Daily analysis 11.07.2014

Issues with Portugal financial holding are increasing the risk aversion, but the EUR/USD reaction is fairly muted. Nowotny on the Euro. The next week can be interesting. The zloty stabilizes around 4.14 per the Euro but the downside pressure remains. Summary of recent MPC members' statements.

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

• 17.15 CET: FOMC member Charles Plosser is scheduled to speak.
• 20.00 CET: FOMC member Charles Evans is scheduled to speak.

Portugal. Nowotny. The following week

Besides weak industrial production both from France and Italy, the market sentiment was also spoiled by Portuguese issues. There have been hardly any dire news from the peripheral Europe for a long time. The yields on Spanish or Italian bonds reached all time lows thanks to yield hunt and depressed inflation projections. Investors view that the ECB may calm the situation if some turmoil happens pushed some asset to unrealistic valuation.

Such a situation sometimes ends with a sharp sell-off. A similar case was experienced yesterday. The market “recognized” (it may have been a bit pushed by the weak European data, because the issue was known since Wednesday) that there may be some problems with the second-largest Portuguese bank – Espirito Santo (ES). Its parent company Espirito Santo International (ESI) failed to make some bond payments. Because ESI is the largest holder of Espirito Santo Financial Group (EFSG) and EFSG is the owner of 25% ES stocks (only the bank is traded on the exchanges) there have been some fears whether the ES would need some financial and if yes how the Lisbon government can deal with the issue. A fairly complex capital structure of the Espirito Santo family business pushed the yields on Portugal bonds by 40 bps higher in the recent three days. Spanish and Italian papers also lost some value what translated to the stocks' slide both in Europe and in the States (the US equities half the looses at the end of the session). Currently the case does no look like an event which can stop the US bull market from reaching news highs, so the global sentiment should rebound soon.

On Thursday we had some interesting comments form Ewald Nowotny. The ECB member (neutral) didn't seem to be concerned with the Euro value. Austrian central banker told Bloomberg that “We have reached a certain stabilization” and the Euro rate is “definitely not part of our policy instruments”. It is another statement from the ECB official who seems to be ignoring the Euro valuation. It is hard to say whether the Bank tries to play some kind of game with the market or it really thinks that the exchange rate is at fair level (a bit in contrary to the recent Draghi comments).

Moving slightly to the future it is worth noting the next week Yellen hearings before the Congress. The most important news which investors would like to get from the FOMC chair is whether the recent data may push the Fed to tighten the monetary policy before mid 2015. Maybe some questions from the Republican Senate Banking Committee (Tuesday) or testimony to Housing Financial Services Committee (Wednesday) can give an answer. Besides signals on monetary policy we will focus on Euro Zone industrial production (hard to expect any good news taking into account the recent publications from the separate countries) and US readings (retail sales, industrial production and consumer confidence). It is possible that after a bit muted week we can get some volatility in the following days.

Today, it is hard to expect any major changes. The Portuguese case should bring much less attention than yesterday and finish the week near the current levels (no major news is expected from FOMC members speeches).

Risk aversion pushed the zloty lower

The zloty, as usually, was under pressure due to risk aversion increase. It was not a dramatic move (mainly due to fairly calm reaction on the local bonds were investors didn't translate Lisbon problems into the Warsaw ground) but in the days to come we will be moving rather around 4.14-4.15 than 4.12-4.13.

Since the latest MPC meeting and new NBP macroeconomic projections almost all members gave some statements regarding their view on the future interest rate moves (Hausner and Kazimierczak didn't speak but taking into account their June comments they should be in the “neutral camp”). Only Elzbieta Chojna-Duch seems to dovish enough to vote for a cut either in September or October. She can be followed by Osiatyński but he sounds to be less convinced. The rest of 10-person committee will stay on the side line unless the growth slows significantly, inflation fails to rise from the zero level or the zloty moves under 4.00 per the Euro. In result the odds for a cut seems to be still fairly low.

Summarizing, the zloty should remain under a slight pressure to the Euro and most trades will be made between 4.14-4.15 for the Euro and 3.41-3.42 for the Swiss franc. It is also worth noting that GBP/PLN, which has corrected recently may rise again toward to two year-highs around 5.23 (the UK currency should be quite resistant to issues in the Euro area).

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

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