Daily analysis 23.02.2015

The deal regarding Greece is closer, but the following hours remain uncertain. German Ifo worse than expected. Moody's cut Russian rating below investment grade. Azerbaijan devalued its currency by 1/3. Janet Yellen before the Senate Banking Committee. The zloty remains fairly stable. Bratkowski doubts whether 50 bps cut is possible in March.

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

• No macro data that may significantly affect the analysed pairs.

Additional uncertainty regarding Greece

During the Friday evening rumours concerning Greece bailout pushed the EUR/USD towards 1.1420 and helped the US markets to reach all-time-highs. However, the bullishness on the euro quickly evaporated when it turned out that Athens would have to produce a list with reforms which can unlock the needed money from troika.

According to the statement published on the European Council website, Greece will have time until the end of February 23rd to present a complex plan which will be a good starting point to continue the bailout program and build the basics for its renegotiations. Any money transfer to Athens will be dependent on the details presented by Athens and decision regarding accepting this measures are set to be made on Tuesday during the Eurogroup conference call.

In the Eurogroup statement on Greece we can also read that Athens also committed “to implementing long overdue reforms, to tackle corruption and tax evasion, and improving the efficiency to the public sector”. This, of course, contradicts to the Syriza calls to increase the public employment, increase the wages or pause the privatization. As we wrote recently, however, the Hellenic Republic would have to make concessions to get the needed funds.

Additionally, it is also worth noting that some document calls do not look precise. It claims that Greece may reduce its primary surplus target for 2015, but the numbers are not mentioned. Both sides seem to leave some room to manoeuvre in case a major obstacle arises on the horizon.

Taking all the issues into consideration, we still expect that the deal goes through and on Tuesday it is supposed to be accepted by the Eurogroup. As the result Greece should leave the headlines for 4 months. However, if tomorrow's EU finance ministers meeting fails to accept the Athens proposals we should expect a significant slide on the European currency.

Ifo weaker than expected

Despite that one of the most important index of the Germany economy rose to the highest level since July, still the reading was much lower than economists expected (106.8 vs 107.7 points). The upbeat message is that the subindex describing future economic conditions was markedly higher than in the January survey.

Commenting the data, Hans-Werner Sinn wrote that “satisfaction with the current situation decreased somewhat, but companies expressed greater confidence in future business developments. Overall the Ifo President was fairly optimistic claiming that “the German economy is proving robust in the face of geopolitical uncertainty”.

Moody's cut Russian rating

The Russian rating was cut to junk by Moody's due to “the existing and potential future international sanctions, the erosion of the country's foreign exchange buffers and persistently lower oil prices plus hight and rising inflation will take a negative toll on incomes as well as business and consumer confidence”.

The rouble reacted negatively to the rating agency report and dropped around 3%. However, the RUB slide might also have been caused by oil depreciation which quickened its downside move on Friday when Moscow FX was already closed and continued the bearish bias today. As a result if we don't see a significant geopolitical deterioration the rouble should move in line with the oil changes.

Azerbaijan surprise

We rarely focus on Kazakh currencies, but actions from the Azerbaijan central bank are worth noting. The country is basically funded only by oil and gas export. During the recent years the manta was pegged to the US dollar. It is pretty common strategy in countries where revenue is generated from commodities. It prevented the currency to appreciate and allowed central bank to accumulate foreign reserves.

However, sliding oil prices pushed the authorities in Baku to devalue local currency by a third claiming that it will “stimulate the diversification of Azerbaijan's economy, strengthening the international competitiveness of the economy and its export potential, and guaranteeing stability in the balance sheet”. What is pretty interest the move was processed on Saturday. The Financial Times also reported that government claimed for months that it would not devalue its currency. It is another central bank which uses some “tricks” to run the monetary policy.

The Azerbaijani manat against the USD in the last 5 years

Source: Bloomberg. The strengthening of USD/AZN means the weakening of the Azerbaijani manat against the American dollar.

The foreign market in a few sentences

Expectations on faster deal regarding Greece were clearly pushed back. The case also weighed on the EUR/USD. We, however, still expect that the game between Athens and troika would end with the agreement which would allow getting a few months rest from the Hellenic issues. Tomorrow it is also worth paying attention to Janet Yellen testimony before the Senate Banking Committee. There is no doubt that some questions are going to be asked regarding the moment of first interest rate hike. Taking into the account solid US economic conditions the Fed's chief should rather confirm a relatively quick monetary tightening. As result it should give another boost to the USD event if we see the final agreement on Greece.

Calm reaction on the zloty. Bratkowski comments

The local currency was fairly calm concerning global events. On Friday, the zloty gained some value to the euro while today a slight weakness is observed. The range, however, is fairly small and most transactions are made between 4.16 and 4.18. However, if we see a final agreement on Greece it is expected that the EUR/PLN may drop below 4.16. On the other hand, if Athens decides to play va banque we should not rule out the EUR/PLN rise above 4.20.

Moving towards the domestic issues it is worth quoting Andrzej Bratkowski. The most dovish MPC member, who advocates for a 100 bps rate cut, told financial daily paper “Parkiet” that he “doubts” Poland would cut the interest rates in March. It is a question whether Bratkowski want to push the other part of the Committee for more bold moves or it is really a slim chance for a half percentage point drop. If the latter is the case it should be zloty positive and if no additional easing is mentioned in the March statement the PLN should gain from a smaller cut.

We are not expecting strong moves during the Monday's session. The EUR/PLN should remain in the 4.16-4.18 range while CHF/PLN would probably stay below 3.90. Larger moves may be only caused by the rumours on Greece. Positive info form Athens should boost the zloty by around half of one percent. On the other hand if the Hellenic Republic fails to agree with it partners it may push the euro above 4.20 and CHF/PLN can climb to 3.90-3.95 range.

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

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