Daily analysis 27.01.2014:
Another day with high volatility – EM currency weakness and a strength of traditional “safe havens”. Why the EUR/USD is fairly stable? What is the probability that the Federal Reserve decides to pause tapering on Wednesday? Issues with the lira and Argentinian peso have put a significant pressure on the zloty.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- Besides the market consensus we are also publishing the consensus range. It gives more info how economists predict the incoming data and what kind of impact can be generated from surprising reports.
- Already published IFO index – survey was at 110 level. The actual reading is 110.6.
- 16.00 CET: New home sales from the US (survey 450k).
Turkey, Argentina, Ukraine. Will the Fed pause taper?
It took only 6 days to test the Turkish economy minister statement. On last Tuesday I quoted Nihat Zeybekci, who said that: the current lira volatility poses no risk to the economy even if it falls to 2.35-2.40”. At that moment the local currency was traded at 2.25 and a 5% buffer seemed to be quite difficult to break. The market, however, accepted the bet pretty quickly and today, despite last week solid intervention (around 3bn USD), we tested 2.35. It should be a good lesson for any government member not to provoke speculators. The advice is particularly valid when a country deals with broad corruption allegations, has twin-deficit (both current and budget around 7% GDP), the foreign reserves are melting, foreign investors struggle to protect value of their assets, and around a corner there is a short term capital which is just waiting to jump and further destabilize the currency.
There is hardly any good news from other EM countries which deal with their local issues. Ukraine is still in a deep political crisis no valid solution is on the horizon (especially taking into the account how divided is the country). Moreover, Argentine does seem to loose any grip on it falling currency. The foreign reserves dropped to 8 year-low and the central bank is loosing a tool to keep the value of the peso. We can expect that in a near future the country will have to modify its monetary policy, admit that it cooks inflation statistics (officially the prices rise less then 15%, but unofficially the inflation is around 30%). It is also quite possible that the peso will have to fall much closer to the black market rate (currently at 12-13 per the dollar; while the official rate is at 8.00 after a 15% devaluation last week). Rising interest rates will significantly cool the economy and push Argentine into more trouble.
Despite a visible risk off trade (both Swiss franc and Japanese yen are rising) it is worth to note that the dollar does not gain the value and the EUR/USD is pretty stable. It is true that the euro is boosted by fairly solid macro reports (PMI, IFO, current account), but when a risk aversion is significantly rising investors do not look at economic reports, but move swiftly to the dollar. It is possible that the trade is not that obvious, because there are some rumors that the tapering can be paused for some time (either this week or in March) due to recent sell-off on equities and EM. Currently such perception does not seem to be very valid. The US economy seems to be doing pretty good (besides the January jobs report) and most FOMC officials agree with a gradual taper (10 billion per month).
Summarizing there is a slim chance that the EM crisis will be solved quickly. A relative weakness of the dollar should be reversed after the Federal Reserve statement on Wednesday and the “greenback” can significantly gain value to the euro (at least in short term).
On Friday we moved significantly above 4.20 level, what was a major warning sign that the depreciation can be longer that we previously thought. At the beginning of the European session, in line with the lira slide, we topped 4.23 per the euro. Despite that Poland is considered as a stable country and a part of the core EM economies, the zloty can be under presser especially a short-term capital will try to destabilize the zloty. The technical analysis also doesn't look favourable, and after rising over 4.23 we can even toward 4.30-4.36. Even if the move will not be as deep as TA shows the zloty will have to wait much longer to return in the 4.14-4.18 range.
Summarizing, it is worth to observe the Turkish lira first. Both the correction and further depreciation of the zloty will come from appreciation or slide of the Turkish lira.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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