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Afternoon analysis 02.09.2014

2 Sept 2014 17:02|Artur Wiszniewski

The euro extended losses against the dollar amid the Ukrainian crisis and speculation for ECB stimulus. The zloty remained under pressure from risk-aversion and MPC meeting. The frank rose despite poor economic data. The pound dropped due to increased support for the independence of Scotland.

The Swiss economy failed to grow in the second quarter. The growth of gross domestic product was flat, quarter on quarter, lower than expected 0.5 percent. That was the worst result in the last two years. The GDP growth eased to 0.6 percent on a yearly basis from 2.1 percent in the previous quarter.

The poor figures pushed the Swiss currency lower only for a moment. Later on, the franc regained it’s loss and rose against the euro. The frank is fueled by the increased geopolitical risk – when the risk is heightened, investors seek safe haven assets like the Swiss currency. Given the unpredictable consequences of the Ukrainian crisis to fragile economic recovery in the eurozone, the frank is favored against the euro.

The scale of the appreciation of the franc is limited due to a cap, which was imposed by the Swiss National Bank in September 2011. The SNB set a floor of 1.20 per euro on the franc to prevent the export-oriented economy from the risk of deflation and recession.

The Swiss currency remained at the highest level against the euro since the end of 2012. The Swiss currency was bolstered by the escalation of the geopolitical risk in Ukraine and in the Middle East. In addition, the frank is supported against the euro by speculation for ECB stimulus. The EUR/CHF fell to 1.207.

Scottish independence hit the pound

The pound fell sharply after the latest survey was published before this month's referendum on the independence for Scotland. The pools from YouGov for The Times and The Sun newspapers showed the increase of support for the independence to 47 percent and the number of opponents dropped to 53 percent (only people willing to vote). The advantage of opponents shrank to 6 percent points from 14 pp. in the previous survey.

The prospect for independent Scotland creates additional risk for the pound. The British currency is under pressure of expected interest rate increase. The Bank of England was considered the first main central bank to raise the cost of credit after the crisis. But BOE President, Mark Carney, said the monetary authorities will decide whether to drop accommodative policy based on labor market developments (especially wage growth).

The pound fell against the euro and the dollar. The GBP/USD dropped to 1.65 and the EUR/GBP rose to 0.794.

The euro fell

The European Central Bank will announce its rate decision on Thursday. A change in the monetary policy is not expected. However, the market participants will seek clues from ECB about the outlook of the asset buying program.

The ECB President, during his speech at the Jackson Hole, fueled appetites for quantitative easing in the euro zone. Nevertheless, with regard to the German disagreement for ECB additional measures (Wolfgang Schaeuble has criticized this concept many times in last few days), the chance for imminent action is low. Firstly, the ECB must asses the impact of tools that have been already used (record-low interest rates, no SMP sterilization and negative deposit rate) and those to be used (TLTRO), before making the next step.

To sum up, the market expectation for ECB additional stimulus in September may have exceeded the reality. Therefore, there is a possibility that the ECB statement will support the euro. The euro fell to 1.311 against the dollar – the lowest level since September 2013.

The zloty under pressure

The Monetary Policy Council tomorrow will decide on interest rates. The odds for a cut are low. Although the Polish economy needs a more accommodative policy, the MPC must consider consequences of cuts in relation to the Ukrainian crisis. Lowering the interest rates may result in a significant increase in the zloty's susceptibility for risk-aversion. And that may pose an additional risk to the Polish financial sector.

The Ukrainian crisis is elevating. Yesterday the German Chancellor, Angel Merkel, criticized Russia for escalating the tension. She also said that the European Union will accept the cost of additional sanctions to stem Russian expansions in Ukraine. The U.S. president Barack Obama is heading to Tallinn in Estonia, to reaffirm Baltic States about U.S. adherence to its obligations stemming from NATO Pact. The visit was criticized by the Russian authorities.

The zloty fell against its major pairs except for the pound. The euro rose to 4.213, the dollar increased to 3.211 and the frank gained to 3.487. The pound dropped to 5.295.

Wednesday's MPC statement may weaken the zloty, if monetary authorities sketch the clear the outlook for intern rates cut.

2 Sept 2014 17:02|Artur Wiszniewski

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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