Daily analysis 11.01.2017

11.01.2017 13:26|Marcin Lipka

New weakness records on the Turkish lira and the Mexican peso. The dollar’s condition is slightly better, despite a decrease in oil prices. The zloty remains stable against the euro and gains slightly against the forint before the MPC meeting.

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

  • 15.15: Mark Carney’s testimony.
  • 16.00: Announcement from the MPC and the press conference.
  • 17.00: Donald Trump’s testimony.

New weakness records on Mexican peso and lira

The condition of the Turkish lira continues to deteriorate. Today, the USD/TRY was near the level of 3.90, which means a 10% increase since the year’s beginning, as well as a 30% appreciation since the end of September. To compare, the USD/TRY was at the level of 2 at the end of 2013.

The fatal condition of the Turkish currency is caused by a few factors. This situation is pictured well by today’s data regarding the current account. Between January and November 2016, the current account balance was at the level of negative 28 billion USD (approximately 4% GDP). This means that the deficit was by 1 billion ISD larger than it was in analogical period of 2015, despite an approximately 9 billion USD decrease in import.

This high deficit is mainly a result of a worse trade balance of services, especially tourism. In 2014, the tourism balance was at the level of positive 24.4 billion USD. One year later, this index went down to the level of positive 21 billion USD, to reach the level of positive 13 billion USD in 2016. Therefore, despite the lira’s wear-off, tourism’s surplus is 40% lower than it was two years ago. Of course, this is strongly related to the region’s geopolitical situation.

Another problem is the foreign currency debt of the local companies. This is a common situation in the emerging markets. Bloomberg calculated that the net obligations of the Turkish companies were above 210 billion USD in August. This is twice as much than at the end of 2010. This unstable currency situation may cause that some companies will experience problems in controlling their debts.

Yesterday, we took note that in the short-term, pressure on the lira is caused by too mild monetary policy. The foreign capital demands higher return rates due to increasing economic risk, as well as inflation above the level of 8% YoY. However, the exchange rate will become sufficiently attractive to stop the overvalue, especially if negative information stops appearing and the central bank will return to a relatively hawkish policy. Nevertheless, we have not been receiving such signals for the time being.

Overvalue of the Mexican currency is not as dramatic as the lira’s overvalue. The USD/MXN increased 5% since the year’s beginning and more than 15% since the American presidential elections. However, these changes are mainly a result of anxieties of a more protectionist approach from the USA, when it comes to the trade policy. More than 70% of export (worth 400 billion USD) goes to the USA. According to the data from the World Bank, Mexico exported 95 billion USD worth automotive sector products in 2015 and 84% of this export went to the United States.

Mexico seems to be more prepared for handling the weaker currency problem than Turkey. The Mexican trade balance has been positive in many years. Moreover, the Mexican central bank increased interest rates from 3% to 5.75% since the end of 2015 and the monetary tightening will most likely continue, despite that the prices growth is relatively limited (positive 3.3% in November). Baxico also has 175 billion USD of currency reserves, as well as the credit line in the International Monetary Fund. If the American import from Mexico does not reduce, the peso has a chance for a significant work-off of its recent losses.

Dollar is slightly stronger

Recently, the dollar has been losing against the majority of the developed market currencies. However, today the American currency is working-off its losses. Despite the declines in the oil market and the lack of increase in profitability of the debt market, the EUR/USD is nearing the area of 1.05. Moreover, the GBP/USD tested the 1.21 level before noon.

It’s most likely that some of investors are counting that today’s testimony of Donald Trump (5.00 PM CET) will refer to economic policy. Potential comments regarding anticipated changes in taxes, as well as in infrastructural expenses, will be the most significant for the dollar. However, the Mexican peso will anticipate statements regarding potential trade restrictions.

Zloty is calm

The zloty has been doing relatively well over the past few days. The EUR/PLN is stable and the Polish currency is nearing its maximum against the forint. Today’s MPC meeting will be the most crucial event. We think that the Council will suggest rate hikes before the end of 2017, due to relatively rapid inflation and the expected improvement of the business cycle in the second half of the year.

If some of the Council’s members suggest a more restrictive approach, the zloty could slightly gain value. However, the market may be cautious due to the uncertainty regarding the decisions from the rating agencies on Friday. Therefore, the exchange rate will most likely remain near its current level.



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