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Daily analysis 17.06.2016

17 Jun 2016 13:17|Marcin Lipka

The pound is clearly working-off the recent depreciation, and the risk of Brexit is decreasing after Birstall events. The Japanese Ministry of Finance is for coordinated actions against consolidation of the yen. Today's macroeconomic data from Poland will probably have a minor impact on the PLN, regardless of its result.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.00: Retail sales from Poland for May (estimations: positive 5.6% y/y).
  • 14.00: Industrial production from Poland for May (estimations: positive 4.6%).
  • 14.30: Building permits and initiated investments in real estates sector (estimations: 1.145 million and 1.15 million, respectively; data seasonally equalized, annualized).

What does the markets behavior from yesterday suggest?

Yesterday's quotations have clearly shown what is creating moves on bonds, shares and the currency market. Behavior of the American dollar in the early afternoon was particularly interesting.

There were two phone surveys regarding the British referendum on Thursday. Both of them have confirmed the trend of an increasing likelihood of Brexit. Only one out of five surveys indicated advantage for the EU supporters. The rest of the surveys gives a 1%-6% advantage for the Brexit supporters. According to whatukthinks.org website, the median of six recent surveys (that includes four phone surveys) shows that 52% of respondents vote for Brexit, while 48% are for the EU.

This information has an increasing impact on behavior of the broad market. We could also observe a wide capital flow to the American dollar, not only from the pound, but from the euro and the franc as well. Only the yen managed to keep the majority of its previous growths. This may show that some of the capital is less willing to get involved in the franc, because the SNB is probably relatively well prepared for hypothetical Brexit.

Thus, it is possible that if next week shows an ongoing advantage for the Brexit supporters, the dollar and the yen will be bigger beneficiaries of this fact than the franc. However, many has changed in the market, since it appeared that Jo Cox, the shot member of the Labor Party, died. She was an active supporter of the United Kingdom in the European Union.

The Financial Times wrote, quoting the BBC interview with the event witness that the man caught by the police was to shout: “Britain first,” or “put Britain first.” The Financial Times wrote that “Britain First” is, “an extreme right-wing party that appeals to Brexit.”

These dramatic events caused both camps to withhold their campaigns. Moreover, it is possible that no survey will appear today. According to the Reuters agency, the BMG/Herald survey will appear tomorrow, instead of being published today as initially planned.

The above situation had a significant impact on the bookies quotations as well. According to the calculations by Oddschecker and Bloomberg, the likelihood of Brexit decreased from more than 43% to 36%. Of course, it is difficult to foresee whether yesterday's events will significantly impact the result of the referendum. However, they should at least make the Brexit campaign more difficult.

Significant changes were observed in the market Thursday evening. The dollar gave away basically everything against the pound, as well as the euro. Moreover, the American stock market increased by more than 1% from its minimum.

In conclusion, if during the weekend surveys continue to show advantage for the Brexit supporters, we can expect the yen and the dollar to be the biggest beneficiaries of the capital flow. Value of the franc should increase as well, but to a smaller degree than it did recently. Of course, the pound should be under pressure. The euro should be sold as well, because Brexit is an increase in system risk for the entire EU, thus, for the euro zone as well.

On the other hand, if the Brexit supporters begin to lose advantage due to yesterday's events or intensifying campaign of David Cameron, the pound would clearly gain value.

Is Japan demanding intervention?

The yen strengthened by more than 6% against the dollar, as well as the euro, since the beginning of the month. On the other hand, Japan has been struggling against excessively strong currency for months. This topic appeared in today's comments from the minister of finance as well. Taro Aso said that, “regarding the currency market sudden changes are not desired, and it is very important to keep the exchange rates stable. I would like to coordinate our actions with actions of other countries.” Aso also said that he would like “speculative moves to be withheld.”

However, as it is reminded by Bloomberg agency, the American treasury secretary has recently suggested that the bar is relatively high when it comes to a possible intervention that would stabilize currencies. The USD/JPY pair was at the level of 110 at that time. Currently, it is at the level of 104. Even though possible moves are not that significant to lead to extraordinary actions.

Moreover, perhaps Aso's comments were supposed to discourage the speculative capital to use the current trends few days before the referendum. The other possibility is that they were to give a signal that coordinated actions of leading central banks are possible in the case of Brexit. However, considering the previous events, such as resignation from keeping the EUR/CHF rate above 1.20, cooperation between particular institutions remains vulnerable to the strong short-term disturbances.

Are sentiments on zloty too pessimistic?

Changes in the broad market that suggested a slightly decreasing risk of Brexit, allowed the EUR/PLN to go below 4.42. Moreover, the franc reached the level of 4.06, which is 0.07 PLN less than during the peaks of Thursday's session. However, the zloty began to wear-off yet again before noon, and the EUR/PLN was testing the area of 4.45.

Today's wear-off of the PLN should rather be temporary. This is considering that the risk of Brexit continues to decrease. In this scenario, a return to the area of 4.40 before the referendum would be more likely, rather than going above 4.45. This is considering even a general uncertainty. Of course, if surveys remain unfavorable for the EU supporters, the zloty will continue to lose value. Especially considering that there are many opinions in the market that the Polish currency can be exceptionally exposed to Brexit.

The market will receive data regarding industrial production, as well as retail sales this afternoon. However, basically regardless of its result, it should have a minor impact on the PLN. Increasing or decreasing risk of Brexit should be the only thing that matters within the forthcoming days.

17 Jun 2016 13:17|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:

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Afternoon analysis 15.06.2016

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