Hungary. Fiscal policy will also weigh on domestic demand in the Czech Republic next year, while it will remain more supportive in Poland and Russia (and possibly Turkey).
Overall, from a macroeconomic standpoint, we expect Israel, Poland, Turkey and Russia to stand out. Hungary and South Africa should continue to lag.
� Is there an inflation risk emerging in EMEA? Is there an inflation risk emerging in EMEA? Is there an inflation risk emerging in EMEA? Is there an inflation risk emerging in EMEA?
ThThThThe answer is mixed.e answer is mixed.e answer is mixed.e answer is mixed. In a number of countries, there are indeed signs that inflationary pressures are building up. This is the case in Poland, Russia and Israel. When this mounting risk coincides with the presence of a credible central bank, we believe this is supportive for the currency. In other parts of EMEA, inflation risks remain muted, including in South Africa, Turkey, the Czech Republic and Hungary.
In Poland, we expect inflation to rise further in the second half of the year due to higher food prices (flooding and droughts), and the ever-longer time for delivery in industry - a characteristic phenomenon of an economy which is speeding up. Also, the second administrated price hikes (probably in December) constitute some additional risk that inflation will be well above the central bank target (2.5%) at the end of this year. We expect inflation to reach around 2.8-3.0% by the end of 2010, which will likely prompt the central bank to be pro-active on the policy front. We indeed call for a NBP hike as soon as October, which will provide support to the PLN. In Russia, we also think that the disinflation process will end soon, as macroeconomic conditions are changing: acceleration in money supply growth, easing credit conditions, growing loan books, rising wages and a closing output gap all point to higher CPI growth. This will be exacerbated by a one-off factor, the drought-related increase in food prices. Our seasonally-adjusted ex-food and gasoline inflation index shows acceleration since March on a mom basis. We expect the increase in yoy headline CPI to start showing in October/November when favourable seasonality fades away.
Graph 4.Graph 4.Graph 4.Graph 4. Inflation risks mounting in PLN, RUB and ILSInflation risks mounting in PLN, RUB and ILSInflation risks mounting in PLN, RUB and ILSInflation risks mounting in PLN, RUB and ILS
4
6
8
10
12
14
16
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Poland ( LHS)
Israel (LHS)
Russia (RHS)
Source: SG Cross Asset Research, Bloomberg
Finally in Israel, inflationary risks are also rising. GDP growth in Q2 was stronger than expected at 4.7% qoq annualised after 3.4% in Q1, but Q3 may be less buoyant as export growth is fading. The outlook for domestic demand is still positive, though, as the labour market continues to improve (employment and wages are growing). The central bank sees the fast rise in house
prices as the main inflationary risk, although it does not consider that they are diverging from fundamentals yet. Another risk factor is the government's plan to increase some indirect taxes. CPI growth fell to 1.8% yoy in July from 2.4%, but the central bank's August survey of inflation expectations showed that the 12-month inflation forecast rose to 3.2% from 3% in July, above the upper limit of the inflation target range.
Elsewhere, inflation does not constitute a major macro issue at this stage. In South Africa, the economic recovery has so far not been strong enough to fuel inflationary pressures, and the ZAR's strengthening trend has helped contain prices. The main upside risk for inflation comes from wage negotiations, but this is not the prevailing factor at this time. In Turkey, the central bank recently published a relatively dovish inflation report, which suggests that inflation risks are likely to remain measured going forward. We broadly agree with this assessment but also recognize that a further pickup of domestic demand may alter the inflation outlook.
We also think that the inflation risks are going to stay moderate in the Czech Republic, even though the inflation trajectory is on an upward trend. Overall, during the second half of the year, inflation should gradually grow towards the CNB target of 2% and might even go above it in Q4. Overall, we expect inflation to reach 1.5% this year and 2.4% in 2011, which will trigger a relatively slow policy shift on the part of the central bank. In Hungary, while the central bank recently revised its inflation forecast upwards, the profile still points to a declining trend. In addition, the risk factors for the headline CPI mainly relate to possible indirect tax hikes or an increase in administered prices. The broad domestic demand picture does not indicate any major inflation risk at this stage, although the persistent weakness of the HUF may somewhat alter that view.
Graph5Graph5Graph5Graph5.... Moderate inflation risks in TRY, ZAR, and CZKModerate inflation risks in TRY, ZAR, and CZKModerate inflation risks in TRY, ZAR, and CZKModerate inflation risks in TRY, ZAR, and CZK
External vulnerabilities have decreased but imbalances External vulnerabilities have decreased but imbalances External vulnerabilities have decreased but imbalances External vulnerabilities have decreased but imbalances could quickly recould quickly recould quickly recould quickly re----emerge emerge emerge emerge The crisis has triggered a massive adjustment of the current account balances in most countries, as the contraction in imports generally surpassed the drop in exports. Current account deficits
shrunk the most in Hungary and in Turkey (see chart below), reducing these countries’ external vulnerability. The trend is turning around again though, especially in Turkey where the economic recovery is led by domestic demand. Policymakers will have to act to avoid the re-emergence of large and unsustainable imbalances, especially in a volatile global market environment. The financing of the deficit could be more difficult for some countries as direct investment is not recovering from the crisis yet and portfolio investment is likely to remain cautious and driven by the differentiation theme. In this context, the most vulnerable countries are Hungary (high public and external debts), Turkey (fast widening current account deficit and uncertainty regarding fiscal policy) and South Africa (financing of the current account deficit highly dependent on the volatile portfolio flows).
Graph6Graph6Graph6Graph6.... The adjustment of current account deficits is overThe adjustment of current account deficits is overThe adjustment of current account deficits is overThe adjustment of current account deficits is over
-8
-6
-4
-2
0
2
4
6
8
SA Hungary Turkey Poland Czech R. Israel Russia
2007
2009
2010
Source: SG Cross Asset Research, IMF
Graph7Graph7Graph7Graph7.... FDI and portfolio flows FDI and portfolio flows FDI and portfolio flows FDI and portfolio flows
-5
0
5
10
15
20
25
30
Hungary Czech Rep SA Turkey Poland
FDI
Portfolio
bn USD, 12-mth accumulation
Source: SG Cross Asset Research, Ecowin
� Is EMEA at risk of a sovereign debtIs EMEA at risk of a sovereign debtIs EMEA at risk of a sovereign debtIs EMEA at risk of a sovereign debt crisis? crisis? crisis? crisis?
We do not think that the size of the government debt is a We do not think that the size of the government debt is a We do not think that the size of the government debt is a We do not think that the size of the government debt is a serious issue for EMEA, with the exception of Hungary.serious issue for EMEA, with the exception of Hungary.serious issue for EMEA, with the exception of Hungary.serious issue for EMEA, with the exception of Hungary. Looking at a GDP-weighted average for the region (based on our seven-country sample), we find that the EMEA government debt ratio stands at only 35% of GDP, which to us points to moderate debt sustainability risks. There are two countries for which the government debt to GDP
ratio hovers around 80%, namely Hungary and Israel. In the case of Israel, the level of debt may be higher than desirable, but we do not have any major concerns about access to financing, given the depth of the local market, and Israel’s status as a safe haven in EM. In contrast, Hungary’s debt level remains a well-documented issue, which deserves to be addressed through a rigorous fiscal adjustment program. The problem for the country is that there are now significant doubts about the fiscal adjustment efforts going forward, following the breakdown of relations with the IMF. Elsewhere, the debt ratio is fairly high in Poland, at about 55% of GDP, but is not considered as alarming. While investors’ focus is clearly on sovereign risks, reflecting the EU periphery issues, overall we believe that the debt picture in EMEA is broadly manageable. Graph8Graph8Graph8Graph8.... Government debt raGovernment debt raGovernment debt raGovernment debt ratiostiostiostios
10
20
30
40
50
60
70
80
90
Israel Hungary Poland Turkey Czech Rep
EMEA average
South Africa
Russia
% of GDP
Notes: average is GDP weighted; IMF forecasts for 2010
Source: SG Cross Asset Research, IMF
� Are EMEA central banks credible? Are EMEA central banks credible? Are EMEA central banks credible? Are EMEA central banks credible?
The picture in terms of central bank credibility is relatively The picture in terms of central bank credibility is relatively The picture in terms of central bank credibility is relatively The picture in terms of central bank credibility is relatively mixed in EMEA.mixed in EMEA.mixed in EMEA.mixed in EMEA. In particular, we have some concerns about the risk of policy errors in South Africa, and, to a lesser extent, in Turkey. In South Africa, the SARB is subject to significant political pressures to modify its mandate towards a more pro-growth agenda. This may hurt the credibility of the inflation-targeting regime in our view. For the time being, there is little concern about inflation risks, but the policy challenge may surface later on when a more solid macro recovery takes hold. In Turkey, the central bank paints a relatively dovish outlook but an overly lax monetary policy, combined with an accommodating fiscal stance, may eventually lead to some macro imbalances.
We are more impressed by the credentials of the National Bank of Poland with regards to its inflation targeting. On this basis, we believe that the NBP will be fairly quick to respond to mounting inflation risks and expect a hike as early as October. In Hungary, the central bank faces severe challenges but has so far done a good job at defending the currency, including the threat of defensive interest-rate hikes. If the CHF-HUF cross spins out of control going forward, an aggressive policy rate move is quite likely, in our view. At this stage, the main factor hurting the authorities' credibility is the lack of policy dialogue between the central bank and the government. We would
also rate the Czech and Israeli central banks as highly credible. In the case of Israel, however, the frequent occurrence of monetary policy surprises is a factor that may weigh somewhat on investor confidence.
We expect strong We expect strong We expect strong We expect strong fundamentals and fundamentals and fundamentals and fundamentals and
prospects of a Q4 rate prospects of a Q4 rate prospects of a Q4 rate prospects of a Q4 rate hike to support the PLNhike to support the PLNhike to support the PLNhike to support the PLN
We wait for better levWe wait for better levWe wait for better levWe wait for better levels els els els to reto reto reto re----enter a long PLN enter a long PLN enter a long PLN enter a long PLN
positionpositionpositionposition
Another volatile week for EUR/PLN, mainly driven by external developments. Softer than expected retail sales had no major impact, and the central bank’s decision to leave its key rate unchanged had been widely expected. The MPC statement did not include key changes from the previous month. It again discussed factors that may fuel inflationary pressures in the medium term as well as the situation of public finances, urging the government to introduce decisive measures to reduce the budget deficit. The MPC expects a rise in inflation in the next few months due to food and energy prices. The 2011 VAT increase should also push CPI growth higher, but the MPC expects the impact to be minor. Overall, the central bank has not turned more hawkish this month, but we still expect a rate hike in Q4 as macro fundamentals are strong. This should continue to support the PLN in the medium term.
The main economic data next week will be Q2 GDP, to be released on Monday. We expect 3.2% yoy growth after 3.0% in Q1, in line with consensus. The manufacturing PMI (on Tuesday) will provide further clues about the outlook for manufacturing activity following a deceleration in industrial output growth in July. Strong data could help push EUR/PLN back down towards 3.95, but global market sentiment remains a key driver. We prefer to wait for better levels to re-enter a long PLN position, as the risk of central bank intervention will increase ahead of 3.85.
TheTheTheThe CZK outperforms its CZK outperforms its CZK outperforms its CZK outperforms its CE peersCE peersCE peersCE peers....
Although tAlthough tAlthough tAlthough the shorthe shorthe shorthe short----term term term term outlook is rather dark for outlook is rather dark for outlook is rather dark for outlook is rather dark for the the the the CZKCZKCZKCZK,,,, the longthe longthe longthe long----term term term term outlook remains rosyoutlook remains rosyoutlook remains rosyoutlook remains rosy....
After hitting its lowest level since November, slightly below EUR/CZK 24.60 at the end of July, the exchange rate corrected modestly during August. It climbed close to the 25.00 level this week, but the CZK still performed significantly better than the HUF or the PLN. The Czech currency is still capped by rather sound fundamentals; very low exchange rate volatility stems from unattractive interest rates.
Based on our NATREX calculations, the CZK is still around 2.5% overvalued, and unfavourable sentiment on global markets should push for an elimination of the gap. However, a more marked move beyond EUR/CZK 25.00 would not be easy from a technical standpoint and is only likely to occur in the event of a sharp increase in risk aversion on global markets. Only global aversion will remain a key short-term determinant as the economic calendar is almost empty for next week.
The absence of macroeconomic imbalances and government efforts to stabilise public finances leads us to the conclusion that the long-term outlook for the Czech crown remains favourable.
HUF weaker despite more HUF weaker despite more HUF weaker despite more HUF weaker despite more hawkish centrahawkish centrahawkish centrahawkish central bankl bankl bankl bank
More currency volatility More currency volatility More currency volatility More currency volatility ahead ahead ahead ahead on the back of on the back of on the back of on the back of
A rate hike is A rate hike is A rate hike is A rate hike is likelylikelylikelylikely if if if if EUR/HUF approaches EUR/HUF approaches EUR/HUF approaches EUR/HUF approaches
300300300300
The HUF weakened this week on the back of renewed concerns about the country’s economic and fiscal situations. The central bank left its key rate unchanged at 5.25% on Monday, but the tone of the statement and press conference were clearly more hawkish. The central bank has now more reasons for concern. The NBH’s new forecasts show that the inflation outlook has significantly deteriorated (2010 was revised down to 4.7% from 4.9% but 2011 was revised up to 3.5% from 3.0% and 2012 up to 3.4% from 2.9%). The central bank also expects the budget deficit to be above the 3.8% target this year and to remain well above 3% in 2012. Despite the NBH’s hawkish tone, the HUF is likely to remain under pressure as the prospects for the country are far from bright.
Furthermore, the economy ministry said this week that the government would not seek a new loan agreement with the IMF when talks restart in autumn. The talks would be just a "regular" country review. “Serious” discussions with the IMF are unlikely before October, as the government will not be willing to talk about fiscal tightening ahead of the local elections.
More currency volatility is likely on the back of fiscal issues and disappointment regarding a new IMF deal. CHF/HUF reached a new historic high just below 220 on Wednesday, and technical analysis suggests it is on an upward trend. Further HUF weakness vs EUR and/or CHF would likely trigger verbal intervention from the central bank. A rate hike is likely if EUR/HUF approaches 300. The outlook remains clouded for the Hungarian currency and we expect EUR/HUF to move back towards 290 in the coming month.
We think that the RUB We think that the RUB We think that the RUB We think that the RUB may return to the 34 area may return to the 34 area may return to the 34 area may return to the 34 area
when the risk when the risk when the risk when the risk environment normalisesenvironment normalisesenvironment normalisesenvironment normalises
The RUB was hit in the first part of the week by risk aversion, lower oil prices and equity markets. We see such upward moves of the basket as an opportunity to re-enter long RUB positions. We think that the RUB may return to the 34 area when the risk environment normalises. Overall, we expect the RUB to strengthen to 33.50 vs the basket by the end of the year, and then to continue appreciating towards 32.00 on a one-year horizon.
The main risk to our bullish call on the RUB scenario is lower oil prices triggered by a reassessment of global economic growth prospects. As investors are taking off risk, the RUB has come under some pressure, but we think that the sell-off will be limited in terms of the basket. Should depreciation risks build up, the central bank will likely stand ready to smooth volatility in our view.
EUR/CZK: EUR/CZK: EUR/CZK: EUR/CZK: ST pause in LT downtrendST pause in LT downtrendST pause in LT downtrendST pause in LT downtrend
���� EUR/CZKEUR/CZKEUR/CZKEUR/CZK ---- We expect the We expect the We expect the We expect the 25.02 pullback 25.02 pullback 25.02 pullback 25.02 pullback levellevellevellevel –––– orororor,,,, at mostat mostat mostat most,,,, the Fibonacci retracement at the Fibonacci retracement at the Fibonacci retracement at the Fibonacci retracement at 25.17 25.17 25.17 25.17 –––– to cap the upside until to cap the upside until to cap the upside until to cap the upside until EUR/CZK EUR/CZK EUR/CZK EUR/CZK resumes its LT resumes its LT resumes its LT resumes its LT downtrend towards downtrend towards downtrend towards downtrend towards 23.7023.7023.7023.70 and and and and the July 2008 low of 22.89.the July 2008 low of 22.89.the July 2008 low of 22.89.the July 2008 low of 22.89.
EUR/CZK has been stable above 24.61 since the beginning of August, consolidating the down-leg which started at 26.06 in early June.
We expect the 25.02 pullback level - or, at most, the 25.17 Fibonacci retracement - to contain any upward attempt until EUR/CZK breaks below 24.61 and resumes its LT downtrend.
24.41 and 23.92 should then be the next major steps on the way to the October 2008 low of 23.70 and the July 2008 low of 22.89.
Written at 8:00am GMT on August 27
3333rdrdrdrd supportsupportsupportsupport 2222ndndndnd supportsupportsupportsupport 1111st st st st supportsupportsupportsupport LastLastLastLast 1111stststst resistanceresistanceresistanceresistance 2222ndndndnd resistanceresistanceresistanceresistance 3333rdrdrdrd resistanceresistanceresistanceresistance
23.92 24.41 24.61 24.76 25.02 25.17 25.27
CHFCHFCHFCHF////HUF: test of intermediate upside targetHUF: test of intermediate upside targetHUF: test of intermediate upside targetHUF: test of intermediate upside target
���� CHF/HUFCHF/HUFCHF/HUFCHF/HUF –––– Any downAny downAny downAny down----move move move move from the 217.95/218.20 from the 217.95/218.20 from the 217.95/218.20 from the 217.95/218.20 resistance zone would be an ST resistance zone would be an ST resistance zone would be an ST resistance zone would be an ST corrective move before CHF/HUF corrective move before CHF/HUF corrective move before CHF/HUF corrective move before CHF/HUF rises towards 230.00.rises towards 230.00.rises towards 230.00.rises towards 230.00.
From an Elliott-wave viewpoint, the rise initiated at 200.35 two weeks ago is probably an impulse, i.e. a move that should unfold into five waves. As this rise can only be broken down into three waves, any stabilisation or down-move from the 217.95/218.20 resistance area (*) should merely aim to consolidate wave 3333. CHF/HUF could thus decline to 213.80 – or even to 212.50/70 – to draw down-wave 4444 before heading north again.
Once 217.95/218.20 is broken, CHF/HUF should target the 230.00 Fibonacci projection. The MT pullback line - which comes at 220.05 on Friday (+0.40/day) - and 225.00 should be the main steps on the way.
(*) Late June high and tentative resistance line.
3333rdrdrdrd supportsupportsupportsupport 2222ndndndnd supportsupportsupportsupport 1111st st st st supportsupportsupportsupport LastLastLastLast 1111stststst resistanceresistanceresistanceresistance 2222ndndndnd resistanceresistanceresistanceresistance 3333rdrdrdrd resistanceresistanceresistanceresistance
A ED 4.0% (-10.0bp) 173bp (-7bp) 1.00% ------|-----v ------|-----v -----v|------ ---v--|------
SA R 3.5% (4.1bp) 240bp (4bp) 0.25% ------|-----v ------|--v--- ------|v----- ----v-|------
Source: SG Cross Asset Research, * Curve, slope and convexity indicators: a low mark indicates a curve for which rates are low, which is flat, which has low convexity and vice-versa. ** Directionality
indicator: a low value indicates that the curve is in bull flattening/bear steepening mode and vice-versa.
Curve drivers: The curve drivers are calculated using a 2-year rolling probabilistic PCA. Their time series are shown as a multiple of the historical standard deviation. The first driver, the level factor, can be seen as an average of the IRS within the data sample. The second driver, the slope factor, represents one chosen IRS spread. The third driver, the convexity factor, can be synthetised by some statistically weighted flys. For MXN, the convexity driver is not significant.
Curve, slope and convexity indicators: These indicators give a synthetic view of the current level of the previously presented curve drivers. A low mark indicates a curve for which rates are low, which is flat, which convexity is low and vice-versa,
Directionality indicator: a low value indicates that the curve is in bull flattening/bear steepening mode and vice-versa. For more
about this type of indicator, see our 2010 FI Outlook.
For each currency, we give the best flattener/steepener, the best receiving fly and the best paying fly. The carry and roll-down calculations are given for steepening positions and paying flys positions.
Long term model is based on a probabilistic PCA, calibrated on historical data going back to January 1999. Z-score is
calculated as the difference between market and model value, divided by the standard deviation of the residuals. Correlation to level/slope is the correlation between the trade and the first two factors of the PCA, calculated since January 1999.
Short-term model is based on the same probabilistic PCA, calibrated on a two-year rolling data set.
Correlation to level/slope: this is the correlation between the trade and the relevant driving factor, calculated on the same
horizon than the one chosen for calibrating the model.
z-score: a high positive z-score indicates either attractive flatteners or attractive receiving flys. Vice-versa, a low negative z-score indicates either attractive steepeners or paying flys.
Economic Data PreviewEconomic Data PreviewEconomic Data PreviewEconomic Data Preview
Brazil July IP to test slowdown magnituBrazil July IP to test slowdown magnituBrazil July IP to test slowdown magnituBrazil July IP to test slowdown magnitudededede Brazil industrial production vs trend remains positiveBrazil industrial production vs trend remains positiveBrazil industrial production vs trend remains positiveBrazil industrial production vs trend remains positive
The Brazilian economy decelerated in Q2 but still grew above potential. Industrial output continued to grow above trend even with the impact of tax break expiries and the World Cup (Chart). Further, declines in industrial production in relation to its potential level generally lead to rises in inventory levels. But according to the FGV, stocks are falling, not rising. Industrial output is poised to pick up again in the coming months in response to demand expansion (though moderate), keeping the output gap in positive territory. July IP data will be the first test, and positive growth in vehicle production for that month already points in that direction.
Brazil COPOM set to put the tightening cycle on holdBrazil COPOM set to put the tightening cycle on holdBrazil COPOM set to put the tightening cycle on holdBrazil COPOM set to put the tightening cycle on hold Brazil inflation expectations show diverging trends (%)Brazil inflation expectations show diverging trends (%)Brazil inflation expectations show diverging trends (%)Brazil inflation expectations show diverging trends (%)
We expect Brazil’s Copom to remain on hold next week, keeping the Selic rate at 10.75%. Lower activity and inflation readings favour the central bank’s dovish stance. Copom’s balance of risks, expressed in July’s meeting, pointed to an increasingly dovish stance, and high frequency data (the Copom driver as of late) released since the last meeting supports the pause. However, we believe this pause may be temporary, as Copom could be pushed to resume the tightening cycle into 2011. Fundamentals remain strong, and we expect growth to pick up in H2 2010 driven by an economy working near full employment, favourable credit conditions and still loose fiscal policy. Notably, despite benign inflation readings, longer-term inflation expectations remain at the strongest levels since end-2008. This implies a loss of confidence in the effectiveness of BCB’s action this far.
Brazilian GDP slowed in Q2 but domestic demand Brazilian GDP slowed in Q2 but domestic demand Brazilian GDP slowed in Q2 but domestic demand Brazilian GDP slowed in Q2 but domestic demand continues to boost growthcontinues to boost growthcontinues to boost growthcontinues to boost growth
Brazilian domestic demand to keep output gap positiveBrazilian domestic demand to keep output gap positiveBrazilian domestic demand to keep output gap positiveBrazilian domestic demand to keep output gap positive
Brazil's GDP slowed down considerably in Q2 2010. Temporary factors, such as the end of the tax break for durable goods purchases and the drop in hours worked during the World Cup, contributed to a more sluggish growth. Retail sales were flat on the quarter while industrial output expanded only 1.4% qoq. We believe the economy slowed to 0.8%qoq sa from the frenzied 2.7% expansion posted in Q1. On an annual basis the economy likely expanded 8.1%. However, there are signs of a pick-up in activity in Q3. Vehicle output and sales resumed growth in July. And electricity use also advanced. Overall, the strength in fundamentals – record low unemployment, high business and consumer confidence and rising credit market – should continue to drive growth in H2 2010.
EM cross asset performance and SG sentiment indicatorEM cross asset performance and SG sentiment indicatorEM cross asset performance and SG sentiment indicatorEM cross asset performance and SG sentiment indicator
SG Sentiment indicator*SG Sentiment indicator*SG Sentiment indicator*SG Sentiment indicator* EM FX performance (long EM FX 180d return %)EM FX performance (long EM FX 180d return %)EM FX performance (long EM FX 180d return %)EM FX performance (long EM FX 180d return %)
** Maximum percentage deviations from ERM II central rate over last two years, based on a ten-day moving average of daily data at business frequency. An upward/downward deviation
implies that the currency is on the weak/strong side of the band.
Fisca l ba lance (% of GDP)Fisca l ba lance (% of GDP)Fisca l ba lance (% of GDP)Fisca l ba lance (% of GDP)Curren t account ba lance (% of GDP)Curren t account ba lance (% of GDP)Curren t account ba lance (% of GDP)Curren t account ba lance (% of GDP)
Emerging Markets Weekly
CROSS ASSET RESEARCHCROSS ASSET RESEARCHCROSS ASSET RESEARCHCROSS ASSET RESEARCH –––– FIXED INCOME & FOREXFIXED INCOME & FOREXFIXED INCOME & FOREXFIXED INCOME & FOREX GROUPSGROUPSGROUPSGROUPS Global Head of ResearchGlobal Head of ResearchGlobal Head of ResearchGlobal Head of Research Head of Macro StrategyHead of Macro StrategyHead of Macro StrategyHead of Macro Strategy
Patrick LeglandPatrick LeglandPatrick LeglandPatrick Legland
The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Société Générale (“SG”) believe it to be fair and not misleading or deceptive. SG, and their affiliated companies in the SG Group, may from time to time deal in, profit from the trading of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in this document or be represented on the board of such persons, firms or entities. Employees of SG, and their affiliated companies in the SG Group, or individuals connected to them may from time to time have a position in or be holding any of the investments or related investments mentioned in this document. SG and their affiliated companies in the SG Group are under no obligation to disclose or take account of this document when advising or dealing with or for their customers. The views of SG reflected in this document may change without notice. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. Dealing in warrants and/or derivative products such as futures, options, and contracts for differences has specific risks andDealing in warrants and/or derivative products such as futures, options, and contracts for differences has specific risks andDealing in warrants and/or derivative products such as futures, options, and contracts for differences has specific risks andDealing in warrants and/or derivative products such as futures, options, and contracts for differences has specific risks and other other other other significant aspects. You should not deal in these products unless you underssignificant aspects. You should not deal in these products unless you underssignificant aspects. You should not deal in these products unless you underssignificant aspects. You should not deal in these products unless you understand their nature and the extent of your exposure to risk. tand their nature and the extent of your exposure to risk. tand their nature and the extent of your exposure to risk. tand their nature and the extent of your exposure to risk. This research document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this report they should not base their investment decisions solely on the basis of this document but must seek independent financial advice. Important NoticeImportant NoticeImportant NoticeImportant Notice: The circumstances in which this publication has been produced are such (for example because of reporting or remuneration structures or the physical location of the author of the material), that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation (« recommandation d’investissement à caractère promotionnel »). This publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, it must be made clear that all publications issued by SG will be clear, fair, and not misleading. Analyst Certification:Analyst Certification:Analyst Certification:Analyst Certification: Each author of this research report hereby certifies that the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers. NoticNoticNoticNotice to French Investors:e to French Investors:e to French Investors:e to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorised by the CECEI and regulated by the AMF (Autorité des Marchés Financiers). Notice to UK InvestorsNotice to UK InvestorsNotice to UK InvestorsNotice to UK Investors: This publication is issued in the United Kingdom by or through Société Générale ("SG") London Branch which is regulated by the Financial Services Authority ("FSA") for the conduct of its UK business. Notice to US Investors:Notice to US Investors:Notice to US Investors:Notice to US Investors: This report is issued solely to major US institutional investors pursuant to SEC Rule 15a-6. Any US person wishing to discuss this report or effect transactions in any security discussed herein should do so with or through SG Americas Securities, LLC to conform with the requirements of US securities law. SG Americas Securities, LLC, 1221 Avenue of the Americas, New York, NY, 10020. (212) 278-6000. Some of the securities mentioned herein may not be qualified for sale under the securities laws of certain states, except for unsolicited orders. Customer purchase orders made on the basis of this report cannot be considered to be unsolicited by SG Americas Securities, LLC and therefore may not be accepted by SG Americas Securities, LLC investment executives unless the security is qualified for sale in the state. Notice to JapanNotice to JapanNotice to JapanNotice to Japanese Investors:ese Investors:ese Investors:ese Investors: This report is distributed in Japan by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. The products mentioned in this report may not be eligible for sale in Japan and they may not be suitable for all types of investors. Notice to Australian Investors: Notice to Australian Investors: Notice to Australian Investors: Notice to Australian Investors: Société Générale Australia Branch (ABN 71 092 516 286) (SG) takes responsibility for publishing this document. SG holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this newsletter is only directed to recipients who are aware they are wholesale clients as defined under the Act. http://www.sgcib.com. Copyright: The Société Générale Group 2010. All rights reserved.