Afternoon analysis 21.07.2015

Slovakia warned Greece. The dollar dropped from a three month high. Hungary cut interest rates to a record low. The zloty gained against all its major pairs.

The Greek government has submitted the second part of the bills that need to be implemented before the nation launches negotiations with the European Stability Mechanism. The European countries demanded that Greece will implement rules on handling the banking crisis. The new EU law moves the cost of bank restructuring from taxpayers to the creditors’ depositors and owners.

The previous week’s voting on the first part of the bills showed that some lawmakers from the Syriza party were against. As a result, Prime Minister Alexis Tsipras had to reshuffle his government. However, it has not resulted in a break of coalition. And this time, the voting will rather regard technicalities, thus the risk associated with it is limited.

Greece agreed to implement the key bills in two tranches. The first was due 15 July, and the second is due on 22 July. However, the most controversial bills regarding taxes for farmers and pension reform are not expected.

Nevertheless, the Greek government has a lot of work to do. The negotiations with the ESM have to end before 20 August, when Athens must repay the European Central Bank. In such a situation, the Greek crisis may return to headlines, if the nation misses deadlines.

The Slovak Finance Minister Robert Fico warned Athens. He said, if the nation does not fulfill its obligation stemming from the bailout deal, the Bratislava government will insist on Greece leaving the eurozone.

Euro increased

After the period of gains fueled by the Greek optimism, there is now time for some profit taking. Thus, the European and US markets were lower today. The situation was similar in the currency market, where the dollar dropped. The US currency dropped from the highest level in three months.

Currently, we are observing a swap of roles between the euro and the dollar. The European currency, as a financing currency, is weakening when the risk aversion is stronger. It is caused by the divergence in the monetary policy between the European Central Bank and the Federal Reserve. The Fed is expected to hike rates in September. However, if the expectations alter, the dollar increase may be limited (more on the issue in our previous commentary).

The zloty resumed gains

The Czech National Bank warned that it will not accept the EUR/CZK below the 27 crown level. The statement came after the Czech currency reached the highest level since November 2013. The crown dropped after the comments.

The Hungarian Central Bank cut interest rates by 15 basis points to 1.35 percent. The decision surprised many as the expectations were for a 10 basis point decline. The monetary authorities said today's cut was the last in the cycle, and the current level will be held for a very long time. As a result, the forint increased against the euro.

On Tuesday, the zloty exploited the weakness of the dollar, and recouped some of yesterday's losses. The Polish currency gained against the pound, and was stable against the euro and franc. Whether the move will continue is dependent on the expectations concerning the Fed's policy.