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Afternoon analysis 01.07.2016

1 Jul 2016 17:33|Marcin Lipka

Are problems in the British economy, as well as low evaluation of the pound are the only consequences of Brexit? The Mexican peso is gaining value after an increase in interest rates. The euro is at the level of 4.40 PLN.

What are the consequences of Brexit?

The past week behavior of the global shares market might have suggested that investors were not perturbed with the negative Brexit consequences for the worldwide economy. This could be true to a certain degree. However, optimism in the stock markets may also result from expectations regarding future interest rates.

Global investors came to a conclusion that due to Brexit, the central banks will be more cautious regarding the monetary tightening. Profitability of the ten-year treasury bonds from the USA, went to their lowest level in history. We can observe a similar behavior of the debt instruments in the majority of the developed markets.

As a result, those who manage the funds have a choice between shares, bonds and cash. In the current conditions they prefer to choose the first one out of the above options. This is because the two others are beginning to bring a negative nominal refund. On the other hand, enterprises are still earning money, as well as pay the dividend for the time being. Even if the fear of the global economy is greater, the risk for the companies is reduces by the lack of alternatives, as well as lower financing costs.

It is difficult to hope that the British currency will come out of this process unharmed. Deficit on the current account remains at a record high level. Political situation remains unstable. The United Kingdom is endangered with a breakdown. Negotiations between London and Brussels will most likely be very difficult. Moreover, it is expected that the Bank of England will ease its monetary policy. All these factors cause it difficult to find the elements that could support the British currency.

A positive global sentiment supports the currencies of the emerging markets as well. However, the largest effect of lower interest rates is fading away rather quickly. Thus, the global shares market will have to find a different reason for an increase. If it does not happen quickly, we may come to a conclusion that Brexit is not only a problem for the United Kingdom, but also for Europe, as well as the emerging markets. Regarding this, it is worth to remind the example of Greece. This country was causing quite serious disturbances many times, and their impact on the worldwide economy was significantly smaller than it is in the case of the United Kingdom.

Attempt to stop depreciation of peso. Zloty is steady

Even though Mexico is quite distant from the European, as well as the Asian emerging markets, its example may be a warning that a relatively stable situation can get out of control quite quickly.

The Mexican peso is one of the most smooth currencies. This has advantages, as well as disadvantages. One of the disadvantages is a fact that it is used by the wallet capital as a security from the risk on other emerging markets currencies. A strong capital flow causes the situation to become unstable due to quite trivial reasons. It also makes it difficult to bring the exchange rate balanced.

The Mexican central bank (Banxico) tried currency interventions. However, their result was rather miserable. If we are dealing with strong moves that are based on the statement from one of the candidates for the American president, it is very difficult to define what will the range of this move be.

As a result, Banxico decided to clearly raise interest rates yesterday. They increased from 3.75% to 4.25%, while expectations were at the 4.00 level. The Mexican peso is becoming more attractive than other currencies of the emerging markets that decrease interest rates, instead of raising them. This, combined with a relatively low inflation, may cause the USD/MXN to finally stabilize in the 17-18 range, instead of going towards the 20 level, with a global increase in risk aversion.

The situation is quite stable on the zloty. A significant part of yesterday's consolidation has been undone. Thus, the EUR/PLN returned to the 4.40 level. We may also claim that considering the internal, as well as external risks, this level is most likely to become the base case value for the next weeks, if not months.

1 Jul 2016 17:33|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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