Afternoon analysis 13.07.2015

Greece has agreed to implement reforms in exchange for a new bailout. The market focus shifts to the Federal Reserve as the Greek crisis is reaching its end. The zloty gained against the euro and the franc, but the dollar increased.

After a six month standoff, the Greek Prime Minister Alexis Tsipras agreed a deal with the European countries. However, the Greek government suffered a defeat. The reform plan that will be implemented in exchange for financing is comprised with measures that have been criticized by the Syriza party since the very beginning (detail on the agreement is our previous commentary).

Although there was a broad relief in the markets, we can expect that there will be a short period of heightened risk aversion as Greece will implement the reform plan. Greece has until Wednesday to implement a package of bills to allow the eurozone national parliaments to agree disbursement of financing. The effort is caused by the fact that Greece is due to repay the European Central Bank on 20 July.

It is very likely, that the radical part of Syriza will try to impede the legislation process, which may briefly increase uncertainty. The situation will get more serious later, when the country starts negotiating the third bailout with the European Stability Mechanism. However, it is still a distant event.

The German parliament will probably vote on the Greek bailout on 17 July. The German defiance against the Greek government may result in higher volatility in the markets.

The European Central Bank left the level of emergency liquidity for Greek banks unchanged. The limit is still 89 billion euro. As a result, the capital control remained in place and banks will remain shut.

Nevertheless, an ongoing easing of the Greek crisis will shift the market attention to the Federal Reserve. This week the Fed President Janet Yellen will deliver a report on the monetary policy to Congress. Yellen's speech will probably provide some useful information on interest rate hikes. On Friday, the Fed Chair said interest rates will go up this year. But she did not say, whether there will be two hikes or just one hike.

As a result, the EUR/USD resumed its decline. As the ECB is set to keep interest rates low, the euro is a financing currency. Thus it will drop if the market atmosphere is positive. The carry trade was observed on Monday’s session.

Optimistic NBP

The July report on inflation from the National Bank of Poland revealed a quite optimistic view on the domestic economy from the central bank.

The NBP sees modest growth of the world economy. The US returned to growth after a slippage in the first quarter. The European countries also grow, but slower. However, the emerging markets economies are performing not very well. Nevertheless, the first quarter brought an increase in exports, which resulted in a better GDP growth.

The major growth factor was domestic demand. It was supported by consumption (due to an increase in employment and real wages) and investments. It the second quarter, the GDP growth was probably close to the previous three month period. The current account balance increased in the first quarter and was positive for the first time since 2004.

The NBP increased the forecasts for GDP and inflation. The economy will grow 3.6 percent in 2015 and 3,4 percent in 2016 (up from 3.4 and 3.3 percent respectively). The CPI growth will stay at minus 0.8 percent this year and 1.5 percent next year (earlier the forecasts were minus 0.5 percent and plus 0.9 percent).

Currently the zloty is influenced by the improvement in risk appetite. As a result, the euro and the franc dropped. However, the pound was little changed and the zloty gave away earlier gains against the dollar. Given the expectation for the Fed to rise rates and the carry trade in the euro market, the EUR/PLN will probably decline. However, the USD/PLN will stabilize with a tendency to increase.