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Daily analysis 05.01.2016

5 Jan 2016 14:12|Marcin Lipka

Situation on the global market is tense. Bloomberg informs about the Chinese intervention on the capital market, as well as on the currency market. The Fed members are calm about the overvalues on the stock market. Lower inflation from the eurozone overvalues the euro. An increase in aversion towards risk is clear on the PLN.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • No macro data that could have a significant impact on the analysed currency pairs.

China is still in the centre of attention

The events from China remain the main catalyst of changes on the global markets. Today the basic index of the Shanghai stock market depreciated again. However, an overvalue within the limit of three percent observed in the beginning as well as the ending of the second part of the session was significantly reduced. Thus, the quotations finished at only slight negatives.

However, there was no significant improvement on the global markets. This can be a result of the fact that today the Chinese authorities intervened on the stock market. The Bloomberg agency informs that “on Tuesday the government funds purchased the local shares by 7% depreciation on Monday”. Additionally, an embargo for selling the shares by bigger investors, introduced in summer last year, is to be extended.

It is also worth noting what is going on with the Chinese currency. The renminbi which is quoted outside the continental China, wore off again to more than its 4-year minimums, and the difference between the official rate increased again. Currently the USD/CNY rate is 6.51, and the USD/CNH is 6.65. This may suggest that a part of investors anticipates a further wear off on the Chinese currency, and further problems on the market.

Quoting unofficial information, the Bloomberg agency informed before noon that “the Chinese central bank intervened on the currency market, in order to prevent too great volatility”. As Bloomberg informs, according to the people who prefer to remain anonymous, “China intervened and will continue to intervene”.

As we can see, the situation continues to be tense. However, it not the most important whether the stock market in Shanghai or the renminbi will depreciate. The investors wonder, how will this commotion on the financial market influence the Chinese economy. If the incoming data is relatively good (at night we will receive the PMI from the services sector, and the day after tomorrow data about the currency reserves), the situation should calm down as it did last year. In the opposite case, the pressure of sellers will maintain on the market. This will be also seen on the currencies of the emerging markets which are significantly further from China.

Fed and inflation from the eurozone

The Fed representatives approach calmly to the events on the capital markets. Loretta Mester, chairwoman of the Cleveland Federal Reserve (with a right to vote this year, slightly hawkish), said in an interview with TV Bloomberg that “the foundations of the American economy are very good, and volatility is the nature of the financial markets”.

John Williams also spoke positive things about the economy. The FOMC representative from San Francisco (close to the Fed consensus, with no right to vote), claimed in his interview with the CNBC that the Unbited States are in a good condition. What is also worth noticing, he expects that there will be between 3 and 5 hikes this year. And even though it is coherent with the median of expectations of all the FOMC members (4 hikes), one could expect that Williams would be for 3 hikes, rather than to expand his range to five hikes. This may be considered as a hawkish sing, especially considering the current market situation.

Getting to the eurozone, it is worth noticing today's publication about inflation. It was clearly below the market consensus (0.2% y/y). Just before yesterday's data from Germany it was +0.4% y/y, and then it was reduced to 0.3% y/y. What is more important, the base case inflation remained on the level of 0.9%, whilst it was expected to increase to 1% y/y. Data from Germany, as well as from the whole eurozone are negative for the common currency, because the increase a chance for a serious discussion regarding the further monetary easing by the ECB.

Few words about the foreign market

Apart from the main market topic, which is the anxiety of the condition of China, it is also worth noting an increasing probability of the further monetary easing in the eurozone. Additionally, if the Friday's data from the American labour market are relatively good, there is a chance that the EUR/USD will end this week above the limit of 1.07.

Global and local aspects

Overvalue of the zloty is mainly and effect of the global commotions, especially the anxieties of the Chinese economy. However, it is worth noticing that the local matters also have a negative impact on the PLN. Poland exits deflation slower than expected, what was shown by yesterday's readings from the GUS. This increases the likelihood of cutting interest rates. Additionally, today profitability of 10-year treasury bonds crossed 3%. 2-year treasury bonds also quoted an increase. Theoretically, with lower inflation expectations they should depreciate. If they grow, it may mean that there is a smaller demand due to a smaller loan credibility in relation to profitability. This also has a negative impact on the PLN.

There is another confirmation that the PLN is affected not only by the global matters. It is the fact that during the three recent sessions the Hungarian forint wore off to the euro by only 0.5%. At the same time the zloty lost 1.2% to the European currency. This additional depreciation to the HUF is a sign of the national currency's weakness, which is a result of the local matters.

On the other hand, fear regarding the monetary policy easing by the new Monetary Policy Council's members can be exaggerated. It is confirmed by the events from December. Additionally, the recent minutes showed that even these representatives of the Council who saw chances for decreases, marked that “monetary policy easing can be performed only in the conditions of a stable currency rate”. Thus, its greater volatility can be a sufficient enough argument for resigning the decreases. Thus it is possible that when the situation on the global market calms down, the EUR/PLN should return to the area of 4.25.


5 Jan 2016 14:12|Marcin Lipka

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 acknowledgement of the source is prohibited.

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