Daily analysis 21.07.2015

Greek issues may return to financial press headlines in a matter of a few weeks. Bullard sees the first rate hike in September, but is it really a positive signal for the dollar? The zloty stabilizes around 4.10-4.12 per euro.

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

• No macro data which may affect the analyzed pairs

Busy holidays in Greece

An interesting timeline for Greece was reported by Bloomberg today. The news agency, citing one of the international officials, claims that by August 6th the negotiations regarding the new bailout are scheduled to end. The first tranche from the ESM program is supposed to be paid by August 17th – three days before the Greek bonds held by the ECB mature.

Additionally, by August 13th votes in the Eurozone parliaments are expected to end regarding the 86 billion euro bailout. The schedule for Greek parliament work is also tight. Tomorrow’s decision on bank resolution law is supposed to be taken and also some issues regarding the civil law. The government, however, according to Bloomberg, moved its decision on to more controversial issues – pensions reform and tax hikes for farmers.

It is still worth noting that the probability of all required measures by the creditors to be implemented is more than 50%. Mainly due to the fact that the pro-European opposition is expected to support all the required measures. A much more severe problem, as we earlier stressed, is the fact that regular government work may be increasingly difficult when the country faces the implementation of the new law. It may stir up unrest in the society and as a consequence even unwind the reforms. It would bring us again to the threats of Grexit.

Similar fears are also probably shared by economists surveyed by Bloomberg. 71% claim that Grexit will not be averted in 2016. In our opinion, the risk is still less than 50% but other internal problems inside the Hellenic Republic, much less patience on the creditors’ side, and the risk of taking the power by more radical politicians can bring international reporters to Athens fairly soon.

Bullard predicts September hike

Yesterday in the interview for Fox Business James Bullard said that he sees more than a 50% chance that interest rates may rise in September. Despite the fact that St. Louis Fed's president will not vote this year and is regarded as a leaning hawk, there are only two months to the meeting and his guess may be close to the truth.

Much more important issues are still regarding how many hikes can be seen in the US by the end of the year. We cannot exclude that when the Fed moves in September, the FOMC may restrain in further rate increases till the end of the year. It may be the case, if we listen to both comments from Yellen and Bullard who claim that it is better to start earlier but keep the gradual pace of tightening.

The word “gradual” here can have several meanings. However, we cannot exclude that after the September decision we may get some hints. If the future interest rate projection shows that in 2015 we can see only one hike and in 2016 only four quarter percentage points increases the market may conclude that the gap between the first and second hike can even be 6 months (decisions at the beginning are expected only at meetings including press conferences). In such a scenario we may observe a significant dollar slide in the last quarter of the year. It may even push the EUR/USD above the recent highs of 1.15.

The foreign markets in a few sentences

Bullard’s comments from Monday were not influential enough to change the view on the US currency. If the data from the States remains solid the greenback should benefit from the first rate hike. But if the theory noted in the paragraphs above turns out to be true a several-month-long correction on the dollar might spur a significant turmoil on the currency market especially when investors are positioned in one direction.

Stable zloty

The zloty is expected to remain fairly stable today in the range of 4.10-4.12. More significant changes are not seen on the US dollar which should remain under the 3.80 mark. No major volatility is also seen on the Swiss franc.

It is worth noting, however, that if the theory of one interest rate hike in the US and a 6-month break, turns out to be true the zloty should benefit from the dovish Fed action. As a result it may push the dollar below a 3.50 mark and the euro below 4.00.

Currently, it is not the base case scenario but its realization can seem quite probable. A significant part of market participants seeing a very gradual tightening might reduce its positions on the dollar which might push the greenback lower. Additionally, a dovish stance from the ECB would favour the EM currencies, including the zloty.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: