USD: Further pressure on vulnerable emerging market oil importers
President Trump’s well-telegraphed decision to exit the Iran nuclear deal has pushed the oil price to new highs, with Brent being just shy of the 77$/bbl level. However, as this doesn’t come as a material surprise, we don’t look for a severe impact on risk assets. Yet, the rising oil price is providing room for a clear differentiation, putting additional pressure on battered net oil importers such as Turkey's lira (USD/TRY hitting new highs day-by-day). In contrast, in the G10 FX space, it should be supportive of Norway's krone both from a purely economic perspective (Norway being an oil exporter) as well as the mechanical approach of the Norges Bank towards rising oil prices and thus the rising probability of policy tightening.
EUR: Undershooting its short-term fair value
EUR/USD remains on the back foot despite yesterday’s upside surprise to German industrial production data (which points to the temporary nature of the slowdown). EUR/USD has started to persistently undershoot our short-term financial fair value measure this month, with the pair now being 1.5% undervalued on a short-term basis. These somewhat unjustified levels collaborate what we see as recent indiscriminate US dollar strength (in large part positioning driven) as well as the rise in the perception of the eurozone risk premium (due to Italian politics). Yet, the latter has had a very limiting impact on the euro since 2015 while the former is soon to be exhausted (see USD: Curb Your Enthusiasm). We don’t look for the EUR/USD decline to last for long. In Sweden, today’s expected deceleration in both headline and core CPI should take some wind out of the Swedish krona's sails.
ARS: A life line from the IMF
As Gustavo Rangel notes, the Argentina government resorting to the IMF could help stabilise near-term FX dynamics of what appears to be the weakest link in the emerging markets FX space. Yet, seeking assistance could also carry a stigma that prevents a recovery in investor sentiment. Argentina’s outlook remains weighed down by the worrying rise in its current account deficit (rising to an unsustainably high 6% of GDP) and large fiscal deficit. No wonder Argentina has become especially vulnerable at a time when FX financing costs and risk aversion are rising.
HUF: Inflation a secondary consideration in the non-friendly EM environment
In line with consensus, our economists expect the Hungarian CPI to nudge higher to 2.3% year-on-year due to the increases in fuel, food and clothing prices. However, risks are to the downside given the recent softer inflation readings in the eurozone. We expect the impact on EUR/HUF to be limited as the pair is currently driven by the external environment, namely across the board deteriorating sentiment towards the EM FX and lower EUR/USD. Still, within the Central Europe 3 space, the Hungarian forint is set to continue outperforming the Polish zloty in the current non-friendly EM environment due in part to what we believe is the less-stretched positioning in the forint.