Afternoon analysis 25.07.2016

A calm afternoon in the currency market. Fiscal and monetary situation in Japan. The Turkish lira is clearly stronger. Slight changes on the zloty at the end of the European session.

Situation in the global currency market is calm. Investors are waiting for macro data that will appear on Wednesday, as well as the central bank meetings. In our previous analysis we took note that the Fed will be more significant for our region than actions from the Bank of Japan. However, it is worth noting that Haruhiko Kuroda and the Prime Minister Shinzo may combine their strengths, in order to combine fiscal stimulation with monetary stimulation.

Very low inflation expectations, as well as sustaining stagnation in the Japanese economy are increasing the likelihood that the Japanese monetary authorities will increase the scale of quantitative easing. It will happen either by purchase of extra bonds, or a decrease in interest rates. Another possibility is an increase in purchase of the ETF or the instruments that are based on the real estate market.

However, the idea of a printing money directly (which was very unlikely since the beginning) and use it for financing the government, as well as giving cash to the citizens, is collapsing. The concept itself does not differ much from QE. However, the goal of QE is to provide the economy with a very cheap loan that needs to be paid back. In the concept of printing money directly, there is no need to pay the money back.

Getting back to the actions of the Japanese, the larger scale of the fiscal and monetary stimulation, the larger chance for a wear-off of the yen. On the other hand, if it appears that the Friday meeting does not bring any changes, the market could come to a conclusion that the BoJ is strongly divided and its ability of further stimulation is strongly limited.

Approximately 80% of economists who were surveyed by Bloomberg, expect any form of monetary easing to occur on Friday. It is also possible that we will see a fiscal stimulation worth approximately 200 billion USD. This is approximately 5% of the GDP. If the monetary authorities from Tokyo manage to combine both of these operations, the yen should lose value. This should also support stock markets, as well as the emerging market currencies.

Lira is stronger and zloty is steady

Today, the lira is one of the strongest currencies in the world. It is gaining approximately 1.5% against the dollar and the USD/TRY is getting closer to the 3.00 area. There was no specific reason for appreciation of the Turkish currency, apart from the fact that two agencies continue to evaluate Turkey's loan credibility at the investment level. Ratings from Fitch, as well as from Moody's did not change during the weekend.

Perhaps, some investors think that the current levels are attractive, assuming that the situation in Ankara has stabilized. However, we are taking note that the political situation remains extremely uncertain. It creates a serious investment risk in the country, when it comes to the capital inflow to the real economy, as well as the financial market.

The zloty was very calm today. The changes have been symbolical since noon. Taking under consideration external, as well as internal matters, stabilization remains the base case scenario in the short-term.