Inflation fears back in the game…
Turkish inflation heading higher
Turkish inflation figures for January are due on Thursday next week. We expect a significant drop to 5.1% y/y vs December’s reading of 6.4% y/y. The massive drop could for the most part be attributed to a large base effect. In the coming months we expect Turkish inflation to continue to decline and it could maybe even drop below 4.0% y/y in Q1 11 (see page 3).
CNB moving closer to a rate hike
The Czech rate decision scheduled for next Thursday will undoubtedly draw attention. Despite it being broadly expected that the Czech central bank (CNB) will keep interest rates on hold maintaining the key policy rate at a record-low 0.75%, in our view the CNB will deliver fairly hawkish comments. It is very likely that a rate hike could be advocated by more than one CNB board member on the back of rising inflation. Our inflation model indicates that inflation will continue heading upwards and will likely stay above the CNB’s inflation target of 2% all year and could actually break 3% in the summer (see page 4).
TRY and ZAR continue to be under pressure
The third and fourth weeks of 2011 have seen a concurrent and decisive turn lower in two high yielding, popular carry trade currencies, namely the South African rand and Turkish lira. In the case of TRY, the Turkish central bank’s (TCMB) efforts to relieve market confusion over the two-tier policy goal of higher domestic rates to cool lending growth and lower external rates to stem short-term capital inflows, have so far proven unsatisfactory and the market credibility of TCMB has continued to suffer (see page 6).
We still like our short positioning in USD/PLN
Since 19 January, we have been running a strategy of short positioning in USD/PLN. Our strategy was activated with the break of 2.8770 on the said date and we are looking for a target of 2.7760, while maintaining a stop loss order at 2.9245 (see more on page 8).
Russian interest rate hike on the offing
The most important event from CIS next week will be the Russian central bank’s rate decision on Monday. We expect a 25bp hike to all key rates, which is also strongly the market consensus judging from recent comments made by central bankers (see page 9).
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