Daily analysis 09.09.2014

Further discussion on Scottish independence and new opinion polls are increasing the odds for slide below 1.60 on the cable. The market underestimates the risk of higher interest rates in the US. The UE announces new sanctions but at the same time suspends them. The zloty is giving back gains from the last week, and the USD/PLN is approaching 3.30.

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

• No macroeconomic data which may affect the analyzed pairs.

The UK. Interest rates in the US. Sanctions

A fair amount of time was spent yesterday on the Scottish independence issue which, according to the YouGov opinion polls, showed that the “yes” camp recorded a first ever victory. Also in Monday's analysis some key aspects regarding the separation were touched, including the currency, central bank, debt share, ect. Because in the last few hours a new poll was published, investment banks revised their projections and new questions emerge concerning relevance of such fast data updates.

According to the research made by TNS-BMRB, the dominance of “No” camp shrank from 13% recorded in early August to 1% last week. Despite that independence supporters didn't win the survey, the pace of changes shows that the probability for Scots to establish their own country is now higher than ever.

The strength of separatist movement was finally spotted by the London politicians. Yesterday the former UK's prime minister Gordon Brown (a Scot, by the way) was lobbying to remain within the UK and promised a higher degree of autonomy regarding taxes, welfare or budget.

In the independence campaign revenues from oil and gas bring a lot of attention. Today's “The Wall Street Journal” reported that even if all profits generated by commodities drilling would feed into the Scottish budget, the deficit still accounts for around 5% of the GDP due to a generous welfare system. However, it is not that clear whether the whole of income would go to the Edinburgh coffers. It is (like many other issues) a matter of negotiation, but assuming that the Scots would receive the same amount of revenue from gas & oil drilling as they share the GDP in the UK, the budget deficit would balloon to 10% of the GDP.

Besides the commodities profit it is unclear what will be the Scottish EU status. There are no clear signs whether Brussels would require a standard negotiation process or the procedures would be much simpler. It is also hard to judge how the capital would behave when the separation is announced. Some assume that a substantial part of deposits maybe transferred to the UK's banks to avoid issues with currencies (similar situation was observed in Greece during the crisis) or uncertainties on future fiscal/monetary policy.

There are also rumours on markets that due to the independence case the BoE may delay the first interest rate hike. According to the Bloomberg data, the future interest rate contracts foresee the monetary tightening for August of 2015 while just month ago it positioned itself for February (before the recent BoE inflation report some even predicted the end of 2014).

Investment banks also updating their expectations regarding the GPB/USD rate if the Scots break up with the UK. Kavin Daly, economist at Goldman Sachs told Bloomberg that in case of separation we may drop to mid 1.50s on cable. A similar view was presented by “Financial Times” article which quotes analysts who expects a slide toward 1.50 if the “Yes” camp wins. Because the situation is relatively new and rarely observed in developed economies the estimates which are circulating on the market can serve as “magnet” which can pull in the cable rate when the separation takes place.

Due to the fact that macro calendar was pretty empty yesterday the market focused on San Francisco Fed research paper where authors showed that both primary dealers and future interest contracts may underestimate the pace of monetary tightening. The subject is not new and most market participants are aware of the overall dovishness around the market but the dollar gained some value after the paper hit the wires. Some might also expect that the report was not published accidentally and the Fed wanted to hive some hints regarding the future monetary police (reminds a bit recent Jackson Hole Draghi speech).

There was also some conflicting news concerning new EU sanctions. The Union decided to tighten the good-services trade restrictions but at the same halted the implementation of the document claiming that there are signs of de-escalation process in the East. Additionally, according to Kremlin website, President Putin and Poroshenko spoke on the issue on Monday (third time within the week).

Summarizing, the US currency is taking advantage both from differences in the monetary policy between the eurozone / US and sell-off of the pound. A relatively smooth slide below 1.2900 should bring us closer toward 1.2800 and in case of more opinions polls favoring “yes” camp the “cable” may quickly test 1.6000 level.

Zloty's weakness

The zloty has been losing value since early morning both to the dollar and to the euro. The move on the PLN is in line with other EM currencies (forint, lira or South African rand) which also depreciated around a half of one percent to the euro. The main reasons behind the sell-off are softer equities market and some profit taking on fixed income where some government bonds brought significant profits in recent weeks.

It is a low probability, however, that the pace of sell-off continues and levels around 4.20 should stop the zloty's slide. The situation looks differently regarding the dollar which should relatively quickly top the 3.30 level (the EUR/USD slide toward mid 1.27 should be enough to push USD/PLN toward 3.30).

Summarizing, the Monday's scenario where we foresee the move toward 4.15 has much lower odds to materialize currently. However, a zloty slide over 4.20 per the euro should also not be a base case scenario. As a result when the situation calms down we should return toward 4.18 per the euro. Much more action is expected on the USD/PLN were 3.30 level may be tested pretty soon.

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

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