Daily analysis 24.08.2015

What causes such strong changes on the main currency markets? The probability of interest rate hikes on the other side of the ocean decreases. The zloty reacts mainly to the changes on basic currencies and the situation on the global shares market.

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

• 21.55: Testimony from Dennis Lockhart, chairman of the Atlanta's Federal Reserve.

China impose the pace

The situation related to China is the basic catalyst of changes on the currency market. It is worth noticing that the current nervousness is still a consequence of the relatively small devaluation of the renminbi conducted approximately two weeks ago. Of course, further events only enforce a belief that the actions of the POBC were determined more by a threat regarding the local economy than the renminbi's will to join the reserve currencies.

Anxieties regarding the condition of China create a vicious circle. The reduced demand from Beijing causes energetic raw materials and industrial metals to overvalue. This on the other hand has an impact on the economies of the countries which export raw materials and are China's close trading partners. These economies quote overvalue of their currencies and a worse perspective for an increase in the GDP.

Smaller purchasing power of the emerging markets' citizens is negative information for global enterprises. Combined with the depreciation of its currencies which may cause a return to global deflation, it gives the perfect concoction to delay the perspective of hikes in interest rates on the other side of the ocean.

According to Bloomberg's calculations, the chances for monetary tightening in the USA in September have decreased to 30%. Also, the likelihood of hikes in December decreased. Currently, it is only 53.6%.

Euro on a tidal wave

The EUR/USD being in the area of 1.15 is not only a result of the weaker dollar. It also had to do with the enforcement of the European currency. The main reason for the strength of the euro is the reverse in carry trade strategy. It is based on loaning the capital in a currency with a low percentage and investing in assets that can reach higher rates of refund.

At the beginning of the year, the investors thought this strategy to be perfect. First of all, because interest rates in the eurozone were negative. Second of all, because of quantitative easing which was practically a guarantee for a quick increase in credits' cost and additionally a decrease in the euro's value.

This approach appeared to be good, until the variability on the markets increased. A decrease in value of the emerging markets' currencies and problems for the countries related to China, cause a reverse of these strategies, and the necessity for their closure. It is practically the same thing as buying back the euro, which causes the appreciation of the European currency. The overlapping of these two movements caused the EUR/USD to increase by almost 500 pips since the middle of last week.

Few words about the foreign market

A panic return of capital to the euro and the American dollar's wear off due to a decrease in the probability of hikes in interest rates in the United States, are the main reasons for an increase in the EUR/USD. Currently, a further condition of the main currency pair will be mainly determined by the Federal Reserve's evaluation of the events on the global financial market. If the Fed does not withdraw from hikes in interest rates in September, the area of 1.12-1.13 should be reached quickly. However, if the Federal Reserve is significantly concerned with the global situation, the movement to the area of 1.17-1.18 is possible.

Relative stabilisation of the zloty

Considering the commotion on the currencies of the emerging markets and a serious overvalue of the global stock markets our region is an oasis of stabilisation. Even when one considers the zloty's wear off to the euro. Additionally, when looking on the whole basket of the zloty (which means its value to other currencies' value), the PLN is practically stable. Thus, an increase in the EUR/PLN is levelled out by decreases in the USD/PLN and GBP/PLN.

Most of all, it is the consequence of Poland being a net importer of raw materials. This means that its prices are positive for the economy, as well as for keeping a balanced current account. Additionally, the Polish export is not really exposed to China, or Asian economies in general. In this situation, it is an advantage.

Currently, one should expect a general stabilisation on the zloty. Changes on particular currency pairs will mainly be a result of changes on the euro and the dollar. Thus for the time being the euro will probably stay in the range of 4.20-4.25 and the dollar will be slightly below 3.70. The franc on the other hand should not move too far from the area of 3.90.

However, if the situation on the foreign stock markets stabilizes, and the aversion towards risk decreases, the euro-zloty should go towards the area of 4.20, even by a relatively high evaluation of the EUR/USD.

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

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