Afternoon analysis 20.07.2015:
The Greek crisis is losing importance. The divergence between monetary policy in the US and the eurozone to drive the markets. The zloty dropped on Monday.
Last Friday, the Greek Prime Minister Alexis Tsipras reshuffled his government. However, the Syriza's coalition government was not broken. Thus, the position of Tsipras is strong enough to exclude a snap election scenario. If his government manages to win the next crucial votes on the bailout program bills, it is very likely that the current government will survive for longer than expected.
As expected, Greece received a 7.2 billion euro bridge loan. The money was spent on the ECB payment due today, and the IMF payments that Greece has missed. The Greek banks were opened today, but capital control remained in place. The daily limit of withdrawals has been replaced by the weekly limit of 420 euros.
The discussion on debt relief continued. Some form of reducing debt burden is expected by the IMF. However, the European countries have different views on the issue. The German Chancellor Angela Merkel dismissed any nominal debt reduction as a similar move will violate the EU law. Nevertheless, the Berlin government is willing to consider an extension of debt maturity or reducing interest, but only when Greece meets its obligation stemming from the latest agreement with creditors. The Italian Finance Minister Pier Carlo Padoan said, that debt extension is a good solution.
The prospect of debt relief will be used as an incentive for the Greek government to pursue the reform plan. All in all, Greece will launch negotiations with the European Stabilizing Mechanism without any delay. As a result, the Greek crisis will lose its position as the major risk factor.
The monetary policy divergence
The market focus will shift to the Federal Reserve. The latest signals from the US central bank point at September as the moment of an interest rate hike. Investors are also expecting, that the September term is very likely.
On the other hand, the European Central Bank pursues its bond buying program. The scheme launched in March will last until the end of 2016. Recent reports on inflation, unemployment rates or GDP growth are not suggesting that the economic situation is strong enough to consider any limitation of anti-crisis measures.
The prospect of record low interest rates in the eurozone and the expectations that the Fed will raise rates soon will continue to pressure the euro. Moreover, the euro will be financing currency to a larger extent. The carry trade will push the euro down, when the sentiment is positive.
After a very good week, the zloty gave away some gains on Monday. One reason is the willingness to take profits.
Moreover, the risk aversion to the emerging market currencies has increased. It was due to the terrorist attack in Turkey, that hit the lira. Moreover, the outlook for the Fed raising rates is weighting negatively. And finally, the recent comments from the Monetary Policy Council suggest that the members that have been considered hawkish are getting more dovish (more on the issue in our previous commentary).
As the optimism stemming from the Greek resolution fades, the market focus is shifting to the Fed. The latest reports from the Polish economy are mixed, and the Fed is hawkish. As a result, the zloty's appreciation potential is limited.
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