Trade Balance Data a Mixed Bag for EMEA Currencies

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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South Africa

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.


The current account surplus is shrinking in Hungary, falling by more than half from the third and fourth quarters, but we don't expect this to be a large source of concern. Other parts of the Hungarian economy are more worrisome.

Indeed, central bank deputy governor Ferenc Karvalits echoed our concerns about credit in an interview Thursday. The governor said lending could remain subdued for a few years despite the central bank's new facilities (a mini-Long Term Refinancing Operation). In addition, unemployment released Thursday ticked up once again and is almost back to cycle highs of 11.8% year over year -- this is surely related to the 18% hike in minimum wage.

Although CPI remains elevated, the only factor preventing the central bank from shifting to a dovish stance is the uncertainty surrounding the IMF negotiations and the risk of a spike higher in EUR/HUF.

This is a wise position to take, in our view, as we see a lot that could go wrong still. The forint is one of the trickiest currencies to trade at the moment, but we think the balance of risk is toward higher EUR/HUF in the short term.


Poland's revised current account deficit came in much wider than expected. The deficit increased back to 5 billion euros in the fourth quarter against expectations for a narrowing to 4 billion euros. This is another disappointment and will weigh on the zloty's medium-term prospects, but on balance we still see the country's economic prospect as favourable and expect EUR/PLN drifting toward the 4.10 by the middle of the year.
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