Daily analysis 21.01.2016:
Another wave of sell off on commodity currencies and panic slide on the ruble after new lows hit the crude oil. The EUR/USD remains stable before the ECB meeting. The zloty is at new 4-year lows to the euro. Further weakness of the Polish currency to the forint.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.00: Industrial production from Poland (survey: +5.5% y/y).
- 14.00: Retail sales from Poland (survey: +3.2% y/y).
- 14.30: Press conference and statement after the ECB meeting.
Another round of commodity currency slide
Yesterday there was another wave of crude oil sell off. The Brent has lost around 26% since the beginning of the year. It pushes commodity currency lower. Today the dollar hit 85 roubles, the highest level in history and 10% more than on Tuesday's afternoon.
Reasons behind the oil slide are still the same – oversupply and fears regarding demand stability caused by emerging markets fears, especially China. The less important case is currently the dollar issue even though the US currency is close to multi year highs especially to the EM counterparts.
On Tuesday the IEA (International Energy Administration) summarizing the last year claimed that the global oil inventories rose by 1 billion barrels in 2014-2015 and it expects to be risen further by 285 million barrels in 2016. Additionally the IEA writes that in a scenario when Iran adds 600k barrels till mid year and with the same level of production by other OPEC members the global glut may even exceed 1.5 million barrels a day.
Despite the fact that the IEA predicts some contraction of production by countries outside the OPEC the “oil market could drown in over-supply”. And for the question whether it can go any lower the IEA responds that “the answer to our question is an emphatic yes. It could go lower”.
On the other hand returning to the commodity currencies it is clear that investors try to evaluate which country can cope with the oil slide most effectively. 26% oil slide from the beginning of the year pushed Norwegian krone only 1% lower to the dollar, the Canadian currency dropped 4.5% and the Mexican peso lost 7.5%. The most significant slide was experienced on the Russian rouble – it lost 14%. As a result we may assume that if the oil drops further the pressure for the Russian currency would be the highest while the Norwegian krone should be fairly stable due to massive reserves accumulated at its sovereign wealth found.
The ECB meeting
Theoretically today's ECB meeting should not bring too much attention. In December the monetary policy was modified by cutting the deposit rate and extending the QE operation to March 2017. It is hard to expect that after 6 weeks any significant changes can be made.
On the other hand it is worth noting that December inflation projections which were based on average crude oil prices above 50 USD per barrel are supposed to be revised. As a result it should have some impact on the inflation projections. There is also some deterioration of the global sentiment and the risk for euro zone economy has risen.
Additionally the EUR to the basket of trade-weighted currencies rose around 4% since the beginning of the year. It may also crate some downward pressure on the inflation comparing to the base case scenario. Finally there is a low probability that Draghi can may a significant decision, but he can sound dovish and start the discussion regarding further moves before the March central bank meeting. It should create some selling pressure on the EUR/USD.
The zloty remains volatile
In the morning the zloty dropped to 4-year lows toward the euro and 13-year lows to the US dollar. The domestic currency is very also to its Hungarian counterpart. The forint is at highest level to the PLN since two years and the zloty dropped to the HUF 5% since the beginning of the year. It confirms that the recent sell off is due to local issues.
Today some attention should be brought by Polish data. If the retail sales or industrial production turn to be weaker than expected then additional pressure on the zloty may occur. Polish assets are in focus after the last week S&P rating cut and higher volatility also brings some speculative capital.
As a result it is still expected that volatility on the zloty should be strong. It would be visible especially on the historically stable EUR/PLN. Moreover if the global sentiment deteriorate further it is possible that the euro can top 4.60 zloty – the highest level since mid 2009.
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