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Daily Forex Commentary

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To Hike or Not to Hike

Wed, Aug 27 2008, 06:26 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

The dollar rallied in the European trading session as the German IFO survey was unexpectedly soft. EURUSD fell almost a full figure on the back of the IFO release. Our first reaction was that such a move was not justified by the IFO release alone, but it does inevitable say something about the market sentiment and something about in which direction the arrow is pointing at the moment. This made us initiate a short strategy in EURUSD (English translation will be out shortly). However, the euro made a comeback this morning during Asian trading, which supposedly should be due to higher natural gas and oil price expectations. We are still confident in our recommendation as nothing has changed since we sent it our yesterday, but we would have liked a daily close below 146.
Minutes from the last FOMC meeting were out last night at 8 p.m. and they showed that most members generally expect the next move to be a hike. But there is no doubt that the nature of the economic situation the FOMC is facing is tough and that the fragility of the financial markets is still a major concern. Our economists are disagreeing with the next move from the FOMC since the labour market will weaken further and eventually force the FOMC to cut rates. We also initiated short strategies in EURGBP (which is already out in English) and in EURJPY (will be out in English shortly). This Wednesday offers consumer prices from the German federal states, unemployment from Norway, mortgage applications and durable goods orders from the US.

Emerging Markets

By the Emerging Markets Team

We look forward to CPI from Iceland 11 am. The analysts surveyed by Bloomberg expect inflation to increase from 13.6 % to 14.6 % y/y.
The key rate is 15.50 % and the central bank is on neutral stance right now. However if we get a big surprise on the upside, maybe the market will start speculating in a hike on the September meeting. Short term the market focus on credit spreads on the Icelandic banks. The credit spreads have widened during the last two weeks (e.g. Kaupthing bank from 700 to 775 basis points). If this widening continues it could prove negative for ISK. However credit spreads are still some way from the highs (Kaupthing bank was above 1000 basis points) at the end of June. We keep our neutral recommendation. South African CPI is released 11.30 am. The analysts surveyed by Bloomberg expect inflation to increase from 12.2 % to 13.6 % y/y. Despite the expectation of increasing inflation it is expected the central bank do not hike more this year. The drop we have seen in oil during the last 1½ month has been positive for ZAR. ZAR has strengthened with about 10 % against EUR and DKK during the last 1½ month. We now expect a correction downwards in ZAR. The combination of high inflation, lower growth data and a large current account deficit makes ZAR vulnerable to lower risk appetite.
Thus we keep our negative recommendation on ZAR. Finally we look forward to the interest rate decision from the Polish central bank. We expect unchanged key rate at 6 % as all of the analysts surveyed by Bloomberg. We stay neutral, but are considering selling PLN. We are waiting for the right timing. A negative recommendation on PLN would be in line with our rotation from currencies related to EUR (as PLN, HUF and RON) towards currencies more related to USD (as MXN and BRL).

Today’s Key Events

• N/A Rate Announcement from National Bank of Poland, PLN
  

• N/A Consumer Prices from the German federal states during the day, DEM
  

• 09:00 Manufacturing Confidence, SEK
  

• 10:00 Unemployment, NOK
  

• 11:00 Consumer Prices, ISK
  

• 11:30 Consumer Prices, ZAR
  

• 13:00 MBA Mortgage Applications, USD

• 14:30 Durable Goods Orders, USD

• Download Full Daily Forex Commentary

Published on  Wed, Aug 27 2008, 06:32 GMT