Afternoon analysis 29.07.2015

The dollar increased ahead of a key FOMC meeting. The Prime Minister Alexis Tsipras said Greece got commitment for debt relief. The zloty declined.

In a radio interview the Greek Prime Minister Alexis Tsipras said, that he has got commitment for debt relief from the nation's international creditors. The decision is expected in November after the first assessment of the reform program.

Earlier it was not clear, whether the nation will win a similar commitment. The European countries, especially Germany, were against any nominal debt relief. The German Chancellor Angela Merkel said however, a decision on debt relief may be considered in the future, if Greece meets its obligations stemming from the bailout program.

In contrast, the International Monetary Fund's stance has been different. The Washington-based institution Chief Christine Lagarde said she will not support any bailout program which does not include some form of debt relief.

It turned out, that some form of compromise has been obtained. The most likely solution will be a maturity extension and a reduction in interest. However, there will be no nominal debt haircut.

Obtaining a commitment for debt relief from the international creditors has been the major goal of the Greek government since the very beginning. However, the nation will not get a nominal debt reduction. And the success was very expensive as the general economic condition deteriorated and the banking system was devastated by capital controls. Finally, a compromise in January would have included a similar debt relief without the need of capital controls and the recent decline in the economic activity.

The Greek stock market is going to be open again. A spokeswoman for the Athens Stock Exchange said the European Central Bank has paved the way for restarting trade. The decision of the finance ministry is expected soon.

Waiting for Fed

The major factor to watch on Wednesday is the statement from the Federal Reserve. If the US central bank says it is ready to rise rates, the dollar will likely gain. However, the move will be limited as the dollar has already priced in the expectations.

In contrast, the volatility may increase, if the Fed refrains from signaling a hike in September. If that is the case, the dollar will decline. Moreover, the stock markets and the emerging market currencies will increase (including the zloty). More on the expectations concerning the Fed's statement in our morning commentary.

Zloty declined

On Tuesday, the oil price rebounded from the lowest level since March. It managed to keep recent gains on Wednesday. It helped the commodity currencies. The ruble and the Norwegian crown gained. Moreover, the Russian currency was strengthened by the central bank's decision to stop intervening to weaken the domestic currency.

All in all, the Federal Reserve is expected to take a step in the direction of interest rate hikes. A similar outcome will hurt the zloty. The Polish currency, like the other emerging market currencies, will decline. However, the zloty will drop mainly against the dollar.