Daily analysis 26.03.2015

Military intervention led by Saudi Arabia on the Yemeni territory pushes the oil significantly higher and creates a turmoil on the whole currency market. The SNB interventions on Swiss franc in 2014. The zloty remains strong but “risk off” sentiment threatens the PLN condition.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 13.30 CET: Jobless claims from the US (survey: 290k).

Intervention in Yemen and its market impact

Foreign equity markets slide and yen appreciation suggest that the market experiences risk aversion sentiment. However, the “flight to quality” is not observed on all assets. The EM currencies are fairly bullish, including the zloty. But there is another issue which may create more confusion – the oil appreciation and its consequences.

Saudi Arabia and its allies has stared military intervention in Yemen to help the Sunni government regaining power. It has also pushed the crude oil significantly higher and the market speculates that if conflict does not ease we might see threats for the oil transport through the Red Sea. It is a major oil route with more than 3 million barrels of oil being handled on the daily basis.

Another element pushing the oil higher is increasing risk for the Iranian talks failure. The deadline for Teheran is set on March 31st. As a result the West is scheduled to gradually ease sanctions while Iran would be obliged to quit its nuclear program. It should also bring hundreds thousands barrels of oil per day in a matter of months. But it was already partly included in the price. So unwinding this positions fuels the crude rally even more.

Because both issues (war, threat for Iranian deal) occurred unexpectedly, the reaction on the Brent or WTI was fairly nervous and pushed both benchmarks by 6%. It also caused strong appreciation on the oil export sensitive currencies including the Russian rouble, Norwegian krone and Canadian dollar. However, it is wroth noting that the price appreciation was caused not by demand hike, but by worries regarding the supply. As a result, better condition of EM currencies not related to commodities is rather a result of disruption observed on developed currencies than its internal strength.

Also higher evaluation of the euro is probably the effect of weakening of the dollar against the yen or commodities currency and not an attempt to reshuffle the safe haven dogma. Appreciation of the oil caused by some supply disruptions should not be regarded as an invitation to buy the euro. Contrary if the oil demand would rise due to stronger global economy it would be a valid argument to increase the risk appetite and flow toward the euro.

Swiss interventions

Today the Swiss National Bank (SNB) published a report including the data that interventions to weaken CHF were valued around 25 billion euro in 2014. It is not a huge amount especially taking into account that two years later the SNB bought foreign assets valued at 180 billion euro.

In many paragraphs the SNB claims that the appreciation pressure significantly rose at the end of 2014. The monetary policy committee (MPC) argues that the main reasons behind the franc appreciation were the referendum on “gold initiative”, Swiss franc conversion loans by Hungary and more appetite for safe haven assets which intensified in mid December. The pressure didn't ease even after the MPC introduced negative interest rate.

The foreign market in a few sentences

The Saudi invasion pushed oil prices higher and created some turmoil on the currency market. Despite the higher risk aversion, the euro enjoyed appreciation move and the dollar lost some value. This situation, however, should not last much longer. We will either see some easing around Arabian Peninsula, or the Saudi operation get broader attention which should bring some selling pressure on the euro and EM currencies.

Puzzling zloty's appreciation?

Some distortions of the currency markets are also observed on the zloty. The Polish currency has been gaining value despite increased risk aversion and Brent oil appreciation. The second issue would be positive if the climbing commodity was a result of better global economy. This time, however, it is a result of worries about the supply side of the equation. Additionally, Poland is a net importer of oil, so any significant appreciation would be visible in current account balance.

It is also worth noting that the distortion should not last for much longer. If the broader market condition remains muted and the oil continues to rise due to higher geopolitical risk we should expect to see rather weaker zloty especially to the dollar.

Today the trade should be quite volatile and it is possible that despite the most recent appreciation the session might end closer to 4.10 per the euro. However, when the geopolitical threat dissipates the zloty should return to bullish trend with a target around 4.00 in Q2.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: