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Daily analysis 09.02.2016

9 Feb 2016 13:17|Marcin Lipka

A clear deterioration of the global sentiment has an impact on many classes of assets. Weak data about production in Germany. An interesting meeting of the Swedish monetary authorities will be held on Thursday. The zloty is under clear pressure, and once again it loses more than the Hungarian forint.

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

  • There is no macro data which could have a significant impact on the analyzed currency pairs.

Clear increase in aversion towards risk

The weak condition of the stock market indexes on yesterday's session in Europe translated to a depreciation of shares in the USA, and significant overvalues in Asia. The Japanese Nikkei 225 lost more than 5%, and the yen reached the highest level in relation to the dollar since November 2014, despite the fact that the Bank of Japan recently introduced a negative deposit rate for the first time in history.

The return to the “safe coasts” has also been seen on the debt market. Profitability of the American 2-year treasury bonds dropped below 0.65%, while it was still within the limits of 1.1% at the break of 2015/2016. Additionally, according to the calculations of the Bloomberg agency, the likelihood of the Federal Reserve raising interest rates now equals 0%. The market of terminal contracts for interest rates also indicates that there is a 26% chance for one hike, and only a 3.5% chance for two hikes during 2016.

What caused such a significant deterioration of the sentiments? For many weeks, a decrease in oil prices is causing investors to think that the market of raw materials is beginning to become doubtful in an anticipated increase in demand for fuel. This, on the other hand, can be a proof that the global economy is slowing down much sooner than expected. Thus, the correlation between the WTI or Brent, and the capital market is very high.

It has been a while since some of the market's participants were anxious about the condition of the bank sector, due to financing the projects on the market of raw materials. Additionally, today's Wall Street Journal informs us that negative interest rates on the ECB deposits may translate to higher costs of credits because the banks, “do not want to transfer these costs onto their depositors, in order to avoid scaring them away.”

Macro data from the euro zone is also not improving the situation. The German industrial production in December lost 2.2% in year on year (y/y) relation, while a reading on the level of negative 0.6% was expected. These values are the lowest since 2009. Additionally, the pace of an increase in orders from Germany to the euro zone is clearly lower. In mid 2015, the 3-month average reached 10% y/y, and currently it is only 0.5% y/y. This may mean that there is an increase in anxieties concerning not only the emerging markets, but also other countries from the euro zone.

Riksbank's decision

The market of the Swedish krona (SEK) is anticipating Thursday's decision of the Riksbank. The central bank will decide whether to decrease interest rates, which are currently on the level of negative 0.35%. Opinions of the economists surveyed by the Bloomberg agency are divided. Eight of them think that the Swedish monetary policy will not change. Six of them claim that interest rates will go to the level of negative 0.45%. Finally, two of them expect a cutting to the level of negative 0.5%.

A decrease can be justified by the deterioration of the global situation, and a risk of lower inflation readings caused by a decrease in prices of raw materials. On the other hand, recently the EUR/SEK clearly increased, and today is testing at 9.50. This means that it is approximately 3% above the level which would probably make the Riksbank anxious, and it could strengthen expectations regarding the intervention.

Thus, it is possible that the Riksbank will publish only a mild announcement, sounding similar to the one from December. At that time, the Swedish monetary authorities wrote that, “the Board of Directors is ready to introduce even more expansive monetary policy, even between the planned meetings.” The monetary authorities also emphasized that, “the Riksbank is ready to intervene on the currency market,” and additionally it is prepared to introduce loans for companies programs via the commercial banks.”

Additionally, it is possible that the Riksbank will want to wait for the ECB decision, which is planned for 10th of March. If a monetary easing before Mario Draghi's move is done too suddenly, it could decrease the amount of possibilities for the Swedish monetary authorities. Thus, in our opinion, it is more likely that the current policy will be sustained, with an additional clear message of a possibility of further easing, if it is necessary. This may slightly strengthen the SEK, and cause the EUR/SEK to go to the range of 9.30-9.40.

Serious sale of the zloty

The euro increased from 4.40 to 4.47 in less than 24 hours. This is a serious move, even if we consider a significant increase in the global aversion towards risk. It is also worth noting that quotations of the national currencies are once again clearly worse than quotations of the forint. The PLN wore off to the HUF by approximately 0.5% in the course of three days. Overvalue of the PLN/HUF pair is once again exceeding 5.5% since the beginning of the year.

Nervousness on the zloty will probably remain for the following weeks, especially since the negative signs are also coming from the debt market. A spread between a 10-year profitability of Germany and Poland is reaching 300 base case points (since December 2015, it remained within the range of 200-250 base case points). This range was not seen since the end of 2012, when the markets feared the collapse of the euro zone. In the case of Hungary, a similar spread on the bonds market has remained essentially the same for a few quarters.

Similarly to yesterday, we can expect that after one or two sessions of an increase in aversion towards risk, the EUR/PLN will once again test the 4-year peaks within the limits of 4.50.

9 Feb 2016 13:17|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.

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