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Daily analysis 08.02.2017

8 Feb 2017 13:19|Marcin Lipka

The Franc is near its eighteen-month maximum against the euro. Was yesterday’s growth of the pound just a result of statements from the Bank of England representative? Global factors wear-off the zloty before the MPC meeting.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

  • 16.00: MPC press conference.

Franc reflects anxieties over the euro zone

The majority of the EUR/CHF quotations was above the 1.07 level between November and January. The global increase in the dollar’s value after the American presidential elections didn’t cause a clear appreciation of the franc against the euro. Moreover, anxieties over further appreciation of the Swiss currencies were decreased by declarations from the SNB regarding the necessity of sustaining negative interest rates, as well as by suggested interventions in order to wear-off the franc.

However, this situation has changed over the past few weeks. The EUR/CHF has frequently been going below 1.0700 and had serious problems with bouncing above this level. Today, the franc is the strongest against the euro since the British referendum. Moreover, the EUR/CHF is by approximately 10 pbs from its eighteen-month minimum (approximately 1.0620).

The main reason for the EUR/CHF overvalue is the anxiety over elections in Europe, especially in France. Moreover, the market has recently started discussing the payment of the Greek obligations for the ECB and the International Monetary Fund, which is due in the middle of this year. There are also anxieties regarding the IMF participation in the aid program for Greece. Of course, these topics are not new. However, they have been causing a general overvalue of the euro, along with political uncertainty.

The matter of the EUR/CHF depreciation may be disturbing, because of decreasing potential of the franc’s wear-off by the SNB. Even though Switzerland’s currency reserves increased over the past year by approximately 100 billion francs (645 billion francs, currently), a significant portion of this growth is most likely a result of purchasing foreign assets, in order to prevent the franc from its appreciation.

The stronger franc may also increase the general market uncertainty. However, this does not have an impact on the CHF/PLN for the time being, due to a relatively positive condition of the zloty. Nevertheless, if the zloty wears-off the franc may rapidly return above the level of 4.10 PLN.

Riddle of increasing pound

Yesterday after 3.00 PM CET, a testimony from Kristin Forbes was published. She is a hawkish member of the British monetary authorities. She took note that the British economy is in a better condition than it was expected after Brexit. Moreover, increasing prices may cause the necessity of rate hikes, in her opinion.

She also questioned the Bank of England’s decision regarding a decrease in neutral level (U*) of the unemployment rate from 5.0% to 4.5%. In her opinion that the unemployment rate is lower than 5%, but not as low as 4.5%. A decrease in the U* was one of the reasons for the pound’s devaluation. This is because this action suggested a lower pressure on the salary growth, as well a on inflation and interest rates.

After 3.00 PM, the GBP/USD increased to the level of 1.2390. This move is justified, because Forbes is considered as a hawkish member of the BoE. However, the pound’s growth clearly accelerated over the following two hours. During the second part of the American session, the GBP/USD was clearly above 1.2500. Reuters wrote that this move was caused by David Jones’s statement (the Tories member) regarding a significant role of the parliament in voting over Brexit.

However, a different explanation is the dollar’s global wear-off. This most likely caused the GBP/USD to return to the level of 1.25.

Zloty gives away a portion of its growths

Yesterday’s wear-off of the zloty can be interpreted as a correction of its recent growth. However, today depreciation of the Polish currency is even clearer. The EUR/PLN is near 4.23 and both franc and the dollar are going above 4.05. Moreover, the zloty is by more than 0.5%weaker against the forint. This goes to show that the appetite for the PLN is weaker and the zloty’s previous strengthening was too sudden. Therefore, the zloty remains relatively sensitive to the risk aversion.

We shouldn’t expect significant changes from today’s MPC meeting. The Council will most likely show a relatively neutral attitude, especially that the National Bank of Poland will publish new macroeconomic projections next month. Therefore, the MPC announcement will have a limited impact on the zloty.

8 Feb 2017 13:19|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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