Daily analysis 17.03.2014

Crimean referendum had no negative influence on the markets. Are the investors getting more resistant on news from the East? China increases their daily limit of Yuan trade. Upcoming summit of Fed appears to be very interesting. Zloty maintained its income from Friday afternoon. Balance of payment for January will be revealed today.

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

• 14.00 CET: Balance of payment from Poland.
• 14.15 CET: Industrial production from USA (estimations +0.3% m/m).

Calmer. Juan. Fed

The market's calming was clearly visible shortly after press conference of Kerry and Lavrov held in London last Friday. The meeting of American and Russian representatives did not bring an immediate end of the conflict. However, Vladimir Lavrov's statement about Russia's lack of will to intervene in the eastern Ukraine slowly began to decrease the general nervousness before the weekend referendum on Crimea. Russia Today ,an English-language station sponsored by Russia, spoke in similar way. All the gossip about Russian forces in eastern part of Ukraine are being demented. Based on the local media information, one may have an impression that Kremlin would not like to become involved in this area (opposite to Crimea). Opinion of Konrad Zasztwota from the Polish Institute of International Affairs can be a certain confirmation of this fact. In his statement for Radio Information Agency he claims that Russia will probably incorporate Crimea into the Federation, but will not try to invade the eastern regions of Ukraine. Additionally, there appeared to be some information about the contacts between administrations from Moscow and Kiev on government level. Other relatively optimistic signal is a chance of introducing the OSCE observers on the area of whole Ukraine, including Crimea. Also the investors assumed that peninsula's incorporation into Russia is actually already discounted. The prices also include the western sanctions. They, however, will currently limit to visa prohibitions and freezing the assets but will not regard any trade exchange (which would be something that could cause a real economic problem both in Russia and in Europe). Thus it is not excluded that this topic will be slowly descending from the financial press headlines and its influence on estimations of shares or currencies in our region will slowly fade out (of course if the military intervention or departing of another Ukraine's regions will not occur).

During recent weekend, China increased their daily limit of Yuan alteration from 1% to 2%. Despite that this movement was announced (due to the rate policy's liberalization), it caused Yuan weakening (by approximately 0.3%) anyway. Lately I have been writing many times about a significant amount of derivative financial instruments (worth of USD 150 billion according to Morgan Stanley) which were sold to entrepreneurs that were counting on Yuan strengthening. However, the construction of given derivatives assumes a payment of certain bonus set in advance when the optimistic scenario is fulfilled (e.g. enforcing of local currency) and unlimited losses if the trend inverts, just as it happened in case of Polish companies in years 2008/2009. According to Morgan Stanley and Credit Agricole CIB from Hong Kong, both of which were quoted by Bloomberg, a crucial level for USD/CNY is 6.20 (currently it's 6.1650), when the losses can be acute for those who made similar contracts. However, it is difficult to expect that CNY weakening would be equal to the PLN one recorded in 2008/2009. Additionally, most of these instruments are held for a relatively short time and if they will not be renewed (and probably this is not going to happen due to visible trend alteration), they will simply fade out. It is also worth noticing that the goal of Chinese central bank's (PBOC) decisions is to warn of holding one-sided transactions, and also to intensify the export (by decreasing Yuan value) and help the weakening economic growth (the plan 7.5% for 2014 can be endangered).

A discussion about Federal Reserve Wednesday's decision should begin today. Cutting QE on a level of USD 10 billion is actually determined. It is still unknown though, what will Federal Reserve do with forward guidance. Probably a plan similar to the one used by the Bank of England will be accepted on the base of FOMC members' statements. Due to this, Fed will announce that it will observe a lot of economic indexes in order to define the monetary policy (apart from inflation and unemployment, probably also consumption, investments, real estate market, income, foreign trade etc.). Another interesting thing is what kind of communicate (the official one, as well as during question answering) will be sent by new Federal Reserve chief, during her first official press conference after FOMC summit (will she confirm her doveness).

In conclusion, the market is clearly beginning to approach the eastern events much calmer. A certain bonus for the risk, which is included in our region's financial instruments (EM currencies among others), will probably maintain for a while. However, the topic should descend from the headlines (if of course another regions will not depart from Ukraine and a regular military intervention will not occur). EUR/USD today does not have many reasons for bigger alterations and the investors will wait for the summit of Federal Reserve.

Calmer, also on zloty

Zloty, which along with rouble, lira or forint is most sensitive to the news from behind the eastern boarder, started to catch up on part of recent losses (more about it in the first paragraph) already during Friday's session. If the conflict's escalation will not take place, we can expect that the Polish currency will refer to the situation in Ukraine with much bigger distance and EUR/PLN pair should descend in the areas of 4.20.

Today we should pay attention to January's balance of payment. After Ministry's of Economy publication of foreign trade data (+176 million Euro) we should once again observe a relatively low deficit on current account (there is a small chance for a surplus). It should continue to stabilize the situation on PLN.

In conclusion, the basis scenario for following hours is to maintain EUR/PLN in limits of 4.22 (+/- PLN 0.01). CHF/PLN should be similarly stable.

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

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