Afternoon analysis 18.02.2015

, author:

Piotr Lonczak

Reports form Poland gave no insight into the plans of the Monetary Policy Council. Greece to ask for loan extension, but Germany oppose. The Ukrainian crisis marginalized.

The standoff between Greece and euro zone countries has no significant influence on the markets. The chance for a compromise is much larger than a scenario leading to Greece leaving the monetary union.

Brussels and Athens do agree that Greece needs an extension of financing as basis for further negotiations – however the proposals are named differently. The Syriza government says it needs a loan extension, whereas the Eurogroup is pushing the country to accept a current bailout extension.

The issue is that Eurogroup's proposal is coupled with austerity plan. Prime minister Alexis Tsipras took power by vowing to undo reforms imposed by international creditors. Thus, the Greek government sticks to its promises, what is not acceptable for other euro zone countries.

Nevertheless, both sides know that Greece leaving the euro zone would be destructive for every one. Therefore, a some form of agreement needs to be reach to avoid a negative scenario. The Greek case will drag on until there is a time, and the deal will be sealed in the last possible moment.

Recent news concerning Greece say that tomorrow Athens will ask for a credit extension as a way to avoid bailout terms. Germany is still opposing a similar solution.

Poor US reports

The euro remained in a narrow band 1.1360-1.1410 dollar. The EUR/USD dropped to the lower band.

The common currency didn't exploit poor reports from the US economy. The reading from housing market – building permits and housing starts – missed expectations. Moreover, the data on producer's prices and industrial productions were not favorable for the dollar.

Last reports from the US are rather below expectations. Although readings will not change the Federal Reserve plan to rise rates in mid 2015, they may spur a short term correction in the dollar market. Today minutes from POMC meeting are scheduled – the publication may provide some insight into Fed's view on the interest rates outlook.

Ukraine leaves headlines

A chance for further stabilization in Ukraine is getting higher. Information agencies said that the Ukrainian army resigned from defending Debalcewe – the last territory of heavy fighting after cease fire has been announced. Although the situation is tense, the geopolitical risk is getting lower in the region. The zloty would benefit from this situation.

Reports from Poland missed expectations. Retail sales increased 0.1 percent on a yearly basis – less than 0.6 percent projected. The result is somewhat surprising as yesterday's data on wage growth showed 3.6 percent gain. Given solid pace of wages growth and record low inflation, the purchasing power of households should have increased, but that was not the case.

Moreover, the industrial production growth was also slightly lower that projected – it rose 1.7 percent against 1.8 percent forecast. Moreover, the construction also missed expectations by rising 1.3 percent.

Coupled with yesterday's report, the overall landscape of the Polish economy is not clear. As a result, the outlook for interest rates remained clouded. The Monetary Policy Council will assess the reports in the perspective of forecasts from the National Bank of Poland as the latest reports are not decisive.

Further marginalization of the Ukrainian crisis and close agreement on Greece create a supportive environment for the zloty. If risk aversion fades, the Polish currency would rise against major pairs, especially against the dollar and the Swiss frank.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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