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Daily analysis 18.07.2016

18 Jul 2016 13:36|Marcin Lipka

The global market is ignoring the events in Turkey over the weekend and focuses on positive data from the USA. The Turkish lira quite quickly worked-off a significant portion of its losses from Friday. However, Turkey’s economic problems may increase in the coming quarters. The zloty benefits from keeping Poland's rating unchanged, as well as from a global increase in risk appetite.

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

  • No macro data that could significantly impact quotations of the zloty.

Positive American data is more important than Turkey

The weekend’s events in Turkey had a potential to deteriorate the global sentiment, at least when it comes to this week's trade opening. However, it eventually did not. Clearly, investors received the situation in Ankara as a local risk. This attitude was probably a result of the positive data from the USA that was published on Friday.

Retail sales, as well as industrial production, were higher than estimations. Base case inflation tested its few-year maximum as well. This increased the chances for the forthcoming months to be successful in the American economy. Profitability of the American treasury bonds increased as well. This, as a result, increased a probability of the monetary tightening by the Federal Reserve.

On the other hand, the pressure on rate hikes is not large enough to become a significant competition for the growing shares market. Even if the Fed returns to the discussion regarding higher interest rates, the pace of the increase will most likely be very slow.

The above events are favorable for the dollar. We took note that the dollar should be the favorite by a positive, as well as a negative sentiment. With growths on the American floors and better than expected data, the buck should be supported by the perspective of higher interest rates. On the other hand, the dollar should also gain value due to a sudden increase in the global risk (for example, on Friday evening). As a result, the EUR/USD is reaching the area of 1.10.

Lira may be under pressure

After the first announcements of the attempts of a military take-over in Turkey on Friday evening, the currency market was still active. The lira (TRY) immediately wore-off against the dollar by approximately 5%. This was the strongest one-day move in eight years. However, the weekend brought information that the situation is becoming relatively stable. The USD/TRY increased by approximately 1%, by reaching 2.92-2.93. This was definitely a small growth, taking under consideration the scale of the events.

The Turkish geopolitical situation is very difficult. It consists of external dangers, as well as approximately three million refugees near the Turkish borderlines. We must also remember the recurring bomb attacks inside the country. They cause significant losses for the tourist sector, for example. However, regardless of these extraordinary events, we cannot say that Turkey's economic growth is balanced and stable.

The country is dealing with a high deficit of the current account (approximately 5% of the GDP). It is mostly financed by the inflow of the wallet capital that uses a significant difference between interest rates of Turkey and the developed markets. It is approximately 6-7%, and the rate of a 10-year debt is approximately 9%.

The labor market is very weak as well. According to the OECD data, the employment level in its relation to the amount of people in working age, is only 51%. This result is even worse than the result of Greece. However, Turkey's unemployment rate went below the limit of 10%. Turkey also balances between the investment and speculative grades in rankings.

It is easy to imagine that the weekend events may put Turkey's loan credibility under pressure. Today, Moody's, as well as Standard & Poor's announced that they would have a closer look on the rating in the nearest future. It is difficult to expect that the current situation is favorable for the foreign investments in Turkey.

Thus, we may expect that the fiscal policy, as well as the monetary policy will be used for stimulating the economic growth. The central bank will probably not cut interest rates at its meeting tomorrow. However, we may expect that the actions from the monetary authorities, will be favorable for the government.

The above elements are clearly creating danger for the lira. It will reveal itself, especially in the moments of an increase in global risk aversion. We also cannot exclude an escalation of Turkey's internal problems, especially considering that its relations with the USA have clearly deteriorated in the past few days. As a result, today's wear-off may be temporary and the USD/TRY may exceed its historical records relatively quickly (the area of 3.07).

A positive surprise

For the first time in many months, we received some positive surprising data regarding the Polish economy, as well as its evaluation. The Fitch rating agency decided to leave Poland's rating, as well as its perspective, at an unchanged level. And even though the decision coincided with the events in Turkey, and as a result the zloty lost value on Friday, the situation of the Polish currency is definitely better – the EUR/PLN went below the 4.40 level.

In summarizing the announcement from Fitch, it is worth noting one specific message - the Agency assumes that the current administration will not want to exceed the 3% limit for the public finance sector. If this happens, we may expect the rating to be under pressure.

Poland's loan credibility may be endangered if, “the program of currency credits conversion puts the financial stability at risk.” Moreover, “changes in economic policy and/or a larger than expected impact of the Britix referendum, may affect the macroeconomic stability, as well as the perspective of the GDP growth.”

What's interesting is that Fitch did not mention that retirement age related risk directly, even though it was mentioned in January, as well as in the mid-May, in the document entitled “Weaker growth, political promises increase the Polish fiscal risks.” However, we may assume that this matter was included in the GDP deficit level. According to the Agency's base case scenario, it will not exceed the 3% level of GDP in the forthcoming years.

Despite mentioning a significant amount of dangers, the decision of Fitch should be considered as a positive for the zloty. In our opinion it decreased the base case scenario for the EUR/PLN from the area of 4.40, to approximately 4.37, while the franc has a chance to reach the limit of 4.00 PLN in the forthcoming days.

18 Jul 2016 13:36|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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