Review
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On Monday ECB Executive Board member Gertrude Tumpel-Gugerell said that the planned timing for euro adoption should be credible and that “overly ambitious timetables” for euro adoption could be “costly”. Austrian central bank governor Nowotny also made cautious remarks about euro enlargement, saying that it should be decided on a case-by-case basis.
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On a similar note, European Commissioner Almunia said that the euro entry criteria should not be loosened. In our view, neither the ECB nor the European Commission are overly enthusiastic about euro enlargement at the present stage given the significant challenges still facing the euro candidates and some of the present euro members. The EU will go a long way to help the CEE economies, but we doubt that a “solution” to the economic woes in CEE would involve a “quick fix” via bending the euro adoption rules.
Preview
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Today, focus will turn to the South African rate decision. We expect the South African Reserve Bank (SARB) to keep its key policy rate unchanged at 7.00%. This is also the consensus expectation.
Trading update
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The bullish sentiment in EMEA FX markets continued during Monday with the regional currencies generally trending stronger. It was the continued global appetite for risky assets rather than local news that drove the markets.
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We are a bit puzzled that CEE fixed income markets were totally unaffected by a pretty sharp rise in Greek bond yields on Monday on the back of continued worries over Greek public finances. Normally CEE yields tend to rise when peripheral euro yields – like Greek yields – rise. On Monday that was not the case and CEE yields in fact inched down.
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Our EMEA FX Scorecard is still overall signalling continued bullish sentiment in EMEA FX markets, but we would caution that if concerns over the situation in Greece were to escalate, then sentiment could spill over to the CEE markets. Most at risk from a potential spill-over from Greece are Bulgaria, Romania, Hungary – and the small Balkan economies like Croatia and Serbia.
