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NEW YORK ( BBH FX Strategy) -- The recent set of external balance data paints a mixed picture for the Europe, Middle East and Africa region. It improves the odds that the rebound in TRY will continue, supports our negative view toward ZAR, and on the margin, is positive for HUF and negative for PLN.
Turkey released a surprisingly narrow trade deficit for February, which shows that at least one of the central bank's problems is improving. The deficit stood at $5.9 billion against expectations for $6.9 billion, narrowing back to levels not seen since mid 2010.
Recall, however, that the current account deficit disappointed in January by shrinking by less than expected to $6.0 billion. Despite our current preference for lower beta currencies, we think that the short-term outlook for TRY has improved after central bank governor Basci took some decisive steps towards the hawkish camp.
USD-TRY has been caught in a narrow range for the last few sessions between the 200-day moving average on the top side (1.7879) and the 50-day moving average on the bottom side (1.7773). Bar another reversal in risk appetite, we think that the most likely resolution is a break lower from here.
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In contrast, the February trade deficit for South Africa narrowed by far less than expected. The January deficit was $7.5 billion compared with $13.5 billion last month. We recognize the marked improvement compared with the three-year-wide level in January, but we still take these numbers as confirmation that there is little to get excited about in the South African economy.
Indeed, the country's credit rating outlook was cut to negative by S&P Thursday, following a similar move by Fitch in January. Both have BBB+ rating on South Africa. Our model still has it at BBB+ but with twin deficits still very wide a move into BBB territory seems probable in 2012. ZAR will continue to trade as a high beta and do well on risk-on days, but we don't think it will outperform in a medium-term basis.