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Daily analysis 12.01.2016

12 Jan 2016 13:24|Marcin Lipka

China remains in focus, but current reports may suggest that the situation can stabilize soon. Commodity currencies are lower but the pressure from falling oil has eased. Fed's members seem to be neutral. The zloty remains weak mainly due to global signals.

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

  • No macroeconomic data which may significantly affect the analyzed pairs.

Some signs of stabilization?

Analyzing the current events from China we can find elements which suggest some improvements in the sentiment and less pessimistic messages from Beijing. The Shanghai main stock index finished the day near previous close and the difference between mainland yuan (CNY) and that quoted in Hong Kong (CNH) narrowed significantly and returned to the levels observed before the risk aversion increases

Beside positive information there was also an element which caused some further disruptions. Yesterday we wrote that the overnight Hibor rate on yuan rose to 13%. Today the lack of liquidity deepen the disruption and the overnight Hibor rose to 66.8%. Interbank lending for 3 month was also affected and rose from 5.14% on Thursday to 10.4% today. The disruption was fairly broad.

Beside reasons on high Hibor which we noted yesterday it is also worth to note the opinion from Gabriel Wildau writing for “Financial Times”. He writes that buying CNH by PboC disrupts short term carry trade transactions which are expected to profit from weakening yuan. This trade takes into the account borrowing CNH, buying foreign currencies and later repaying the loan when the yuan weakens.

It is also worth to remind that earlier we wrote about similar strategy but focused on borrowing CNH, buying foreign currencies and selling them instantly on the CNY market getting this way more yuans. Theoretically this strategy should decrease the differences, but it worked opposite and destabilized the situation pushing downward the sentiment and then banning some banks which took part in the procedure.

We will have to see how the situation may look like in the following days. If the authorities increase the liquidity on the interbank market and the yuan remains stable then the situation should improve and the global repercussions from China would ease. It would also improve the situation globally and may be a sign for the dollar to strengthen.

Smaller pressure on commodity currencies

There is still significant pressure on commodity currencies – the Canadian dollar (CAD), the Russian rouble (RUB), the Norwegian krone (NOK) and the Mexican peso (MXN), are close or at multi-year lows. It is, however, worth to note that the speed of depreciation eased significantly taking into the account further crude oil depreciation

Since mid 2014 the Brent oil dropped 70%. At that time RUB lost 57%, NOK 30%, MNX 27% and CAD 26%. But in the recent month the oil slided 20% while RUB dropped 8.5%, MXN 4%, CAD 3.5% and NOK only 3%. The ratio of falling currencies to the slide of the oil eased markedly.

It may mean that investors are reluctant to the view of further oil easing or even doubt that the Brent may remain at current levels. As a result the deterioration on the oil would have to deepen further to push investors and revisit their expectations to see another sell off of currencies which would match the previous ratio.

The foreign markets in a few sentences

Regarding future condition of the US dollar investors did probably analyze comments from Atlanta and Dallas Federal Reserve members. Overall it is worth noting that both Lockhart and Kaplan were fairly optimistic regarding the US economy. Lockhart even noted that positive surprises are possible. They may come fro Europe, lower gasoline prices or significant amount of cash on firms' accounts. Regarding the global events Lockhart claims they should not threaten the US situation. Also regarding the future Fed's monetary policy it is was hard to find many arguments which may markedly lower the interest rate hiking pace.

The global sentiment might have to deteriorate significantly to push the Fed's members to push back the next interest rate hike. As a result there are small odds that the key FOMC members, like it was observed in August last year, could suggest the moment of moving monetary tightening regarding events in China. As a result when the global situation stabilize we should expected dollar appreciation.

Further weakness on the zloty

Today the EUR/PLN pair topped 52-week highs and the euro was just 0.03 PLN from 3.5 years highs. This levels were observed in the mids of euro zone crisis. The zloty is also weaker to the forint since the beginning of the year, but in the recent hours the Hungarian currency also lost some value.

Both currency are depended on the global issues. The PLN is, however, also under pressure from local financial situation. Cited by the Bloomberg news agency Morgan Stanley claims that if there was no one-time LTE auction revenue and central bank income the budget deficit would exceed 3% of the GDP. Morgan also sees that the Polish GDP would rise 3.2% and the inflation rise 0.6%. The government assumptions are +3.8% y/y and 1.7% respectively.

In risk aversion scenario the zloty may even rise above 4.40 PLN per the euro. However, if the global tensions ease than the threats for the zloty should ease fairly quickly even with some issues regarding fiscal and monetary policy. It would also push the EUR/PLN toward 4.30 or below.

12 Jan 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.

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