Brazil: Rates to stay on hold
The case for a rate hike in Brazil this year has weakened sharply
USD: An uneventful State of the Union address
President Trump's State of the Union address proved fairly uneventful, lacking major detail. While the threat of another government shutdown remains, the lack of negative rhetoric on trade should be seen as a positive for the risk environment. The focus will now turn to Fed Chair Jay Powell's speech today, but don’t expect any deviation from the market supportive message communicated in the January FOMC statement.
EUR: The trend of softness
EUR/USD remains under pressure. Soft December German factory orders have added to the currency downside, with the low yielding euro seen as a good funding currency for emerging market FX longs. Look for EUR/USD to remain below 1.1400 today. In Poland, the MPC is set to stay on hold and reiterate its hike-averse bias. With inflation undershooting the National Bank of Poland's staff projections, the January headline CPI likely to decline further to 0.8% year-on-year and the expected acceleration in 1H2019 unlikely to bring the CPI above the 2.5% target, there is no reason for the NBP to tighten, particularly when growth continues to slow. The impact on the Polish zloty should be negligible as the market is pricing flat rates over the next two years.
AUD: RBA confirms market expectations - expect one off effect on AUD
The Reserve Bank of Australia's shift in forward guidance to neutral from modestly hawkish translated into meaningful losses for the Aussie dollar overnight. Yet, with the market already pricing in a partial cut within the one-year time horizon prior to Governor Philip Lowe's speech, the shift in the RBA's guidance should not be seen a material game changer for AUD and the negative effect on the currency should be rather limited. Indeed, should we see a further de-escalation in trade war rhetoric between the US and China and the Federal Reserve remains on hold in coming months, AUD should stay supported and is unlikely to break below AUD/USD 0.7000.
BRL: Rates on hold but social security reform matters more for BRL
Recent developments on inflation and activity suggest that the outlook for monetary policy in Brazil has turned more dovish in recent months and the central bank is likely to stay on hold. Indeed, the case for SELIC rate hikes during 2019, from 6.5% now, has weakened sharply. For the Brazilian real's near-term prospects, the key is social security reform. However, the Lower House President has said that plans to fast-track the reform debate in Congress are not going to work. As a result, the reform debate/approval should take longer than the market expects, lending a weakening bias to the real in the near term. In relative terms, BRL is set to underperform the Mexican peso given the less idiosyncratic risks that MXN is currently facing and stable/rising oil price from which the peso benefits.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).