Saturday, December 11, 2010

Emea Weekly : Sell CZK

TCMB to remain on hold for long

There is no doubt that the Turkish central bank will keep the key policy rate unchanged at 7.00% next week. However, we find it likely that the apparent "softening" of Turkish growth and downside surprise in November's inflation could result in softening its rhetoric even further. Hence, communication from the TCMB should be expected to be quite dovish next week and the we would not rule out that the TCMB could signal that the risk on rates going forward is equally split to the upside and to the downside.

Polish and South African inflation likely up in November

Both Polish inflation and South African inflation should inch up in November - Polish to 3.0% y/y, which is somewhat higher vs consensus and South African inflation to 3.5% y/y, which is in line with consensus. Polish inflation should remain about 3.0% also in December and will likely inch up in the coming months close to even above 3½% - meaning that inflation will rise above the upper limit of the Polish central bank's inflation target of 2½ +/- 1- percentage points.

Short-term outlook worsens for CZK

Over the past week (and month) the three worst performing EMEA currencies have been the Polish zloty, the Turkish lira and the Czech koruna. For some time our EMEA FX Scorecard has been signalling CZK weakness and that signal clearly has been correct. This week's updated Scorecard shows that the outlook for CZK now have worsened even more. It is especially notable that there is really no short-term factor pointing in a positive direction for the Czech koruna. Besides the technical and carry scores, which have been the main drivers behind the negative score for CZK, in fact a deterioration of macro-economic conditions are weighing negatively on the overall score for CZK now as well. It seems like the speed of the recovery in the Czech economy is losing some momentum. With that regard, the low rate environment, which will be maintained in the Czech Republic for longer (vs regional peers) is increasingly making the Czech koruna a attractive funding currency - at least in the short run.


As risk appetite has to some extent returned to the markets during the last ten days, high carry currencies such as the South African rand have benefitted from this. Furthermore, as gold prices brought new record highs this week, the rand gained back following the recent correction. With the move higher in both the risk appetite level as well gold, USD/ZAR has visited our stop loss level at 6.8600 on the downside and our long strategy from 7.0855 has therefore been terminated. The trendline support in the pair, however, continues to hold, and though we have narrowly been stopped out, technically the bullish picture in USD/ZAR remains intact . Despite ourstop out of our USD/ZAR, we continue to favour our short position TRY/BRL and we have also opened a new strategy of buying a one-year EUR put/ HUF call option where we recommend being positioned for forint normalisation.
Full report: Emea Weekly : Sell CZK

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