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Daily analysis 26.06.2015

26 Jun 2015 13:35|Marcin Lipka

The negotiations regarding Greece enter the final phase. What happens if the base case scenario is not fulfilled? Will the euro go down in the short-term irrespective of the scenario? The zloty is susceptible to the sentiment related to Greece, although the changes are currently limited.

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

  • All day: Statements from the politicians of the European Union regarding progress in the Greek negotiations. The media receive leaks from the groups dealing with the technical matters.
  • Saturday at 17.00: Probable date of the meeting of the Eurogroup. However, the negotiations can continue on Sunday.

Final stage of negotiations

There was no progress in the Greek negotiations in the last few hours. However, there is some information chaos. It is reflected well by discrepant messages from Troika regarding the progress in getting the standpoints closer. Also, we observe changes of sentiment inside Syriza.

Just last night, The Guardian wrote that the Greek government is optimistic, and the agreement is within reach. However, today the Greek Minister of Labour claimed on Mega TV that “judging by how things are today, the chances for any understanding are poor”.

The current development of the situation should not be surprising. The market speculated many times that the discussions will carry on until the last moment. It is supposed to show the Greek society that this government has finally “begun to take care of its business”. On the other hand, increased tension and growing concern with the Greek matters aim to discourage the citizens of peripheral countries from voting for the extreme parties. It shows that instead of fulfilling unreal promises, such politicians expose the countries to uncertainty, and the confrontation policy does not bring advantageous results.

The biggest problem however, is to identify this “last moment”. The forthcoming weekend seems to be the deadline. The installment for the IMF needs to be settled by the end of the month, the EBC is less willing to increase liquidity for the Greek banks, and the current aid program ends within the next few days. Without its positive conclusion, Greece will not receive another installment of aid.

Negative scenario

The agreement between Greece and its creditors remains the base case scenario. However, it is worth looking at a possible negative development of the situation. If the discussions between the eurozone's ministers of finance end with a failure, there is a risk that Athens will introduce the control of capital flow on Monday.

It will be a result of the fact that the EBC will probably withhold liquidity operations, if no limits in the deposits' transfer are introduced by the administration. This would actually cause paralysis of the Greek banking system. This could still be a moment for negotiation, although the result would then be really uncertain.

Grexit could also be among the consequences of a lack in understanding. At first, it would cause significant tension on the markets. Overvalue would hit the European stock markets, and profitability of peripheral treasury bonds would increase. Additionally, the euro would lose significance, and it is possible that it would ascend to this year's minimum.

Will the euro go down irrespective of the scenario?

What is interesting, the euro is under pressure not only in the case of the negative scenario. The European currency may lose value, even if an agreement is achieved (more in Wednesday's analysis). The initiation of carry trade can cause a relatively quick drop to the area of 1.10. However, if the European sentiment improves in the long-term, the latest prognoses regarding the European economic increase fulfil, and inflation begins to accelerate, it will increase the expectations regarding future interest rates.

It should cause a decrease in the attractiveness of the carry trade, and in expectations regarding the extension of the QE. As a result, the European currency should work off the losses. Especially if the path of the interest rates hike appears extremely mild.

Few words about the currency market

A crucial moment in the negotiation approaches. Ending them this weekend and the acceptance of the reform program by the Greek government on Monday – this is the base case scenario. If, however, the agreement is not achieved, Monday's session on the currency market can be very nervous. The European currency should be its main victim. The EUR/USD can even go down to the area of 1.10.

Calm before the storm

Relative calm on the national currency can be deceiving. Despite the fact that the majority of the market's participants expect an agreement between Greece and its creditors, it is difficult to expect a breakthrough by the end of today's session. This should cause the zloty to visibly lose value by the weekend.

Basically, Monday's opening on the PLN depends only on information regarding Greece. If there is no agreement and Greece introduces control of the capital flow, the euro will probably cost more than 4.20. An even bigger movement is expected on the franc or the dollar. These currencies can reach higher levels than respectively 4.05 and 3.80. Also, the pound would reach its 8-year-old peaks, and cross the value of 6.00 PLN.

On the other hand, if Athens establish a savings plan with its creditors, the EUR/PLN is expected to go to the area of 4.13, and the franc can cost even less than 3.90.

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

Range EUR/USD 1.1150-1.1250 1.1050-1.1150 1.1250-1.1350
Range EUR/PLN 4.1500-4.1900 4.1500-4.1900 4.1500-4.1900
Range USD/PLN 3.6900-3.7300 3.7300-3.7700 3.6500-3.6900
Range CHF/PLN 3.9800-4.0200 3.9800-4.0200 3.9800-4.0200

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

Range GBP/USD 1.5650-1.5750 1.5550-1.5650 1.5750-1.5850
Range GBP/PLN 5.8400-5.8800 5.8000-5.8400 5.8800-5.9200

26 Jun 2015 13:35|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 24.06.2015

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