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Daily analysis 10.09.2014

10 Sept 2014 12:25|Marcin Lipka

Is the dollar attractive for all? Better data from the UK and “intervention” of BoE chief paused the pound slide. A significant EM currencies sell-off pushing the forint to historical lows. The zloty dropped to the euro tested 4.21 level.

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

  • No macroeconomic data which may affect the analyzed pairs.

The dollar. The UK. Emerging Markets

The dollar has been gaining value fore a long time. The “greenback” has become a favorite bet around the world but the reasons for strength are not the same everywhere.

For weeks the US currency has been climbing toward the euro what was clearly seen in the EUR/USD slide. The trend did speed up when the ECB announced assets purchase program at the last MPC meeting and lowered the interest rates second time within three months. Moreover, regarding the prospects of tightening the monetary policy by the Federal Reserve we could have observed only one-way trade – demand for the dollar and selling pressure on the euro.

The appetite for notes with George Washington is also seen in Asia. The yen is the cheapest since the Great Recession in 2008. Japanese currency weakness is caused by several factors – changes in the strategy of pension fund investments investment policy allowing it to invest more assets abroad (it needs to sell yen and buy, for example, the dollar). The JPY is also under pressure due to macroeconomic failures – the Q2 GDP dropped more than first estimate projected and Japan is not able to return toward current account surplus. As a result we can expect more stimulus both from the fiscal and monetary side (bearish for the local currency).

In our commentaries we spent a significant amount of space on the pound issues. The sterling depreciation caused by threats of Scottish independence naturally increased the demand for dollars – if one currency is sold, the second one has to be bought and the most obvious choice was the USD.

The perspectives of earlier interest rate hikes in the US are bringing some turmoil to the emerging markets which are also tarnished by local problems. As a result we are observing a heavy buying of dollars for forints, rands, pesos or liras. It gives another “boost” to the “greenback”. The pressure didn't exclude Antipodes where both Aussie and Kiwi dropped to 6-month lows.

Investors are still focused on Scottish independence. In our analysis we probably discussed all possible issues which may arise after the new country emerge in Europe. It also seems that London politicians also recognized the problem and currently senior officials from all parties (including the prime minister) are heading to the north to support the “No” camp. Even the BoE chief got involved in the campaign and said that the currency union with the Kingdom would be “incompatible with sovereignty”. It is in line with the UK's policy which tries to discourage the “Yes” camp that they would have to resign from the pound (while most would like to keep the sterling). However, Carney also suggested that we would see an interest rate hike by Summer of 2015. The confirmation of inevitable tightening combined with better economic data gave some relief rally to the cable. On the other hand, in the short-run new opinion polls regarding the future of Scotland should matter the most. The higher the odds for independence the higher chances for breaching 1.6000 level.

A significant sell-off touched also the EM markets. Since the beginning of the week the South African rand, and Turkish lira dropped more than 2 percent to the dollar. Over one percent depreciation was observed on Mexican peso and Hungarian forint. The zloty has lost since Monday around 3 zloty-cents but a half-year performance is much worse – 8 per cent to the dollar and only forint slide was steeper. The main reason behind the weakness is a perspective of sooner than anticipated interest rate hike across the pond and relatively the brightest perspective of the US economy.

Summarizing, the culmination of global and local issues are causing the dollar to be regarded as the favorite currency all over the world. The situation probably won't change soon but the pace of “greenback” appreciation may lose some steam and can be paused by corrections. Such a rebound is currently observed on the EUR/USD. However, it should be promptly exploited by short-sellers to open new positions against the common currency.

Further pressure on the zloty

The pressure on EM currency which is caused by sooner-than-expected interest rate hike by the Fed and some profit taking on local bond market resulted in a depreciation of the zloty and the EUR/PLN rose to 4.21 level. Besides the short-term pressure we should still remember that the PLN is fundamentally connected with the eurozone, Poland has a balanced current account and the perspective of looser ECB monetary policy should prevent the zloty from a larger depreciation both to the euro and the franc (in case of the CHF, the SNB strategy to keep the floor on the EUR/CHF should also keep the CHF/PLN around current levels).

More problems arise on the USD/PLN where the global demand for the dollars should push the pair toward 3.30. Further, we should look from a different angle at the pound where the main movement catalyst is the Scottish independence issue – the higher the probability of “Yes” vote the more pressure on the pound. In a scenario of the breakup it is possible that GBP/PLN may drop even toward 5.0000.

Reuters published short comments from professor Osiatyński where the MPC member suggested that he would see a 50bps rate cut at the incoming meeting. Taking into the account, however, the fact that he represents the most dovish part of the committee (with Chojna-Duch) we should currently not assume that such a move is a base case scenario (even though it may be economically justified decision).

Summarizing the pressure on the zloty may stay with us for some time but the preferable scenario is a range trade both on EUR/PLN and CHF/PLN and consolidation below 4.20 and 3.49 level respectively.

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

Range EUR/USD 1.3350-1.3450 1.3250-1.3350 1.3450-1.3550
Range EUR/PLN 4.1800-4.2200 4.2000-4.2400 4.1600-4.2000
Range USD/PLN 3.1000-3.1400 3.1400-3.1800 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4600-3.5000 3.4200-3.4600

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

Range GBP/USD 1.6350-1.6450 1.6450-1.6550 1.6550-1.6650
Range GBP/PLN 5.2300-5.2700 5.2500-5.2900 5.2700-5.3100

10 Sept 2014 12:25|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:

9 Sept 2014 17:03

Afternoon analysis 09.09.2014

9 Sept 2014 12:23

Daily analysis 09.09.2014

9 Sept 2014 9:47

Afternoon analysis 08.09.2014

8 Sept 2014 12:30

Daily analysis 08.09.2014

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