RAIFFEISEN BANK SA

  |  22.01.2013

Focus Fx, January 22

After eyeing 4.32 per EUR – a level not seen since a year ago – RON then shed some of the gains. Last week’s statement by Deputy Governor Popa that RON “is in the ballpark (of fair value)” hints at limited appreciation for the Romanian currency.

EUR/RON*: 4.354 - 4.55 (March)

The RON rally after JP Morgan’s announcement on the inclusion of Romanian LCY T-bonds in its GBI-EM indexes seems to have run out of steam

After eyeing 4.32 per EUR – a level not seen since a year ago – RON then shed some of the gains. Last week’s statement by Deputy Governor Popa that RON “is in the ballpark (of fair value)” hints at limited appreciation for the Romanian currency. The expected tougher stance of international lenders (IMF, EC and World Bank) at the end of their review mission scheduled for next Tuesday and softer appetite of non-residents for Romanian bonds look consistent with a weaker RON. Thus, we see chances for EUR/ RON to gradually drift higher during the next trading sessions.

 

EUR/USD: 1.336 - 1.30 (March)

On Tuesday morning, rumors over a possible profit warning from Deutsche Bank as well as the possible resignation of the German Federal Bank President Jens Weidmann caused the DAX to double over. Following the increase in risk aversion in the markets, the euro also came under pressure and fell by 0.6 cents to 1.329 EUR/USD. Both pieces of news, however, will not put sustained pressure on market sentiment. We are confident that the euro can make the jump to 1.35 EUR/USD when the Eurozone economic flash indicators (ZEW, PMI, INSEE, ifo) are released until the end of the week and also continue their latest upward trend. Unfortunately, we do not feel there is any further appreciation potential within the euro beyond this mark. The yield differential between German and US 2-year government bonds, which is primarily responsible for developments in the EUR/USD exchange rate, has fallen markedly since the start of the year and benefited the euro’s rise. The narrowing in the interest rate difference is mostly attributable, however, to the rising yields on German bonds. With the current level of 0.18%, we see little room for a further increase.

 

EUR/JPY: 118.8 - 116 (March), USD/JPY: 88.9 - 89 (March)

The Japanese central bank announced early this morning what most in the markets had already anticipated: the inflation target of 1% was doubled to 2%, overnight interest rates were left at 0-0.1% and the asset purchase program (JPY 101 tr by the end of 2013) will be continued on an open ended basis starting in 2014; this means that there will no longer be any announcements for year-end goals but rather only monthly purchase volumes will be given. Recently, the yen reached a two-and-a-half year low against the dollar, racing past our original devaluation forecasts. For the USD/JPY, we expect a brief pause for breath before things continue. Abe is under enormous pressure to deliver results in the fight against deflation, especially before the elections for the upper house in July. If the JPY does not weaken enough by then, he could also initiate interventions on the currency markets in order to weaken the yen even further. We therefore assume that the yen will continue to lose against the USD and by June a low of around USD/JPY 95 should have already been reached.

 

On Tuesday morning, rumors over a possible profit warning from Deutsche Bank as well as the possible resignation of the German Federal Bank President Jens Weidmann caused the DAX to double over. Following the increase in risk aversion in the markets, the euro also came under pressure and fell by 0.6 cents to 1.329 EUR/USD. Both pieces of news, however, will not put sustained pressure on market sentiment. We are confident that the euro can make the jump to 1.35 EUR/USD when the Eurozone economic flash indicators (ZEW, PMI, INSEE, ifo) are released until the end of the week and also continue their latest upward trend. Unfortunately, we do not feel there is any further appreciation potential within the euro beyond this mark. The yield differential between German and US 2-year government bonds, which is primarily responsible for developments in the EUR/USD exchange rate, has fallen markedly since the start of the year and benefited the euro’s rise. The narrowing in the interest rate difference is mostly attributable, however, to the rising yields on German bonds. With the current level of 0.18%, we see little room for a further increase.

 

EUR/CHF*: 1.243 - 1.20 (March)

Recent weeks in Switzerland were characterized by two significant market movements: EUR/CHF rose and temporarily broke the 1.25 mark. Following this, one can now count the CHF as among the weakest of currencies. The interest curve also steepened markedly, a trend that we feel cannot be continued. The movements are largely a consequence of market participants becoming riskier with their investments and trading. In order to continue the CHF’s devaluation trend, a normalization within the euro would be necessary (significant economic recovery and first expectations of increases in interest rates) and we are still far from that point. We could imagine, though, that the CHF marks a new range trading around the 1.25 mark against the EUR. Before we make an official revision in our own forecast, however, we want to first watch and wait and see what the next two weeks bring.

 

EUR/GBP: 0.842 - 0.82 (March)

The British pound is following the example set by other currencies and has reached its lowest point against the euro since 11 months. The reasons, however, are many. On the one hand, investors are once again showing a higher affinity for risk and are taking their capital out of the “safe haven” Great Britain and on the other the British economic data itself is also to blame. Retail sales data were disappointing despite the Christmas shopping season in December and public financing requirements were also higher in December than expected. Great Britain’s relations with the EU are another burden, although these and the risk of a downgrade in ratings are only marginal at the moment. At the same time, the movement in the GBP could be interpreted as strength in the EUR. Given that things seldom move only in one direction, we can expect a reversal in the coming months.

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