Daily analysis 10.06.2015

Changes on German debt again generating moves on the EUR/USD. No deal on Greece yet. The zloty remains weak to the euro but when the debt volatility lessens and the global situation calms down we should expect a stronger PLN.

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

• No macro data that may affect the analysed pairs

Second life of the rumour

The debt market generates changes on FX again. Yields increase on German 10-year Bunds above 1.00% for the first time since September 2014 has caused the future rate differences between European and US core debt to decrease markedly.

It pushes the fixed income funds which play on rate differentials on both sides of the Atlantic to close positions. Moreover, increased volatility decreases the attractiveness of such trades in the future especially if lower liquidity becomes persistent.

As a result, some of the players which counted on selling the euro and buying the dollar, would gain both on the rate differential and lower euro value, are set to close some positions. This issue and future increased risk that this scenario might be repeated in the future gives some boost to the euro despite the Greece issue not being resolved yet.

The diagram presents the profitability of the German debt and quotations of the EUR/USD

Source: Bloomberg. Own calculations. Quotations of the EUR/USD (yellow line, right scale), and profitability of 10-year-old German debt (white line, left scale). During recent 5 years the corelation between the debt’s profitability and the EUR/USD was positive for most of the time (both instruments increased or both of them decreased). However, it was more often that profitability “overtakes” the EUR/USD rate, that the other way round.

It is also worth noting that in the last 5 years German yields were usually ahead of the EUR/USD valuation. It means that when investors on the bond market are expecting higher inflation and higher growth the euro should follow this trend.

On the other hand, we also have to remember about the other side of the trade. If the US treasuries resume the yield appreciation trend and the Fed starts the monetary policy tightening then the situation might get much more complex. The USD can be stronger to the euro even if the Bunds keep rising. Consequently, the Federal Reserve meeting next week and future interest rate path are crucial for the future EUR/USD condition.

No good news from Greece.

It is hard to find any good news regarding Greece. There are no talks about progress to the solution but rather about trying to stop the deterioration in the matter. However, another time it is hard to say how much of the tension is artificial to trick its own society and have an excuse to withdraw from the electoral promises. We expect that Syriza has to play the game both on the local ground and in Europe but the issue at home is much more complex so the EU leaders are patient with all the ups and downs. Finally, however, Tsipras has to make a concession and the deal would be done.

The foreign market in a few sentences.

The macro calendar on Wednesday is empty. The currency market will be closely observing the debt situation and with no data from Greece or the US it would be the main catalyst for FX.

The PLN stabilizes at low levels.

The zloty remains at fairly low levels and investors have to pay around 4.16 PLN for the euro. Yields on German debt or future interest rates in the eurozone may also determine behaviour of the zloty to the European currency.

Nevertheless, the transition is not as simple as on the EUR/USD, where we are dealing with two economies with an equal rating. Similarly, however, higher yields in Germany combined with increasing volatility may be an argument to close carry positions on the PLN.

Moreover, there are issues with Greece, Turkey and the domestic economic situation. In case of no impulses from the broader market the geopolitical factor may also generate significant moves.

Summarizing, in the matter of a few days the EUR/PLN is expected to remain fairly high and a sustainable slide below 4.15 without a deal on Greece is not the base case scenario.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: