Afternoon analysis 01.06.2016

The oil is under pressure before the OPEC meeting. The OECD on risks regarding Brexit. The zloty is weaker in the afternoon. Marek Belka on interest rates in an interview for Bloomberg.

The OPEC meeting is expected to be concluded tomorrow. Despite the fact that there are some opinions that the cartel may surprise and freeze production due to the fact that Iran is approaching its export goal, this idea looks to be rather improbable.

The Saudi Arabian strategy to keep pumping at full capacity and put pressure on higher cost producers seems to be working. Both the WTI and Brent prices jumped around 80% from last year’s low. Moreover the cartel is benefiting from production disruptions and higher demand for gasoline in the US and in India.

As a result there is a low probability that the OPEC would like to intervene especially that it failed to do it last year. The base case scenario for the Vienna meeting is to keep the current policy unchanged, so the price will be determined by market forces – supply and demand.

The OECD on Brexit

In our earlier analysis we noted some significant changes in opinion polls concerning Brexit. The OECD also input some comments in it’s the most recent economic outlook regarding the upcoming referendum.

The OECD writes that, “the outcome of the referendum is a major risk for the economy.” The Organization for Economic Cooperation and Development also notes that, “a vote for Brexit would heighten uncertainty, raise the cost of finance and hamper investment.”

The Organization also significantly lowered the GDP estimates for the British economy. In November, it expected that the UK GDP would grow in 2016 and 2017 at a level of 2.3% and 2.2%, respectively. Currently the OECD predicts growth at 1.6% this and at 1.9% next year.

It is also worth noting that the pound has been weaker since the morning. Currently, the cable is getting closer to the 1.44 level, while at the end of the previous week it was worth more than 1.47. Most of the sell off is a result of higher fears regarding Brexit and its expected negative impact on the pound.

Weaker zloty. Belka's statements

The EUR/PLN is returning toward the 4.40 level while the CHF/PLN is moving closer to 4.40. This is probably a result of mainly due to higher yields on Polish bonds. It is also partially derived from the global situation and the depreciation of other EM currencies and partly due to new OECD projections where both the growth and the investments were significantly lowered for the current year.

There were some comments regarding the monetary policy from central bank chief Marek Belka. He told Bloomberg, “I don’t think that a further reduction of interest rates would produce lower borrowing costs for businesses and even longer-term treasury bonds.” These comments suggest that the governor hasn’t changed his mind regarding the monetary policy even after some weaker data from the Polish economy.

The zloty should remain under pressure in the coming hours but the risks that the euro may significantly exceed the 4.40 PLN level is rather limited, even taking into the account some deterioration of the global sentiment.