Daily analysis 13.08.2014

Diplomatic turmoil weights on the markets. Ukrainian hryvnia is testing record low levels. Statistical playground with Japanese GDP. Thursday's readings from Europe. CPI, situation in the East and local economy condition in the Q2 will be key to the zloty's valuation.

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

• 14.00 CET: Inflation data from Poland (PAP survey: minus 0.2% y/y).
• 14.30 CET: Retail sales from the US (+0.2% m/m; excluding autos and gas +0.3% m/m).

The convoy. Hryvnia. Japan. Europe

Markets still pay quite a lot of attention to the convoy issue. The Ukrainian side which firstly agreed on the case in a three-party talks currently tries to build the atmosphere that accepting the humanitarian aid will be equal to brining to its territory a Trojan Horse. It may however end with a diplomatic failure because Moscow agreed to all the requests made by Ukraine. As Sergey Lavrov explained in Sochi yesterday (“RT” source) Kiev accepted the the route and the Russian side confirmed that in the transport representatives from Red Cross, the OSCE and Ukraine authorities would be present. A fairly clumsy handling of this case by Ukrainian administration may kind of warm the approach toward Kremlin when it turns out that n the Russian transport there is nothing besides foods, water and medicine. If that scenario is fulfilled (markets seem to recognize it already) we should expect a slight rebound on the EM currencies and sentiment improvement on European boards. According to “The Wall Street Journal” the transport is scheduled to cross the border in the evening today.

Since a few days the Ukrainian currency has been losing value. Several months ago we had covered pretty closely how the hryvina traded on the market. Recent weeks were, however, pretty calm and the USD/UAH remained in a range between 11.50-12.00 level. More weakness came just few days ago. Firstly they were connected with the deteriorating conditions of the local economy (inflation pressure, GDP slump may exceed 7% this year, persistent current account deficit despite falling currency and gas payments pause etc.). Later the issues regarding the hypothetical Russian intervention played also visible role what in result cause the USD/UAH to jump toward record-high levels around 13.50. The hryvnia should remain under pressure because the economy is still re-balancing from catastrophic policy of former Yanukovych administration and central bank actions. Additionally, there are no signs for improvement regarding the upcoming future and also the IMF is not really eager to secure a certain UAH value (actually one of the help conditions was to allow local currency to trade freely).

In the morning Japanese GDP slump brought some attention to the market. The economy shrank by 6.8% in II quarter. What is quite interesting it is still less than economists expected. Such strong changes are, however, a result from one time events (sales tax hikes), which significantly lowered the consumption and investments (in previous quarters this components boosted the economy at similar pace). The result was also “boosted” by the statistical measures. Quarterly reading at 1.7% was annualized (simply multiplied by “4” to simulate the whole year). However, if we look at the y/y result we are getting +0.2% y/y what still confirms that Japanese economy remains in stagnation period.

Tomorrow it is worth to look at the European data. Bloomberg consensus shows that German economy may shrink by 0.1% q/q. Markets, however, already knows it so only a softer reading (low probability) may significantly lower the European currency. Moreover, we are also getting French readings from France and for the whole euro area. Because the market is positioned quite bearish we should expect that even a slight upside surprise should give a reason for a rebound

Summarizing today we should expect a fairly calm trade (US data will rather not change the picture, and the convoy issue gets less and less attention). Therefore, we will be waiting for the Thursday's macro reports from the euro area. It is also worth to note that we didn't set new lows for on the EUR/USD after the ZEW publication. We should then consider that a stronger rebound may be on the horizon and its target may reach levels above 1.3450.

A comeback toward 4.20

The zloty managed to return toward 4.20 level. It was supported by relative resilience of the EUR/USD and fairly calm session across the pond. The stabilization to the zloty is still derived form capital flow toward local bond market which is further supported by interest rate expectations.

In result the issue with inflation data may be differently viewed. The lower reading may on one hand increase the pressure for a cut what is negative for the zloty, but mounting chances for softer monetary policy are keeping the capital flow in place what actually supports the local currency. As a consequence if the inflation turns to be much softer we should expect that the PLN loses some value but the move will be muted by the bond effect.

Similar situation may be observed regarding the GDP. Polish MPC members signalized that if economy slows under 3.0% then it will be the argument in favor of the interest rate cut. The market consensus is around +3.2% y/y but the current expectations seem to be directed toward a lower reading.

Summarizing, the zloty managed to escape from further weakness and waits for the macro data (inflation today, GDP on Thursday). Overall the higher the CPI and the GDP should result in stronger zloty (and weaker readings should push the PLN lower). We have to also remember about the bond effect, so only a visible deviation from the may spur the reaction exceeding half percent reaction.

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

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