Daily analysis 21.07.2014

Due to lack of macro data the Ukrainian events and military operation in Gaza Strip should shape the sentiment on Monday. Tomorrow's CPI reading from the US may give some boost to the dollar. Rand is stronger after interest rate hike in South Africa. The zloty remains under pressure due to events on the East.

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

• No major macro data which should affect the analyzed pairs.

Ukraine and Israel. Rand. CPI

On Friday the US market leveled off the losses recorded just after the Malaysian plane had crashed and Israeli soldiers entered the Gaza City. During the weekend, however, there have been many opinions showing that the European leaders seem to strengthen their stance toward Russia and the Middle East conflict looks to be going into much more bloody phase. Both are negative for risk asset and therefore can be bearish for stocks.

Today's major daily newspapers (“Financial Times, “The Wall Street Journal”) were mainly focused on two issues – the Ukrainian situation and the Israeli operation. Regarding the crash of the Malaysian Boeing, the press seems to be unanimous in claiming that the separatists shoot the plane accidentally using weapons supplied by Russia. Moreover, journalists noted that the pragmatic approach presented by many European countries (Holland, Italy, France or the UK) looks to be shifting toward introducing more severe sanctions on Russia during their meeting on Tuesday. On the other side, it seems that the Kremlin wants to soften its stance. Besides quite often quoted sentence that “if military operations had not resumed in eastern Ukraine on June 28, this tragedy probably would have been avoided”, we can also read that Putin “will do everything in his power to move the conflict in eastern Ukraine from the military phase we see today to the negotiating phase, with the parties using peaceful and diplomatic means alone”. As we wrote on Friday, quoting a former US ambassador to Russia, the current events can have either significant positive or negative consequences. Currently everything depends on Putin's withdrawal of support to the separatists after the West push the pressure further.

There is a major turmoil going on in the Middle East. Since the Israelis launched their ground operation more than 500 Palestinians lost their lives and 13 Jewish soldiers died (the most since 2006 according to the “WSJ”). There is, however, no visible reaction on the shekel. The currency is close to its three-year high to the dollar. In recent months, the central bank in Israel tried to weaken the currency to help exporters and slow its appreciation trend but due to the capital flow into the Jewish state and exploration of new gas fields the demand for dollar lessened, strengthening the shekel naturally. Currently there is no significant threat that the ILS might weaken.

We are also observing that South African currency is holding pretty well. Despite some recent downgrades and growth cuts the rand has not lost its value. One reason behind a relative good performance of ZAR is monetary policy. The central bank hiked interest rates on Thursday due to inflation rising beyond its “3 to 6%” target to 5.75%. It is probably not the end of the monetary tightening, but the Committee has quite challenging job to do – keeping prices checked without putting pressure on subdued economic growth. When it chooses to give more breath to the inflation later, we may see the ZAR coming back to the downside trend.

Summarizing, the EUR/USD should be pretty stable today and most trades will be made around the current levels. Tomorrow, however, we might have more volatility. New sanctions could be introduced on Russia and we will also get June's CPI reading from the US. If the inflation from the States rises again (above 2.1%), we should get another dollar bullish argument which can also push the EUR/USD below 1.3500 level.

On the weaker side

The zloty has been traded around 4.15 per the Euro but weak data from Polish economy and increasing odds that the West may introduce more sanctions on Russian could produce the retaliatory effect (pretty significant effect on Polish expert) putting the PLN on risk to weaken further.

A good risk barometer in the region is still Russian ruble. The USD/RUB pair is around 35.00 level (didn't weaken further after the Malaysian jet crashed but lost significantly on introduction of US sanctions). However, if the UE strengthens its stance on Kremlin the ruble can be pushed down further. We should also expect more pressure on the zloty in line with the Russian currency slide.

Summarizing, today we still should have a fairly calm trading, but tomorrow there is much more probability that with new sanctions on Russia, the PLN may weaken further. With a risk of another disappointing reading from Poland on Wednesday (retail sales) it is probable that we can hit 4.17 per Euro this week.

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

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