Afternoon analysis 10.02.2015:
The rumors that Greece and its creditors moved closer to an agreement helped stock markets but didn't support the euro. The common currency was pressured before tomorrow's decisive resolutions concerning Greece and Ukraine. The zloty dropped further.
Currently Greece and Ukraine are the major sources of risk for financial markets. On Wednesday there scheduled meetings that may bring a breakthrough in both cases or escalation of the problems.
Greece in spotlight
Euro zone finance ministers meet to decide whether to agree for Greece propositions to mitigate country's debt burden. Unofficial reports from information agencies said that both sides moved closer to a compromise solution.
The proposal is to extend Greece's bailout by six moths and provide 10 billion euro additional loans for Athens. Moreover, the European Commission may also ease country's debt surplus target to 1.5-2 percent of GDP form current 4.5 percent.
Greece leaves bailout program in the end of February. Prime minister Alexis Tsipras on Saturday said that the program will not be extended. A similar scenario would lead to a possible default of the country as it runs out of money in next few months. Thus, the specter of euro zone dismantle has been evoked. However, given today's information, the negative scenario is less likely.
The Ukrainian crisis is the major risk source next to Greece. Tomorrow Russia, Ukraine, Germany and France leaders gather to seek a solution for the situation after several meetings of top officials in last few days.
The meeting is of crucial importance and is probably the very last hope for a political solution of the Ukrainian crisis. If there is no agreement, the European Union will impose additional sanctions on Russia and the United States will probably decide to provide military support for Kiev, including lethal weapon.
Negative scenario will lower probability of a peace agreement in East, what would hit financial markets and result in heightened risk aversion (what would affect the zloty). However, given involvement of the key European politics in the negotiations and possible fallouts from failure, the chance for a positive outcome is rather high.
The zloty, as other currencies in the region, was negatively affected by the heightened risk aversion. The Polish currency dropped against all its major pairs – the CHF/PLN hovered above 4 zloty for a second day in a row. The euro briefly moved above 4.20 zloty and the dollar was above 3.70.
Recent information that Greece and EU partners moved closer to a compromise were not reflected in the currency market (the euro remained weak), but it provided support for the US and European stock markets. Thus, there is hope that some of this positive sentiment will percolate to currency markets.
The zloty has remained under pressure of the broad market developments. As a result, the potential for appreciation is dampened. However, if tomorrow's key meetings yield positive outcomes, the way for a stronger zloty will be paved.
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