Banks in Emerging Markets to Meet: Forex Investment Ramifications

The central banks of Hungary, Thailand, Turkey and India are set to meet soon and currency investors are intent on forecasting how subsequent interest rate adjustments will impact …

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The central banks of Hungary, Thailand, Turkey and India are set to meet soon and currency investors are intent on forecasting how subsequent interest rate adjustments will impact market movement. India and Turkey are expected to maintain current rates, while the outlook for Hungary and Thailand contains more volatility. Thailand is expected to ease rates in the wake of flood rebuilding, while the banking position in Hungary remains more uncertain. For more on this continue reading the following article from TheStreet.

The central banks of India, Turkey, Hungary and Thailand meet in the next two days.

We think the greatest chance of a surprise is in Hungary, where the central bank could disappoint near consensus calls for another 50-basis-point hike.

We will also be looking closely at the communication by the Indian central bank for clues of how soon rates will start to fall.

India, Tuesday, 05:30 GMT: We expect the Reserve Bank of India to keep rates on hold in its meeting Tuesday (repo at 8.50%, reverse repo at 7.50% and reserve ratio at 6.00%).

Only a minority of forecasters expect monetary easing. The bank has made a point to communicate that the next move will be a cut, but we don’t think it will happen just yet.

The economy is decelerating, and inflation has begun to slow down. The RBI intervention along with regulatory measures by the government and an improvement of global risk appetite has increased foreign investor demand for Indian assets, which led to the strong rebound in the rupee.

Still, we think that sentiment remains fragile and that front-loading rate cuts will only make the RBI’s life harder should it have to step in to defend the INR once again. INR has been one of the outperformers in the emerging-market space year to date, but it was one of the worst performers in 2011. We do not think the underlying fundamentals have shifted that much in 2012, so we remain skeptical that INR outperformance can continue.

Turkey, Tuesday, 12:00 GMT: We expect the Central Bank of the Republic of Turkey to keep the repo rate at 5.75%, in line with expectations. The bank will probably continue to micromanage liquidity in the interbank market, which amounts to a de facto tightening.

Since late November, interbank rates have been roughly stable between 11%-12%, from 6%-7% before that.

Inflation and economic activity remain very high, but both are expected to start decelerating in the coming months.

Inflation expectations have come down in recent weeks as the lira strengthened, but it is unlikely to reach the TCMB’s 5% target this year.

Positive risk sentiment along with increasing confidence that the central bank will continue providing dollars through daily auctions has reduced the pressure on the lira.

Still, we remain concerned about the country’s wide current account deficit, dependency on short-term flows and dwindling foreign-exchange reserves. We do not expect USD/TRY to break below 1.80 and would be looking for opportunities to get long around that level.

Hungary, Tuesday, 13:00 GMT: We agree with the majority of analysts, who expect the MNB to continue tightening by 50 basis points, but the chance of a surprise has increased a lot in recent days.

If it were not for the currency risks, the central banks would be on an easing path. Economic numbers have generally come on the weak side and are expected to worsen substantially this year given the declining confidence in the economy and likely credit contraction by banks.

Positive sentiment toward the forint continues on more supportive comments about Hungary’s prospects of getting an agreement with the IMF, but we do not think it is enough to change the central bank’s cautious stance.

There is a long road from here until an actual agreement is reached, and sentiment toward HUF could change quickly with just one negative headline.

In the near term, however, we still see EUR/HUF testing the 300 level should risk appetite hold up, and it could be a good level to establish new longs given our skepticism about Hungary.

Thailand, Wednesday 07:30 GMT: The combination of weaker global demand and the protracted economic impacts of the floods are likely drive Thailand’s central bank to deliver another cut of 25 basis points, to 3.00%, at Wednesday’s meeting.

Recent comments from Governor Prasarn support this view. However, it is possible that the bank will adopt a wait-and-see approach after this meeting.

The bank recently increased its 2012 GDP forecast from 4.1% to 4.8% on the back of expected stimulus from government reconstruction spending.

Moreover, inflation pressures remain relatively high, though lower import prices will help cap the upside.

USD/THB has come sharply lower along with other regional currencies after failing to break the 32.0 level a few weeks ago. The next key level to watch would be the 50-day moving average at 31.32.

With China likely avoiding a hard landing this year, we remain constructive on the stronger regional emerging-market credits such as Thailand.

This article was republished with permission from TheStreet.

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