Daily analysis 08.02.2016

Chinese foreign reserves dropped 100 billion USD last month. Weaker global sentiment is mainly the effect of crude oil slide. Gatnar, from the Polish MPC is against cutting rates. The zloty weakens on global sentiment deterioration.

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

• No major economic data which may significantly affect the analyzed pairs.

Chinese foreign reserves

During the weekend, Chinese foreign reserve data was published. It dropped for the third month in a row by around 100 billion USD. Currently, the FX reserves are at mid-2012 lows. This is not a positive message for the local currency, but the overall situation in China should diminish the fears for significant depreciation threats.

Firstly, despite that fact that the reserves have been sliding for the last 18 months, they are still valued around 3.2 trillion USD. It means that they secure around 2 years worth of import while according to the IMF data, on average, the EM countries have 6 months of import reserves.

Another element which should fundamentally stabilize the RMB, is the fact that China still records a significant current account surplus, which was at 2.74% of the GDP (around 300 billion USD) in 2015. It means that, apart from financial transactions, there is still more FX surplus than debt.

Some threats can be forseen from the overall foreign debt – state and private. But in contrary to most EM economies, the FX reserves exceed the overall foreign debt by around 1.5 trillion USD (around 15% of the GDP).

As a result, the odds for significant yuan depreciation are fairly low. Investors are rather expected to see some depreciation to the dollar and fairly stable CNY rate, to the trade-weighted basket of currencies.

Global sentiment deterioration

Around midday, there was a significant sentiment deterioration around the globe. Due to the fact that no extraordinary events hit the wire, the most probable scenario which pushed the equities lower, is the falling oil. The slide on Brent and WTI was partly caused by the uncertain outcome of Venezuelan talks with other oil producers, which wanted to build a coalition and cut some output to boost prices. However, the talks seem to fail to meet expectations, and some recent rebound has been corrected.

What is also worth noting, is that there is a higher divergence between the behavior of commodity currencies. Since the beginning of the year, the Brent dropped around 12%, while the Norwegian crone gained around 3% to the dollar, and the CAD lost only around 0.5 to the US currency. A much worse performance is observed on the Russian rouble, which lost 5.5% to the greenback and 7% slide from the Mexican peso.

Since mid 2014, the Brent lost around 70% and the slide on CAD, MXN, NOK and RUB are 22%, 30%, 31%, and 56%, respectively. It means that some of the currencies were previously pushed significantly lower with some help from the monetary policy (CAD and NOK), while others are catching up with the losses (MXN), despite that the monetary policy is quite tight and FX interventions have been proceeded on the constant basis.

The zloty remains under pressure

Since this morning the PLN has been significantly weaker, mainly due to global sentiment deterioration. The local currency was not even stabilized by comments from the new MPC member. Eugeniusz Gatnar told Bloomberg that, “there is no need to change” interest rates.

According to Gatner the, “pace of GDP expansion, credit growth, retail sales, and consumer optimism are contributing factors confirming that rates are at appropriate level.” He also adds that, “a decision on changing the rate level will depend on the inflation and GDP outlook published in march, as well as on how the economy will react to the government's new economic policy. After all, the effects will be seen in only a few months.” We may conclude from the comments, that he is against cutting the benchmark next month. If there is really no rate reduction, this element should increase some stability to the PLN.