Daily analysis 03.03.2014

Market turmoil after Russian intervention in Crimea causes only a limited sell-off on the EUR/USD. Is the Euro a safe-haven? Russian ruble losing value significantly, even though the central bank raised interest rates by 150 bps. The zloty is sliding around one percent to major currencies. Record-high PMI reading from Poland.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 16.00 CET: Manufacturing ISM reading from the US (survey 51.9 points)

Ukrainian issues are shaping the whole market

The intuition was pretty straight forward regarding the opening on Monday. Due to military intervention in Crimea stocks were supposed to fall, commodities to rise and the EM currencies to depreciate. Most of the predictions were right expect the EUR/USD. I have mentioned many times that one the of the main reasons for Euro's strength comes from rising current account surplus which currently accounts more than 2% of the GDP. The other element which is worth noticing is that the common currency is getting a “safe haven” status. We witnessed the similar situation was during the recent EM turmoil. The incoming sessions will show whether the EUR/USD is able to hold close to two years highs despite that we can have the most severe political crisis since many years.

Political conflict does not immediately translate to another world war, as some local polititians have suggested in the recent hours. The situation seems to be much more complex. Just a few days ago most observers were positive that the West gained another ally – Ukraine, and that Russia agreed to give up on Kiev. The defeat, however, had much broader effect on the Kremlin ruler. He decided to switch the defeat into the victory. This “mastermind” move had a swift and harsh response from the international community. What is even more interesting, not only Western countries backed Ukraine. Moscow received some criticism from Ankara, where Ministry of Foreign Affairs issued a statement on “the territorial integrity, sovereignty, independence and national unity of Ukraine”, claiming also that it is of a “great importance to immediately reestablish stability and peace in Ukraine and the Crimean Peninsula, which is a part of Ukraine”. China also backs the Kiev, stating on Ministry of Foreign Affairs website that “it is China's long-standing position not to interfere in others' internal affairs. We respect the independence, sovereignty and territorial integrity of Ukraine". Russia, however, should be the most concerned with one of its closest allay message. Ministry of Foreign Affairs in Islamic Republic of Iran posted a message on its official website that “the Ukrainian people themselves should decide on their fate” and “Iran believes that foreign interference in Ukraine has exacerbated the situation”. Taking into the account that the whole world is against Russia and the foreign press has no mercy for Putin's actions, it is pretty probable that the Kremlin ruler decides to slowly withdraw from its plans (his administration will try to do it as gently as possible not to disgrace him more).

On Monday morning most investors are clearly withdrawing from Russian assets. The local stock market is losing around 10% and the EUR/RUB has risen to historic highs, despite the fact that the central bank increased the benchmark by 150 bps. Recently I wrote that the ruble does not have many reasons to weaken – Russian economy still enjoys a current account surplus, foreign currency reserves are high and the government debt is low. Currently, however, the situation is different. A preparation to start the Ukrainian operation puts Russian assets on elevated risk. Even if the situation calms down, the future will be much worse than predictions indicated before the conflict began.

Summarizing, the incoming days should give us a pretty clear answer whether Russia agrees to calm down and resolves the issues in support of the Western countries or it chooses to seize the Crimea region officially. It is sill more probable that Putin decides to withdraw his military action and will not risk his international career just to gain a part o Ukraine (the most important city and the naval base has been under Russian control for years). A peaceful solution will calm most of the markets. On the other hand, an extended time of tension and increasing risk for military confrontation will depreciate risk averse assets.

The zloty is under pressure

Beginning from the good news, it is worth to mention a strong PMI reading published on Monday. The HSBC and Markit survey found out that the manufacturing index rose to 55.9 points and it was the highest level since December 2010. Commenting the data Agata Urbańska-Giner, HSBC economist for Central & Eastern Europe wrote that “new orders were the key growth driver and recorded the second-fastest rise in survey history" (since June 98). The PMI shows also a strong export orders and employment.

Currently, however, investors only pay attention to events at our east border. The zloty, in line with other currencies from the region, lost around 1% at the opening on Monday. The slide is not that significant, especially taking into the account that Poland is quite close to a potential conflict.

The zloty seems to be depended from Putin moves. There is still much more probability that isolated Russian president will decide to withdraw from his military plans and gradually calms down the situation. If it happens, we should expect a relatively fast slide on the EUR/PLN pair toward 4.15 level. On the other hand, if the Russian military decides to start the regular operation in Crimea, then we can expect a further depreciation of the zloty. I don't expect any major changes in hours to come (it is still too early for both parties to find a solution) and therefore it is possible that the EUR/PLN climbs over 4.20 and the CHF/PLN remains above 3.45.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: