Daily analysis 24.10.2014

The US data and solid session on equities stabilized the EUR/USD. Banking stress-tests in Europe. The rouble remains under pressure but Russia probably remains at investment bay. The Ukrainian election with no impact on the region. The zloty managed to stabilize the rate under 4.23 level on sentiment improvement and comments from governor Belka.

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

• 16.00 CET: New home sales from the US (survey: 470k, seasonally adjusted, annualized data).

Lower volatility. Test. Ruble. Ukraine

The market volatility eased a bit after the recent spike in nervousness caused by some changes in US future interest rates and rumors on more monetary stimulus form the ECB. Calmer trading is also a result from bullish session on equities and solid PMI readings across the pond.

In afternoon analysis have focused on European stress-test for several days. The banking sector research is aimed at showing whether the largest euro zone financial institutions are able to withstand a sever recession and a market slump (similar to the Lehman Brothers bankruptcy).

According to the tables provided by “The Wall Street Journal” on 150 major banks we can clearly see that at least several of them are set to fail the test (mainly Italian, Spanish, Portuguese or Austrian). Much more servere problem would occur if the failure hit major lending institutions. It is rather a “long tail” scenario despite that Bloomberg reported today that if the AQR does not include the recent capital increase at Deutsche Bank it can “technically” fail the probe. The second benchmark on which investors are set to focus is the total amount of capital required by the sector. If the number exceeds 10-20 billion euro it will be a negative message for the markets.

The market still closely watch developments on the Russian currency. Yesterday the dollar+euro/rouble band was moved up by 40 kopeks. In means that the central bank (CBR) sold at least 2.8 billion USD worth of its reserves. Summarizing, the CBR in October exchanged more than 15 billion USD from its 440-430 stockpile.

The sliding in currency reserves is not the biggest issue for Moscow. On late Friday Standard&Poor's is expected to announce its decision on Russia solvency grade. Regarding the negative rating perspective and it lowest possible investment level it should be clear that S&P cut the Kremlin credit worthiness to the junk territory. However, we still have to remember that in recent years Russia saved a lot of funds from its commodity exporting industry (around 170 billion USD). Moscow also still has high currency reserves and was running pretty cautious fiscal policy (budget deficit and debt almost does exist).

As a result Russia will be probably keep its investment rating after the weekend. It is also in line with a view of Tim Ash. The well-known analyst from Standard Bank told “The Wall Street Journal” that putting Russia into the junk would be “a huge move”. He also added that “I think a move to junk is very, very unlikely at this stage”.

No surprises are expected concerning the Ukrainian election. The western-oriented parties lead by the president and prime ministers are expected to receive around 40% of votes. We can also assume that if the election runs smoothly it can be a signal of some improvement in the region. Paradoxically the Russian ruble may gain from the outcome especially if the S&P does not lower its rating.

Summarizing, the following hours should be rather calm. More volatility can be expected on Monday after stress-test results are published. In the incoming week market participants will be focused on German Ifo reading, Federal Reserve meeting and euro zone inflation. If the events show further divergence in monetary policies between the euro area and the US we can expect 1.2500 level may best tested.

Slight appreciation

On Thursday evening due to a solid US session the zloty managed to stop the slide and the EUR/PLN stabilized around 4.23 level. Furthermore in the morning the Polish currency was supported by governor Belka comments. He said during the international conference organized by the the IMF and NBP that “Poland has a fantastic, splendid economic location for doing business, low taxation and undervalued zloty”.

Market participants focused on the last part of the statement which not really suggest that the central bank is concerned with the zloty weakness but it may rather suggest that the MPC would not like to ease significantly the monetary policy (it would be the PLN negative). The comment can also be connected with a slight verbal intervention especially that the zloty recently has underperformed its peers.

Summarizing, the pressure on the zloty was eased by the NBP comments. As a result the yesterday scenario of more downside risk for the Polish currency should be a bit modified. Currently the EUR/PLN and CHF/PLN should remain with in 4.21-4.23 and 3.49-3.51 range respectively.

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

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