MAY Forecast Summary... 2 Currencies Strategy... 3 East Asia The Subcontinent...6 The Americas..7 Europe/Africa

Transcription

1 C O N T E N T S Forecast Summary... 2 Currencies Strategy... 3 East Asia The Subcontinent...6 The Americas..7 Europe/Africa MAY 2007 We believe that the euro has probably peaked against the dollar but also expect that the yen will not fall much more against the USD our target for EUR/USD over the next three months is $1.33, and for USD/JPY is 118. The worst of the US economic slowdown is coming through now and GDP growth should accelerate in the second half of 2007 as the housing slump gradually fades, contagion to household spending stays limited, and business investment picks up again. The upswings in the Euro-zone and Japan should continue as well but euro rates will likely peak out soon whilst Bank of Japan rates should rise we expect another BOJ hike in August or September. The Fed is likely to keep rates on hold at 5.25% at June s (28/29 th ) FOMC meeting and will probably retain the current mild tightening bias as well. Core inflation could well soon move back into the Fed s 1-2% pa comfort range, from 2.1% currently, but the prospect of stronger economic growth should, for the majority of the Fed, keep the inflation risks on the upside. We still expect that the Fed will be able to cut rates by 25bps (to 5.0%) by the end of 2007 but one rate cut is fully discounted by markets and, probably, won t significantly undermine the dollar. The US external deficit should also stabilise during 2007 whilst central bank FX reserves diversification, although continuing, will probably become less of a USD-drag as well. Chinese renminbi appreciation should accelerate but not by much we expect a 6% pa gain. New measures are unlikely following this week s US-Sino summit but China, probably, will be perceived as doing enough to head-off any new protectionist measures. Continued CNY gains should keep lifting currencies across Asia. Carry trades should have more upside over the next few weeks but another stress period probably isn t too far away we forecast that there will be another sell-off in Q3. Risk appetite will likely hold strong for a while but the prospect of an August/September BOJ hike will probably bring another short period of sharp JPY appreciation. On the high yield side, we like the CAD, sterling and Aussie dollar the best. Of exotic currencies, the BRL, IDR, PHP, MXN, HUF and ZAR should perform best. We would avoid new exposure to the TRY. This Currencies report appears every month and is distributed by . Also published by is Economics for Investment - Weekly. The hard copy Economics for Investment is printed and distributed every two months. Please ask your Relationship Manager if you would like to receive them. All of the Economics for Investment publications can now be accessed on This publication is for information only and is not to be construed as an offer to buy or sell investments. American Express Bank Ltd., whilst considering the contents to be reliable, takes no responsibility for any individual investment decisions based thereon. These represent the views of American Express Bank as of the date of this publication; these views may change over time and without notice. GLOBAL ECONOMICS UNIT John Calverley, Kevin Grice, Sarah Hewin, Giriraj Singh Distribution: Nadia Fraga address: aeb.economics@aexp.com AMERICAN EXPRESS BANK LTD. 60 Buckingham Palace Road, London, SW1W 0RR (No. FC1863, BR301). Incorporated with Limited Liability in the State of Connecticut, USA and registered with the Secretary of State, Hartford, Connecticut, USA with its head office in New York, USA. American Express Bank Ltd.("the Bank") is authorised and regulated by the Financial Services Authority ("FSA"). The Bank is entered in the FSA's Register and its Register number is The FSA's Register can be accessed at The Bank's registered VAT number is GB May 23, 2007

2 Economics for Investment Currencies EAST ASIA Spot per US$ 23/05/07 CURRENCY FORECAST SUMMARY 3 month forecast per US$ % Change* 3 month interest rate, % Implied return, 3 months, %** Large devaluation risk, %*** 12 month forecast per US$ % Change* Japanese Yen/US$ Japanese Yen/Euro Australian Dollar Chinese Renminbi Hong Kong Dollar Indonesia Rupiah Korean Won Korean Won/JPY New Zealand Dollar Australian Dollar/NZD Philippine Peso Singapore Dollar Taiwan Dollar Thai Baht THE SUBCONTINENT Indian Rupee THE AMERICAS Canadian Dollar Argentine Peso Brazilian Real Mexican Peso EUROPE/MIDDLE EAST/AFRICA Euro UK Pound/US$ UK Pound/Euro Swiss Franc/US$ Swiss Franc/Euro Hungarian Forint Hungarian Forint/Euro Polish Zloty Polish Zloty/Euro Russian Rouble Turkish Lira Turkish Lira/Euro South African Rand South African Rand/Euro * -ve = depreciation, +ve = appreciation, ** return on USD investment in currency over 3 months, *** defined as a 10% or more devaluation against the US$ over three months. American Express Bank Ltd. 2 EFI Currencies May 2007

3 FROM GFM A TECHNICAL ANALYSIS VIEW CARRY TRADES High yielders are still in favour, with the IDR and BRL being the preferred plays of late. Continued strong emerging risk appetite favours 8500 on the IDR, with 1.85 open on the BRL near term. IDR/USD (000's) BRL/USD IDR/USD IDR/USD BRL/USD BRL/USD 2007 Source: DATASTREAM Emerging markets remain in play, with the FX carry trade extending to former range plays like the IDR over the last few weeks. While Bank Indonesia is keen on lowering rates, the market loves the flow story into bonds and stocks. BI Gov. Abdullah seems to be OK with the stronger IDR, citing the positive effect that the strong FX rate has on inflation in recent comments. This is a bit of a sea change for the market, as the BI had been thought to be protesting sub-9000 levels in the past (going for export growth). But, with the growth outlook and the regional outlook very positive, lower rates should be on offer, and the flows should hold up. With the BI apparently looking for 8500 as the bottom of the trading range, then the risk would have to be that the IDR firms a bit more than they like (FX markets being what they are) and the 8500 zone is lost for 8100/8000 again to pressure the 2003 USD lows (around 8250). RISK? From a technicals perspective, if the IDR moves back through 8970/9000 then the USD will look open for 9260 again, with some risk for While possible, if the market continues to like emerging market risk then the IDR story will likely keep gathering fans. The yen cross has moved through 74, a watershed level on the cross and earlier this week through 72. The lows from 2003 should attract from here on. The Brazilian Real has also cleared a watershed level with 2.00 lost by the USD. This should help to confirm the 1.80 technical target, and the central bank will be keenly aware that with the rating agencies upgrading their views on Brazil (and sticking with positive outlooks), more funds will be putting money to work in the country. A bit of where have you been? but this will keep the positive Bovespa and bond flows intact. The CB will be cutting rates, but the markets risk appetite is such that rates would need to be quite tight over the USD (200bps or so(?) compared to 725bps now) to knock the BRL off the current run. Technically, the break of 2.00 should leave 1.80/1.65 open over the coming weeks, while 2.00 reverts to resistance now, with 2.05 marking the risk level above this which if cleared, would leave 2.10 open for The CLP cross has put in a very choppy few weeks, but has recently comfortably cleared 265 and raced through 270 probably on a sustained basis. 290 is the target now levels not seen since early Sourc e: DATASTREAM For choice? Funds are taking on board more risk it seems. The turn through watershed levels like 9000 in the IDR and 2.00 in the BRL should leave these currencies set to rally further. Analysis from: Gerry Celaya, Redtower Research American Express Bank Ltd. 3 EFI Currencies May 2007

4 EAST ASIA CURRENCIES JAPANESE YEN Spot Month Forecast 118 We expect the yen to stay weak for a few weeks before appreciating in Q3. Q1 GDP growth at 2.4% pa was a little weaker than expected, but remained above trend for Japan and showed that the economy is successfully re-balancing. Exports and business investment are easing back on the US economic slowdown but consumer spending in Japan improved and should continued to improve as the household savings rate drops, unemployment probably falls further and wages (finally) pick up. Core inflation is likely to stay negative into Q3 but continued above-trend growth should eventually lift price pressures and bring another BOJ rate hike. We expect rates to move up 25bps (to 0.5%) in either August or September. Large devaluation risk*: 10% AUSTRALIAN DOLLAR Spot Month Forecast 0.82 We expect the AUD to stay strong and hold close to recent highs. The global economic upswing should continue for several more years and support metals prices. In addition, the next move in RBA rates is likely to be up. Australian economic activity is picking up again, and the upswing is broad-based. Credit growth is up, retail sales have improved, and April brought another strong employment report with the unemployment rate dropping to 4.4%, the lowest level since Inflation should stay in the RBA s 2-3% pa target range for a while, but the recent budget was stimulatory as well, and the very tight labour market should eventually lift wages. We expect another 25bps RBA hike (to 6.5%) by end Large devaluation risk*: 15% CHINESE RENMINBI Spot Month Forecast 7.53 CNY/USD has climbed 1.9% so far in 2007, an annualised gain of 5%, and we expect the appreciation pace to pick up a little to 6-7% pa. China lifted bank reserve requirements and interest rates ahead of this week s summit with the US, and also marginally widened the CNY daily trading band. More measures have also been announced to lift capital outflow. Rates (especially deposit rates) should move up further but will likely remain too low to severely curb the current over-investment problem, or the domestic equities bubble. But maintaining high employment and GDP growth will stay Beijing s top priority. A more draconian policy tightening and much sharper CNY appreciation remains unlikely. Large devaluation risk*: 5% HONG KONG DOLLAR Spot Month Forecast 7.83 The HKD peg should stay in place for at least the next few years. The budget waiver on property taxes slowed Hong Kong inflation to 1.3% pa in April and, despite continued good GDP growth, inflation is unlikely to pick up significantly before Q Q1 GDP growth slowed to 5.6% pa on softer business investment and exports, but household spending accelerated on the low unemployment rate (down to 4.3% in April, the lowest level since mid-1998), the buoyant stock market (which will benefit most near term from Mainland capital outflows liberalisation), and the prospect of renewed Hong Kong property price gains. GDP growth remains on track to come in at the top end of the government s % target range for 2007, after last year s 6.9% GDP gain. Large devaluation risk*: 5% American Express Bank Ltd. 4 EFI Currencies May 2007

5 EAST ASIA CURRENCIES INDONESIA RUPIAH Spot Month Forecast 8500 Bank Indonesia has allowed the IDR to climb sharply to help curb inflation. BI is believed to be comfortable with the IDR in the range and we expect more appreciation. Rates were cut 25bps in May (to 8.75%) and should fall further by end 2007 our forecast is to 8.0%, possibly lower as inflation looks set to stay in the 5-7% pa target range (after 6.3% in April). Lower short rates should sustain the IDR-bonds rally and lift capital inflow. Direct foreign investment should also rise this year on new reforms and government-sponsored infrastructure improvements. Lower rates are also lifting household spending and GDP growth has a good chance of reaching 7% pa by 2008 (after Q1 s 6.1% gain). Large devaluation risk*: 15% SOUTH KOREAN WON Spot Month Forecast 925 KRW appreciation should continue. The economy is improving and GDP growth should accelerate to around 5% pa by late 2007, from Q1 s weak-for-korea 4% pa gain. Exports continue to lead the way but consumer spending is up as well and should be leading the upswing during the second half of this year. Inflation, 2.5% pa in April, should stay at the bottom end of the % pa target range for most of The central bank, although recently expressing some concern about rapid offshore corporate borrowing, is also now less worried about household debt and property prices which, at the top end at least, are no longer climbing sharply. Rates stayed on hold at 4.5% in May and should stay on prolonged hold. Large devaluation risk*: 20% NEW ZEALAND DOLLAR Spot Month Forecast 0.71 The NZD has probably peaked against the USD, the yen, and the Aussie dollar but, near term at least, is unlikely to fall too far. It remains a close call but RBNZ rates probably won t rise any more form 7.75% currently (next meeting on June 7 th ). Retail sales and employment growth remained strong in Q1, and house price appreciation remains rapid (11% pa in April). But consumer confidence is slipping back and interest rates are now well above a neutral range of 5-6% and should now be restrictive enough to eventually slow household spending. The budget also focused on stimulating business spending rather than consumer expenditure. Nevertheless, any RBNZ rate cuts are unlikely before Large devaluation risk*: 20% PHILIPPINE PESO Spot Month Forecast 44.0 The PHP is up sharply but more appreciation looks likely. The fiscal improvement should stay on track and continued very strong worker remittance inflows (up 25-30% pa in March) should offset a likely deterioration in merchandise trade and keep the external accounts in overall surplus. Direct foreign investment is also up sharply and should stay strong. In addition, domestic credit growth is picking up and economic activity should improve during the course of But inflation, currently at a seven-year low of 2.3% pa, probably won t rise very much and market rates will likely climb. The BSP s tiered system of interest rates should stay in place for a while but should eventually be replaced by lower official rates (still at 7.5%). Large devaluation risk*: 15% American Express Bank Ltd. 5 EFI Currencies May 2007

6 EAST ASIA / SUBCONTINENT CURRENCIES SINGAPORE DOLLAR Spot Month Forecast 1.51 The SGD s rally has stalled on the fall in Singapore rates 3-mth rates are now down to 2.7% - but appreciation should resume soon. Exports have weakened on softer electronics shipments but will likely improve in the second half of Domestic demand is also set to stay strong, in part because the property price boom should continue. Q1 GDP rose 7.6% pa and the government has lifted its 2007 growth estimate to 5-7% pa. The unemployment rate dropped in Q1 to 2.9% and the flexible labour market should keep wage pressures contained. Nevertheless, June s GST hike should add percentage points to inflation and the MAS should retain its mild trade-weighted SGD appreciation bias. Large devaluation risk*: 5% TAIWAN DOLLAR Spot Month Forecast 33.0 The TWD has stayed weak, In contrast to the rest of Asia, on its low yield and carry-trade borrowing, with central bank intervention heading off sharper slippage. We believe that TWD weakness is now largely over and expect appreciation over the next few weeks. Taiwan GDP growth should accelerate as household spending improves and exports, probably, surprise on the upside. April unemployment was up (to 4.0%) but remains historically low whilst the credit card crisis is now largely over. Stronger US demand going into 2008 should also lift exports. Inflation should stay low, but the central bank wants to normalise local rates and a hike (by 13bps) to 3.0% is likely at in late June. Large devaluation risk*: 10% THAI BAHT Spot Month Forecast 32.0 The baht should continue to appreciate on the large external surplus, as political and policy worries subside, and as the economy finally improves. Inflation is under control down at a 6-year low of 1.8% pa in April and rates were cut 50bps this week (to 3.5%). Rates could still fall further but, more likely, will now stay on hold. Business and consumer confidence remains depressed but fiscal policy is now very stimulatory and measures have been announced to boost mortgage lending. GDP growth is still on track to slow to around 4.0% pa in 2007 after 2006 s 5.0% gain but the second half of this year should be better than the first. Capital inflows into Bangkok stocks should also stay strong. Large devaluation risk*: 15% INDIAN RUPEE Spot Month Forecast 40.0 The rupee has been allowed to rise sharply to take some of the pressure off interest rate hikes in the fight to contain inflation. We expect further INR gains but at a much slower pace than has been the case recently. The RBI kept rates on hold at 7.75% in late April and will likely keep rates on hold for a while. But credit growth remains too strong and March industrial output accelerated to 12.9% pa. GDP growth should slow on recent rate hikes but we doubt that economic growth will slow enough in 2007 or 2008 at current interest rates to pull inflation (at a 5-month low of 5.4% pa in early May) down to the RBI s 4.5% medium term target. More INR appreciation and, eventually, more rate hikes look likely. Large devaluation risk*: 10% American Express Bank Ltd. 6 EFI Currencies May 2007

7 AMERICAS CURRENCIES CANADIAN DOLLAR Spot Month Forecast 1.06 The CAD has climbed to a 30-year high per USD but should stay strong. Energy prices and M&A activity should stay supportive. In addition, the next move in BoC rates should be up, although a move from current levels (4.25%) remains a few months away we expect a hike in the second half of 2007, possibly as soon as the July 10 th meeting. The Canadian housing market is peaking out but should not experience a US-style slump. The Canadian economy more generally is picking up. Q1 GDP growth probably climbed 3-4% pa, well above trend. In addition, March retail sales rose at the strongest pace for three years, whilst April core inflation accelerated to 2.5% pa, the fastest gain since Large devaluation risk*: 15% ARGENTINE PESO Spot Month Forecast 3.06 The peso has firmed and should rise further as Argentina eventually allows currency appreciation to play a larger role in the anti-inflation fight. Economic activity remains strong with GDP growth still on track to climb around 8% pa for yet another year in 2007 but there remain concerns that the Kirchner Administration is manipulating consumer price data ahead of the October Presidential election. April inflation slowed to 8.9% pa but strong wage gains up 16% pa in April point to underlying inflation pressures holding strong. The government now wants to lift investment but businesses will likely to cautious until the price controls approach is relaxed. Supply bottlenecks will likely continue. Large devaluation risk*: 10% BRAZILIAN REAL Spot Month Forecast 1.90 The real has rallied, as expected, and the currency should rally further, although central bank intervention will likely limit the gains. Brazil s economy should boom in as lower rates boost domestic demand and continued high commodity prices support exports. March retail sales growth of 11-12% pa was the strongest since mid-2004 and GDP looks on track to climb 5%+ pa this year and next. Fitch and S&P have upgraded Brazilian debt (to BB+) and investment grade should be achievable during Inflation should stay under control and BRL appreciation points to more rapid SELIC rate cuts. Rates should fall 50bps (to 12.0%) in early June and then drop to 10.5% by year end. Large devaluation risk*: 10% MEXICAN PESO Spot Month Forecast The MXN rally should continue as global investor risk appetite holds strong and US GDP growth improves during the second half of this year. Mexican rates were surprisingly hiked in April (by 25bps to 7.25%) but should stay on hold this week (on May 25 th ) and will probably stay on hold to end April headline inflation eased to 4% pa but will likely move up again over the next few months before eventually dropping back again below 4%, and staying there, by late Inflation is mainly up on supply issues (especially for food) and the economy is slowing down the central bank now expects GDP to climb % pa in 2007, down on 2006 s 4.9% gain. As a result, the next move in Mexican rates should be down but, probably, not before Large devaluation risk*: 10% American Express Bank Ltd. 7 EFI Currencies May 2007

8 EUROPE CURRENCIES per euro EURO Spot Month Forecast 1.33 We believe that the euro is topping out. At least one more ECB rate hike, and one Fed rate cut, is now fully priced in by markets. The Euro-zone economy continues to perform well, with manufacturing and services remaining buoyant whilst lower unemployment is lifting consumer confidence and household spending. Strong business sentiment should sustain the economic upswing in coming months. Inflation is where the ECB wants inflation to be (just under 2% pa) and may well edge lower near term for technical reasons. But the ECB remains worried about wage pressures and still-rapid credit growth. A June rate hike is a done-deal but after that any further rate hikes will likely come through more slowly. Large devaluation risk*: 10% UK POUND Spot Month Forecast 1.99 The prospect of higher UK rates and lower US rates, and continued carry trade activity should keep sterling close to $2.00 over the next few months, and pull EUR/GBP down to The May inflation report as well as a hawkish statement from the BoE after the recent 25bps rate hike (to 5.5%), makes it likely that rates will rise again either in June or by August at the latest. GDP growth is around trend, there is little spare capacity, and money supply expansion is strong. But so far wages have stayed under control, and higher rates should eventually slow household spending. Sterling is likely to fall back to 0.68 per euro longer-term and to $ as US GDP growth eventually picks up again. Large devaluation risk*: 10% SWISS FRANC Spot Month Forecast 1.24 Carry trade activity has pulled EUR/CHF close to its weakest level in nearly 9 years. We expect carry trades to remain in play over the next few weeks, keeping the CHF under pressure. The Swiss National Bank is alert to the inflation risks from the weak currency, but in tradeweighted terms the CHF adjustment has been muted down only 4% from its average, when the CHF was overvalued, and off less than 3% from the 2006 average level. Swiss rates are set to move higher in June, but should then stay on hold, so the euro s yield advantage could well increase. But carry trades are not a permanent one-way bet, and the CHF will bounce back sharply if and when investor risk appetite wanes. Large devaluation risk*: 10% HUNGARIAN FORINT Spot Month Forecast 183 The EUR/HUF should stay supported over the next few weeks by interest rate differentials and carry trades we forecast a move to the range. The 6.6% of GDP fiscal deficit target looks achievable (down from 9.2% in 2006). Fiscal austerity is pulling the economy weaker GDP growth is only expected to be 2.5% pa this year but the external deficit is also improving and likely to narrow to 3-4% of GDP. Inflation is up on tax charges, but should ease lower in the second half of Official interest rates were left unchanged this week at 8.0%, the highest in central Europe, but should fall by year end we expect to 6-7%. For now the yield pick should stay attractive but EUR/HUF should drop towards 260 by end Large devaluation risk*: 25% American Express Bank Ltd. 8 EFI Currencies May 2007

9 EUROPE/AFRICA CURRENCIES per euro POLISH ZLOTY Spot Month Forecast 2.82 The zloty s rally against the euro should resume soon our target is back to 3.75 over the next few weeks (3.80 currently). The economy is forging ahead, with GDP growth around 7% pa in Q1 and likely to stay buoyant. Booming tax revenues should bring the budget deficit some way below target, allowing the government to bring in labour market reforms (cutting pension contributions) from mid-year. The central bank raised rates in April, to 4.25%, for the first time in nearly three years, and a further 25bps hike is likely over the next three months. Inflation (2.3% pa in April) should fall further back from the 2.5% target in coming months, but for technical reasons. Underlying price pressures will stay high. Large devaluation risk*: 15% RUSSIAN ROUBLE Spot Month Forecast per euro 2.30 per euro The RUB will stay influenced by the euro/dollar rate but any downside, on anticipated long run euro weakness, should be limited. Capital inflows have soared since last year s liberalisation measures, with the central bank s full year 2007 target ($35bn) likely to be reached by end May. Inflows should stay buoyant unless oil prices collapse (which we don t expect), sustaining upward pressure on the RUB. Policymakers are likely to allow modest RUB appreciation to cap inflation pressures from accelerating government spending in the run-up to year-end Parliamentary elections and the March 2008 Presidential contest, and from the huge infrastructure improvement programmes now underway. Large devaluation risk*: 10% TURKISH LIRA Spot Month Forecast 1.39 TRY has rallied sharply per euro since the early May political crisis, as expected, but now looks over-stretched (at 1.78). Politics will stay uncertain: Parliamentary elections on 22 nd July may well bring prolonged coalition negotiations, whilst the risk of army intervention over the Presidency has not gone away. But the most likely outcome is a workable government and a compromise President. Meanwhile high TRY yields will stay attractive and the economic fundamentals should remain supportive: inflation falling back into single digits soon and direct investment inflows covering most of the external deficit. Therefore EUR/TRY should not rise too far. The key non-domestic risk is a global carry trade unwind. Large devaluation risk*: 25% SOUTH AFRICAN RAND Spot Month Forecast 6.92 The rand should stay attractive as a high-yielder. Inflation has picked up (March CPIX rose to 5.5% pa) on higher food/energy prices and looks likely to exceed the government s 5.9% pa peak forecast. The economy continues to grow strongly and capacity constraints have risen. Inflation expectations remain well anchored in the 3-6% target band and credit growth, although still high, is slowing, and may ease pressure for rates to rise in the near term. But longer-term, rates look set to edge higher still (from 9% now). But the rand remains one of the more vulnerable carry-trade currencies given the large (5-6% of GDP) external deficit and the Reserve Bank and government would be happy to see the ZAR move weaker. Large devaluation risk*: 20% American Express Bank Ltd. 9 EFI Currencies May 2007