The turn of the year is usually a period of forecasts for the next 12 months. However, this commentary represents a slightly different approach: what's important is the question: will any of currently observed trends change in the quarters to come?
For a majority of people related to widely understood economy or currency market, it is no surprise, that the year 2014 will be associated with 50% reduction of oil's price, sudden dollar strengthening, multiple crossing of historical records on the New York's stock market and increase of conflict in eastern Europe.
Before the possible scenarios of situation's development for the upcoming months are discussed, it is worth taking one issue into consideration. Will the change of a date in calendar have any influence on the currency market, economy or geopolitics? If we will look at any chart or chronological record of events, no turn of trend occurred in the areas of calendar's change. That is the way it was this year, as well as the past years. Thus, there is a bigger probability, that the given tendencies will be continued than disturbed.
Oil – bottom is relatively close and stabilization after rebound
The opinions that were often reiterated in 2014 is that we are close to the bottom when it comes to oil, however, it did not turn out to be true. The oil was getting cheaper each month and reached the levels of 55 USD per barrel at the end of December. Almost 50 per cent reduction of WTI price occurred only twice in the past 50 years. Probably all of us remember the reductions of fuel prices from the turn of 2008 and 2009. The current situation is not similar to that period. Back then, the world has been plagued by the biggest crisis since the Great Depression – main economies entered the recession, unemployment rate in USA increased twice, and the decrease of prices was caused mainly by demand breakdown.
The real and nominal prices of oil from 1968
Source: EIA (U.S Energy Information Administration). The red line shows the nominal price of oil. The blue line shows the price of oil in previous years, with consideration of money's purchase power.
The current situation reminds more of the one from the second half of the 80's. Back then, after the period of high prices, many smaller producers appeared and they began to take away the share of the market, from the Persian Gulf countries. Currently this role has been overtaken by the United States, that have increased their extraction by a half in the recent quarters.
In the 80's, OPEC initially reacted with decrease of extraction. This time Saudi Arabia and their closest allies did not make this mistake. They have decided not to fight against the increasing share of competitors on the market with the help of a price, knowing, that just as 30 years ago, it will end with a failure, and they will be forced to increase the supplies, in order to regain the lost share. Thus, they have decided to allow the market to set the price, having the knowledge, that their costs of production (less than 5 USD per barrel) are the lowest in the world, and in a longer term, those who charge most for oil will be “under the wall”. When such scenario will fulfil, the demand will equal the supply, and the price will be stable.
However, the period of inertia in this sector is very long. Thus, the setting of balance price without the active participation of the cartel, takes a lot of time.
Apart from the matter of supply, we also have a problem of reduced demand due to slower than expected economic development. It results in significant prices reduction on the market of low price elasticity of demand, in order for the demand to catch up with the supply and the prices stabilize.
As a result, after reaching the “bottom” (that probably will not be less than 40 USD per barrel) in the first half of the year, and working off in the areas of 20-30%, we will enter, against intuition, the period of long stabilisation on the oil market. It will probably last many years, generating a visible stimulation of the developed economies, that are net importers of the main energetic resource.
Rouble, krona, peso and Canadian dollar under pressure
Omitting geopolitical matters or the speculations, it should not be expected that the rouble will regain strength, and its getting back to the levels from the beginning of 2014 is practically impossible. The base case scenario is the maintenance of USD/RUB in the limits of 60 with a possible test of areas of 70, if the Brent prices would decrease extremely (below 35 USD). However, the rouble will probably not weaken more, than the expected level of inflation amounts. Especially, that the restrictive monetary policy should encourage a part of the capital, to locate the means in this risky environment.
We can also expect a successive depreciation of Norwegian krona. The authorities in Oslo are clearly standing by fiscal, as well as monetary stimulation. It should also quickly convert to the the currency weakening. The pace of its depreciation may amount, same as in 2014, even 20%. It can happen, even if Brent will not clearly decrease below its current levels.
NOK/USD and Brent oil
Source: Bloomberg. The white line presents NOK/USD pair (the drop shows the decrease of Norwegian krona value; left scale) and the price of Brent oil (yellow line; right scale).
Both the Mexican peso and Canadian dollar, should avoid a bigger reduction of prices. Both economies will take advantage of the improving condition of the United States, despite that export of oil is approximately 2% of their GDP. CAD, as well as MXN, will probably not experience a bigger reduction of prices, than 5%.
Yen's further weakening. More riddles on euro
After winning the early elections, the decision-makers in Japan, will probably intensify their efforts to revive the inflation and economic growth. To do that, they will use fiscal policy, as well as exceptionally aggressive monetary stimulation. Just like in the past quarters, the authorities in Tokyo will also try to reactivate the export “engine”, by decreasing the value of local currency. In the basis scenario, yen should lose at least 10% in relation to the dollar. It will cause, that year 2015 will be the period, in which we will hear about the highest USD/JPY rate from 17 years.
The behaviour of USD/JPY in recent 20 years.
Source: Bloomberg. Increase of USD/JPY pair means weakening of Japanese yen against the American dollar.
The European currency can be one of only a few instruments that will really change the trend in the upcoming 12 months. It will probably not occur in the first half of the year, but it is not excluded, that we will be able to buy euro for only 1.15 USD. If it will happen, we will be able to speak about the lowest levels since 10 years.
The increasing surplus on the current account, may be one of the catalysts of main currency pair's rebound. Just now it is +250 billion euro for previous 12 months. In the scenario of maintenance of average oil prices on current level, the euro zone will save at least another 100 billion euro on the import of “black gold”. That way, the positive C/A balance will increase up to over 3% GDP. In a certain moment it should be an important argument for the buyers of European currency.
However, in order to see a higher rate of EUR/USD at the end of 2014, than 2015, some changes in perception of monetary policy in the area of common currency, must occur. The decision about introduction of national debt purchase, has practically been already made, and the instruments of monetary market, show the maintenance of inflation and money rates, on a record low level during the upcoming quarters.
However, the activation of QE by EBC does not have to mean a few years long purchase of treasury bonds, that had place in USA or is currently observed in Japan. It may look more “punctual”, as it was in case of United Kingdom. If a slightly faster economic growth would be involved in it, the market “will realise”, that there are less and fewer arguments to sell the common currency. Especially, if we will consider earlier expectations. Adding to that a slower tempo of interest rates increases on the other side of the ocean, which is not excluded considering more and more doveish FOMC cast, we will be only one step from finishing year 2015 clearly above 1.20.
EUR/USD in recent 20 years
Source: Bloomberg. Decrease of EUR/USD means the increase of American dollar's value in relation to euro.
We should not draw too many conclusions from the disturbance of the December's EUR/PLN rate. Significant majority of fundamental factors, speaks for the maintenance of zloty's rate in the limits of 4.10-4.20 per euro, or its enforcement in the direction of 4.00. Considering the environment of low interest rates in the euro zone, and the perspective of EBC activating quantitative easing, and also MPC reserve towards the reduction of money's value, the capital's liquidities should favour zloty.
EUR/PLN in recent 5 years
Source: Bloomberg. The increase of EUR/PLN means weakening of zloty against the euro.
The zloty should also be supported by the fact of lower evaluation of oil. The decrease of import related with overestimation of fuels, can amount even 5 billion euro, by the same consumption of energetic resources. It can cause, that not only the commercial trade in 2015 will be positive, but we will end the current account “on plus”. Cheaper oil also means savings for the public (including transport) and private sectors, and also for the consumers. Before the “fuel shock” the foreign institutions expected the increase of Polish GDP to approximately 3%. In this moment, assuming that Brent will not increase and considering IMF estimations on oil's influence on GDP, it is not excluded, that we will finish the year 2015 with the increase on the level close to 4%.
We should also not forget about country's improving fiscal situation. Faster economic growth and its advantageous structure, combined with a lower unemployment, means a significantly lower deficit of public finances' sector, which has a chance to unexpectedly go down in the areas of 3% GDP, already in 2014. It would cause taking off the procedure of excessive deficit from Poland, by the European Commission. It would also be a solid argument for the rating agencies, to increase the “perspective” of our country's credit credibility. This is also a positive element for national currency.
Of course, apart from the chances, zloty has also some dangers ahead of itself. The main factor that can decrease PLN, is the situation on the east of the continent, and further increase of tenses between the world powers, that will effectively decrease the export in that direction. The scale of this danger is difficult to foresee, but if the conflict will be limited to what we have observed in current year, its negative effects will be definitely smaller, than the positives mentioned in previous paragraphs.
Considering all the factors in the base case scenario, EUR/PLN should move for the most of the time in the division of 4.10-4.20 with relatively high probability of going down in the areas of 4.00. The franc should behave in a similar way. Its quotations will probably decrease to 3.35-3.45, with a perspective of dropping below 3.30.
In 2015 the majority of market trends should be continued. The oil will probably remain under further pressure, the currencies dependant from the resources will be sold out, and Japanese yen will record few dozen years minimums in relation to the dollar. The situation on zloty will look the similar way. It will return to the side trend, and the recent wear off of national currency, will be remembered as a short term market anomaly.
Thus, our analysis shows, that the change of date in the calendar will be ignored by the market's participants, and the majority trends observed from few quarters, will maintain unvaried throughout the following months.