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Daily analysis 26.05.2017

26 May 2017 12:29|Marcin Lipka

Although OPEC has announced extension of the oil production by another 9 months, the crude has lost value and put some pressure on currencies of commodity exporting countries. The pound under pressure from shrinking Tory lead. The zloty remains strong and stable to most the major currencies.

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

  • 14.30: Q1 GDP reading from the US (survey: +0.9% q/q, seasonally adjusted annualized),
  • 14.30: Durable goods orders from the US (survey: -1.5%; excluding transportation: +0.4%),
  • 16.00: University of Michigan consumer confidence index (survey: 97.5 pts).

Pressure on commodity currencies

The oil exported countries meeting ended on Thursday afternoon. Both the OPEC and non-OPEC delegates agreed to extend the production cut for another 9 months.. Although this decision should reduce relatively quickly the global stocks of this commodity and bring them back in the next few quarters to multi-annual averages, the market reacted negatively to the final message.

Shortly after 5 pm both the WTI and the Brent experienced a heavy sell off. In relation to opening levels the drop exceeded 5 percent of the value. So why did the oil fall despite that the agreement was extended under anticipated scenario? Bloomberg reported that the traders were counting on some surprise. Perhaps extending the cut to a full year, or deeper production restrictions than 1.8 million barrels (OPEC plus other exporters compared to the end of 2016) or even expansions of the coalition by several additional countries. This speculations may be correct, because the largest price fall has started during the official press conference, which was the latest possible moment when a surprise might have occurred. The initial drop was also extended by the fact that 11 out of 14 sessions ended at higher levels. The “WSJ” also cited some analysts that when speculators figured out that the market was falling after cutting production, many of them figured out that sentiment had suddenly changed and they also wanted to escape the market."

Negative information on the oil market has has also pushed down some commodity related currencies. The Russian ruble and the Norwegian krone lost about 0.8%, and the Canadian dollar was lower over 0.5%.In general, however, it is worth noting that despite these initial reactions, fundamentals are increasingly supporting higher prices in the second half of the year. Inventories should drop at least 1 million barrels per day, even taking into account optimistic estimates of the US output growth.In addition, for countries that do not participate in the deal (Norway, Canada), higher prices in the following months should translate into better condition of both the crown or the Canadian dollar.

Issues for the pound

A few days ago we noted to less and less favourable polls for Theresa May. At the beginning of May, the Tories over the Labour party had a lead of 15-20 percentage points. In the second half of this month the difference started to melt down to around 8 and 14 percentage points.

However, published around the midnight, YouGov's poll for The Times showed that the Conservatives' dominance over the Labour Party has dropped to 5 percentage points. It is less than in the 2015 election (6.6%).This information led to a sharp decline in sterling during the Asian session. The GBP/USD is markedly below the 1.30 level (1.2860), and the pound against the zloty is around 4.80 level, the weakest since November 2016.

A significant drop in support for conservatives may, on the one hand, reduce London's negotiating mandate and, on the other, make the more radical Tory MPs more likely to favor hard Brexit, who would probably block unrestricted access to the UE market for British goods and services (financial).If such a scenario begins to materialize on the market, then sterling could lose even a few percent more of its value to most currencies, including the zloty.

Calm trading on the zloty

In the afternoon trading on the domestic currency is relatively calm again. The EUR/PLN fluctuates close to multi-month lows within the range of 4.17-4.18. The global sale-off on the pound, however, pushed the British currency close to 5 years low excluding the moment of the GBP flash crash in October 2016.

At this moment, the risks to the zloty should be limited. Yesterday we had all-time-highs on the US equities and there is still market pressure for the dollar to rise or for the treasuries yields to move higher. An element of uncertainty may be the trading of crude oil, which may worsen the condition of many EM currencies (including the zloty despite Poland is the crude importer), but for now it is rather not a baseline scenario as the oil should be supported by fundamental factors.


26 May 2017 12:29|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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Afternoon analysis 25.05.2017

25 May 2017 12:12

Daily analysis 25.05.2017

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Afternoon analysis 24.05.2017

24 May 2017 12:11

Daily analysis 24.05.2017

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