Daily analysis 19.01.2014

Financial consequences of abolishing the promise of maintaining the rate of EUR/CHF above the limit of 1.20 by SNB. The market estimates the size and conditions of EBC assets purchase extension. Speculations about resigning from steady exchange rate of euro in relation to Danish krona. Chojna-Duch does not see any reasons to decrease money rates in February. Zloty still remains under pressure.

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

• No macro data which may affect the analyzed pairs.

Financial consequences

Throughout recent days there were any analyses, showing what consequences may the decision of Swiss Central Bank have for the economy of Switzerland, or the economies of countries, whose citizens have debts in CHF. However, it is also worth looking at what has happened to the institutions, that were directly involved in currency speculations.

First of all, the rate of EUR/CHF is still unstable. It results with sudden changes of rate, and spread which is many times higher than the one observed earlier. Second of all, many companies on the financial market, have suffered severe losses. For example, one of the hedging funds has been closed down. Everest Capital managed an amount of 800 million dollars and was specializing in transactions on emerging markets, mainly by buying assets in times of crisis. It appeared, that it also speculated on franc.

Recommendations of BNP Paribas, have also ended with serious losses. As Bloomberg informed, a long position on EUR/CHF has ended with more than a 5 percent loss, because the trade could not be closed earlier, due to the “price's slide”. There is also a wave of articles circulating round the foreign press. British Alpari and Global Brokers NZ, have also lost their financial liquidity.

Much bigger institutions are also among the victims. Evaluation of American FXCM, which only in the last quarter has recorded a customers' turnover on a level of 1.4 billion USD, decreased by over 90%. However, as it appeared, after SNB decision FXCM customers lost 225 million USD on EUR/CHF. Because most of the positions are taken with the use of high leverage, the individual investors recorded negative evaluations of their accounts. Vindication of these dues can be difficult, thus this institution had to find emergency financing.

Loss of capital did not omit the biggest players on the market. According to Bloomberg, Citigroup and Deutsche Bank lost by 150 million USD, and Barclays less than 100. However, in case of the biggest investment banks, the above situation will not influence their activity in any degree. Also the perspective of more and more frustrated market and clearly bigger demand for the instruments securing from the fluctuations on FX, should allow them to work off the losses with some surplus.

Watch out for EBC

According to 93% of economists surveyed by Bloomberg, Mario Draghi will announce the extension of assets purchase on Thursday's summit. The program will probably have the size of approximately 550 billion euro, and it will mainly consist of treasury bonds. Interesting matter is establishing who would take the hypothetical losses, if the purchased treasury instruments would lose on their value.

The opponents of assets' purchase would conditionally agree for it, if EBC would not take the risk, but rather national central banks. However, considering that the co-operation between the members of Monetary Union is rather tightening and the effectiveness of this operation, such strategy seems to be very unlikely.

Merrill Lynch from Bank of America, has pointed out on an interesting matter. Because the amount of bonds' purchase will be probably close to the consensus, EBC has to give the market a clear signal, that if needed, the operation can be extended. Of course, the more doveish Draghi's attitude will be, the bigger probability of causing further pressure on the euro.

Danish krona

Due to completely unexpected decision of SNB, the investors begin to search for another starting point, where weakness of the euro and inevitability of assets' purchase by EBC can cause a “shot”. This weak link can be Danish krona. Since the introduction of the euro, its rate in relation to European currency is steady and amounts approximately 7.45 DKK per EUR.

However, the biggest Nordic banks deny, that Copenhagen gave up on maintaining a steady exchange rate, despite that many of them receives phone calls from the hedging funds, about the chances for success of such scenario. It is not excluded, that Denmark will again decrease the deposit rate, which currently equals minus 0.25%.

Few words about the foreign market

By such sudden movements we can assume, that there will be moments, when we will see strong corrections on main currency pairs. In general however, there are no bases for changing the basics of market trends, and especially further appreciation of American currency.

Throughout the weekend, we had also some statements from Switzerland. The main of them is a comment of minister of finances about franc's situation. Eveline Widmer-Schlumpf said to Schweiz am Sontag newspaper, that according to her the Swiss companies should get used to perspective of EUR/CHF maintenance in the limits of 1.10. And though one should not take it as another level of balance, this statement at least gives a foggy perspective of CHF wear off by approximately 10%.

What is interesting, as Reuters and CNBC inform, the minister of economy, Johann Schneider-Ammann, knew about SNB decision, half hour before its official announcement.

Zloty and Chojna-Duch

There are still no reasons to count for the Swiss currency to get clearly cheaper. Currently only the suggestions of Swiss minister of finances about the possibility of increase of EUR/CHF in the areas of 1.10, give some hopes that franc will return in the areas of 4.00 PLN in relation to zloty. However, it is difficult to say, is it a perspective of months, or e.g. quarters.

In the context of whole zloty market, it is worthy to point out today's statement of Elżbieta Chojna-Duch for Bloomberg. Crucial representative of MPC told the information agency: “personally I think that March is the earliest date when we can estimate the scale of deflation. If it appears, that inflation's coming back to the target will take more time, or deflation will be deeper and longer, it may be a reason for return of money rates decreases”.

After the statements of Chojna-Duch and considering the market situation, the decrease of interest rates in February is very unlikely. Additionally, the decrease of money's cost in March is also not decided, despite that the instruments of monetary market are clearly evaluating the cutting on the level of at least 25 basis points. Behaviour of the market after EBC decision will probably be crucial. If zloty will not begin to clearly enforce itself, the chance for a decrease is small.

In conclusion, we should not expect today any bigger changes on main currency pairs. Closed markets in USA, should cause a limiting of fluctuation. EUR/PLN and CHF/PLN will remain close to 4.30, and USD/PLN will probably be recorded between 3.70-3.74.

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

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