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Daily analysis 10.05.2016

10 May 2016 13:24|Marcin Lipka

Oil may yet again determine the behavior of the USD to a greater degree. Overvalue of the raw materials currencies may be favorable for the American dollar. The zloty remains weak but stable. The EUR/PLN is still above the limit of 4.40, and CHF/PLN is currently near the area of 4.00.

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

  • No macroeconomic data that could significantly impact the analyzed currency pairs.

Catalyst of changes

Since the beginning of the year, we have had a few catalysts that have determined the situation in the currency market. One of them was the action from the central banks of the euro zone and the USA. Investors were also facing the signals from the pound and the yen, which also had an impact on the EUR/USD. Moreover, we cannot forget about oil, which may take over the initiative in the global market, if the activity of other factors decreases.

Quotations of oil between January and February were at 30 USD per barrel. At the same time, index of the dollar was near the level of 100 points. Currently, evaluation of the buck against the six currencies of the developed markets (the euro, yen, pound, Canadian dollar, Swedish krone and franc) is approximately 6% lower. On the other hand, oil increased 50% during the past three months. At the same time, the Russian rouble, Brazilian real and Colombian peso gained 20%, 11% and 14.7% against the dollar, respectively.

This goes to show that a strong flow of capital to the raw materials currencies may generate visible moves. In certain moments, these moves may disturb the main trend, namely the signals coming from the monetary policy. Theoretically, the higher evaluation of oil (or any other energetic resources or industrial metals), the bigger the chance for an increase in American inflation. This may justify an increase in interest rates in the USA.

Will the raw materials take over the initiative yet again?

Since the beginning of May, the raw materials market experienced a one clear slip. The Brent oil and silver lost 8% and 4% of value, respectively. Aluminum and copper each lost 7% of their value. At the same time, the South African rand has lost 7% against the dollar. Moreover, the Mexican peso and Malaysian ringgit lost 5% and 4% against the American currency, respectively.

This indicates that strong moves can be generated by changes in the raw materials market. They can also be a result of capital flow from the currencies of the emerging markets, as well as of the raw materials markets. This may happen within days, or even months, especially if other factors (such as the monetary policy) are not sending sufficient signals.

However, the situation on oil is very difficult to estimate. On one hand, there are fires in Canada. According to Goldman Sachs’ estimates, cited by the Financial Times, these fires reduce the supply by approximately one million barrels per day. Prices of the WTI and Brent should be supported by a higher demand. April’s IEA report assumed that India will increase the demand for oil by 300k barrels per day in 2016. This is the highest growth in India's history.

On the other hand, Iran's supply grows faster than expected. According to Bloomberg data in April, the mining in Iran was 300k barrels/day higher than it was in March. Moreover, production increased by 700k barrels/day since the beginning of the year. This is significantly more than expected shortly after lifting the sanctions.

There is also a chance that the competition between the OPEC members will increase. This should concern Iran and Saudi Arabia the most. Chairman of Saudi Aramco, Amin Nasser, said at the press conference this morning that during the forthcoming weeks the mining abilities of the Shaybah Oil Field will be increased by 33% (one million barrels).

Soon, investors will begin to speculate about the OPEC meeting planned for June 2nd in Vienna. However, considering the recent events in Doha (there was no solid agreement), we may expect that the Vienna negotiations also will not change the Saudi Arabian strategy (the leader of OPEC).

We may see quotations of oil below the level of 40 USD, as long as the problems with the Canadian mining come to an end. Moreover, the meeting in Vienna needs to end with current vision. This information, combined with the trends on the raw materials currencies, may cause the American dollar to strengthen. This may happen especially, if the signals from the leading central banks are unambiguous.

Stabilization at low levels

The zloty is anticipating the Moody’s decision, which will come on Friday, and stabilizes at low levels. The euro costs more than 4.40 PLN, the dollar is reaching the level of 3.90 PLN, and the franc costs approximately 4.00 PLN. The zloty is currently moving to the rhythm of the global sentiment, rather than to the anxieties regarding the rating. This is because in the past weeks, this risk has been calculated in evaluation of the PLN to a significant degree.

It is also worth noting the matter of raw materials. Decreasing demand on currencies of countries dependent on oil export and industrial metals, combined with the Polish internal problems concerning the rating, may cause a part of the capital to return to Poland. This scenario also requires a neutral global situation. If this happens, the EUR/PLN may clearly go below 4.40.

On the other hand, the downgrading by Moody's combined with a negative perspective of loan credibility, and the return of anxieties regarding China, may cause yet another wave of aversion towards Polish assets, and the EUR/PLN may go above 4.50.

10 May 2016 13:24|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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Daily analysis 09.05.2016

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Afternoon analysis 06.05.2016

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Daily analysis 06.05.2016

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