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Daily analysis 15.12.2015

14 Dec 2015 13:24|Marcin Lipka

The PBOC publishes a statement how to peg the yuan to the basket of currencies rather than to the dollar. Another financial minister change in South Africa – the rand appreciates 5%. The zloty is slightly stronger before the BoP readings and after 2016 budget plans.

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

  • 14.00: Balance of payments from Poland (survey: current account: minus 600 million euro; trade balance: minus 156 million euro).

Changes to the CNY approach

On Friday there was a significant turmoil on financial markets. The oil dropped to almost 7-year low and stock market indicies slumped. Slide on junk bonds and fears regarding Federal Reserve interest hike contributed to the sell off. However, there was also another issue which increased the risk aversion – a statement from People's Bank of China (PBOC).

Since mid August investors are very cautious on any news regarding the Chinese currency. The 3% CNY devaluation in Summer crated a 10% slide on S&P 500 index and the Fed decided to moved back the interest rate hike. At that time there were speculations that China wanted to the push down the currency to gain competitive advantage.

However, the reaction on both capital markets and EM currencies restrained some further moves of the PBOC and the yuan pared some earlier losses. The CNY started to weaken again in mid November and the last week was closed at 4-year to the dollar.

Additionally on Friday afternoon “The Wall Street Journal” published a note that PBOC wants to peg the RMB to the basket of other currencies. The message created some more turbulence as it reminded investors how the CNY created volatility in mid August.

Overall it is worth noting that pegging the yuan to the basket of 13 other currencies sounds like a much better solution than keeping it only depended to the dollar movement. The US is scheduled to begin monetary tightening while the PBOC is on track to ease interest rates. A strong will to keep the USD/CNY peg might be difficult in such environment and would create also some pressure from portfolio investors especially that many might question a sustainability of such solution.

Additionally there is also an issue regarding competitiveness of the Chinese currency. The CNY significantly gained value to other currencies being a close follower of the dollar move. The continuation of such trend in the future might have caused more trouble in Asia as Beijing would have to cut its growth target.

Currently we may read the PBOC action as an attempt to allow the USD/CNY to rise slightly if the US currency appreciates on the global market. It is also crucial how China would communicate the issue as in August it was probably one of the main drawback which increased the global risk aversion.

The rand – move in an opposite direction

On Friday we wrote about the South African currency after president Zuma dismissed the finance minister. However, both the internal and external situation pushed Zuma to make another shift on this position. He nominated Pravin Gordhan who directed the country's finance from 2009 to May of 2014.

The decision pushed the USD/ZAR pair from almost 16.00 mark to 15.00 level paring most of the losses recorded last week. Commenting the decision on Bloomberg TV the former central bank governor Tito Mboweni said that “new minister must ensure state-owned cos. are run properly”

Mboweni also expects that “Gordhan must ensure all is done to ensure debt-to-GDP ration doesn't exceed 50%” and the finance minister “must do all possible to ensure banks function properly and that there is stability in financial system”. The example from South Africa is interesting regarding one issue – EM economies where only finance ministers are responsible for the economy and has to fight with the government for expenses cuts are much more prone for policy failure and volatility”

The foreign market in few sentences

Besides China the market is getting ready for Wednesday Federal Reserve decision. As we have noted in previous analysis investors would be evaluating mainly the future interest rate path presented in the December macroeconomic projections. It would be also crucial how the Fed mixes future and current inflation path. Recently Janet Yellen have suggested that “actual” inflation would be important for the hikes.

Some better data

According to Polish Ministry of Finance 2016 budget deficit is expected to be at 2.8% of the GDP, the same level as projected by previous government. The main macroeconomic benchmarks are also expected to be unchanged. Inflation is set at 1.7% y/y and the GDP growth at 3.8%.

It is also worth noting that today's current account data might be much better than expected. On Friday the GUS published that trade surplus was around 3 billion PLN while economists surveyed by Bloomberg expected the deficit around 600 million. Such big difference, if confirmed today by the central bank, might push the current account from negative to positive territory in October. If our calculations turn out to be true and the global sentiment remains as good as in the morning there is a chance that the EUR/PLN might even drop below 4.35 mark.

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

Range EUR/USD 1.0850-1.0950 1.0750-1.0850 1.0950-1.1050
Range EUR/PLN 4.3400-4.3800 4.3400-4.3800 4.3400-4.3800
Range USD/PLN 3.9600-4,0000 4.0000-4.0400 3.9400-3.9800
Range CHF/PLN 4.0200-4.0600 4.0200-4.0600 4.0200-4.0600

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

Range GBP/USD 1.5050-1.5150 1.4950-1.5050 1.5150-1.5250
Range GBP/PLN 5.9800-6.0200 5.9600-6.0000 6.0000-6.0400

14 Dec 2015 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.

See also:

11 Dec 2015 17:51

Afternoon analysis 11.12.2015

11 Dec 2015 13:18

Daily analysis 11.12.2015

10 Dec 2015 16:37

Afternoon analysis 10.12.2015

9 Dec 2015 17:10

Afternoon analysis 09.12.2015

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