Will Stanley Fischer regret his hikes?

- Market movers ahead: Rate decisions take centre stage "In the coming week rate decisions in Poland, Hungary and Israel are expected to take centre stage. We expect all three central banks to keep rates unchanged, but it will be very interesting to see how the banks choose to communicate with regard to the recent rise in fears over a double dip in global growth and change of stance of the Federal Reserve in a more dovish direction. We would especially keep an eye on the Bank of Israel, which could change its bias from a tightening to an easing bias. In this week’s EMEA Weekly, we also take a closer look at the outlook for monetary policy in Poland, Hungary and Israel, based on our Monetary Policy Tracker and the socalled Taylor gap. Lithuanian macro data is due next week. The final GDP number for the Q2 10 should not vary significantly from the flash estimate (around 1%y/y). GDP components data, would support our conclusion that the growth resulting from export and restocking. Recovering in industrial production is expected to accelerate further (to 0.7% y/y in July from 4.8% y/y in June), mostly based on the external demand. However, growth in domestic demand will be slow as unemployment remains at its peak level and wages are likely to stay sluggish for this year. There is no reason to assume the significant acceleration in retail trade during the summer, but in general we expect to see a more intensive stabilisation, mostly due to positive base effect. We expect the decline in the retail trade rate to slow to 3.9% y/y in July, from 6.4% in June. Given that unemployment is structural by the nature it could rise in Q2 10 to almost 19% of the labour force. The Construction sector still indicated a decline trend and will not require, at least in the near future, large-scale labour."
- Fixed Income Outlook: Rates and yields to inch down further "Our Monetary Policy Tracker continues to indicate that the EMEA central banks are likely to go back to monetary easing, which points in the direction of more downside risks to rate and yields across the region. We continue to stress that the biggest downside risks on rates and yields are in Israel and Turkey."
- FX Outlook: Carry erosion: Be careful with shekel and lira "With monetary policy likely to move in a more dovish direction in most EMEA countries we are also likely to see some “carry erosion” across the region. This gives some risks to the region’s currencies – especially for shekel and lira. Our EMEA FX Scorecard overall continues to point toward weaker EMEA currencies on a one- to three-month horizon."
- Scorecard-based trade of the week: Buy ILS/ZAR "We have been long CZK/ZAR for five weeks based on the highest and lowest scores in our EMEA FX Scorecard. However, going into next week the Israeli shekel is the highest scoring currency in the Scorecard, while the rand remains the lowest. Therefore, based on the Scorecard, we recommend buying ILS/ZAR going into next week."

DenDanske EMEA Weekly 20100820