Review
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Yesterday we got a pleasant surprise when Lithuanian Q2 GDP numbers surprised positively. Hence, GDP grew by 1.1% y/y in Q2 – somewhat better than our expectation of a drop of 1.7% y/y.
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South African inflation (CPI) eased to 4.2% y/y in June – well below the consensus expectation of 4.5% y/y and comfortably within the South African Reserve Bank’s inflation target of 3-6%. The number clearly keeps the door open for a rate cut from SARB and South African market rates and yields dropped on the back of the number. Furthermore, the continue overvaluation of the rand is also an argument for cutting ratings in South Africa. That said, there is certainly not room for aggressive monetary easing and if we are going to see further monetary easing it is unlikely to be more than a single cut.
Preview
- It is a relatively light calendar today. Focus on producer prices data out of Hungary and South Africa. We do not expect the data to be market-moving.
Trading update
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The Czech koruna undoubtedly is the EMEA currency that we are most bullish on – both short-term and long-term. Yesterday, the koruna hit the strongest level against the euro in 20 months. We believe this is fully justified given relatively strong Czech fundamentals and optimism about Czech economic reforms. We therefore continue to recommend investors to stay long in the Czech koruna against its EMEA peers and the US dollar and the euro.
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We remain bearish on the South African rand and yesterday’s lower than expected inflation number is a further negative for the rand as it increases the chance of further monetary easing from SARB. That said, while we believe the market is too optimistic on the rand the pricing in the South African fixed income markets appears to be more reasonable.
