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Daily analysis 26.08.2014

26 Aug 2014 12:36|Marcin Lipka

The Jackson Hole effect is still visible on the markets. Political changes in Europe – French government shift and early parliamentary election in Ukraine. Another interest rate cut significantly weakens the shekel. The zloty remains stable. Retail sales in line with expectations and the expectations but the composition may give some hope for improvement in the future.

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

  • 14.30 CET: durable goods orders in the US (survey +5.1% m/m excluding transportation +0.4% m/m).

Jackson Hole. Politics. Minsk. Shekel

The Draghi speech at Jackson Hole symposium spurred much more attention than one might have expected after the text was released. What is more interesting, further monetary easing not only affected European debt market or the currency but also the US equities which may have found another “leading theme” to continue the gains. It is also worth taking a look at Euro Zone debt. The yields on 10-bonds in Spain, Italy, Germany or France (2.2%, 2,41%, 0.95%, 1.29% respectively) dropped to record level. It does not mean, however, that the situation in these countries improved. Contrary – the threat for deflation (which is actually tided with “zero” growth) with stable credit rating (default of Euro are is now out of question) plus adding a possibility of central bank intervention caused that it is a high probability that in the future the rates will be actually even lower. The same situation is actual in Poland were the 10-year benchmark is poised to fall under 3.00%.

The Jackson Hole symposium is positive for European debt market (on Draghi comments), favorable for stocks and clearly negative for the common currency. As a result the further downside pressure should be continued (especially toward G10 currencies where the interest rates hikes are expected pretty soon – the dollar and the pound).

On Monday we learned about French government reshuffle and early election in Ukraine. Changes in Paris are the result of turmoil inside the socialist party where the ministry of economy Arnaud Montebourg objected to the austerity policy announced by Francois Hollande. Today, however, a new government will be introduced (with the current prime minister Manuel Valls. The odds for early election are pretty low due to the fact that socialists would lose quite a lot of seats and it is expected that most key ministers save their positions (except the economy). It is also hard to imagine that the shift can generate any growth in the following quarters.

The changes are also scheduled in Kiev. Petro Poroshenko wants to exploit his popularity and announced a new election for October 26th. It should cause that Kiev authorities would be even more pro-western. According to the July's polls prepared by the “Rating” the “Solidarity” of Petro Poroshenko should score 17.5% (and among those who want to vote and already decided it is 27.5%). Another positions should also go to parties with European course. On the other hand, the “Party of Regions” (of former president Yanukovych) scores only 2.5% (3.8%).

Poroshenko is heading to Minsk with strong arguments. Additionally, the recent incidents also gave him some “marketing” boost. Kiev built a negative picture of the “Withe Convoy” and the recent capture of Russian soldiers on the Ukrainian territory showed that Kiev is getting better and better organized. The support was also clearly presented by the European strongest power – Germany – thanks to chancellor Merkel visit in Ukraine during the independence day. As a result, the betting position for Poroshenko is getting stronger and despite the overall skepticism regarding the summit in Belarus some positive results (bringing us closer to the peace) may be announced after the meeting.

The situation on the Israeli currency is getting more interesting. After the Monday's surprising decision (no economist surveyed by Bloomberg expected a change) by the central bank to cut interest rates the shekel dropped to the dollar more than 1%. According to the Bank statement the main reason behind the decision was falling inflation (0.3% y/y) and future price growth in the lower range of the target. Additionally, it is also expected that the GDP performance in the following quarters may be lower and employment situation stopped to improve. Quite substantial problems hit the tourist industry where the revenue dropped more than 25% in July comparing the same months a year ago. The USD/ILS rose during the last month from 3.40 to 3.60 per the dollar. What is more interesting the market has rumored for weeks that the central bank would intervene to stop the appreciation move and now the local currency is the lowest since almost one year (without the intervention). However, when the Gaza operation ends we should see a comeback to strong shekel (or at least stagnation) thanks to positive developments of current account (surplus + rising revenue from gas export).

Summarizing, the selling pressure on the EUR/USD should remain and the probability to test the 1.30 mark rose significantly after the Jackson Hole comments. Today it is worth taking a look at the durable goods reading where the headline data may be significantly deviated (upward) by the plane orders. Investors should focus on the publication excluding transportation.

The zloty is still in a narrow range

The Polish currency remains stable to the Euro and most transactions are processed with in 4.18-4.19 range. The range-trade is caused by the fact that positive data for the currency (for example a perspective for looser monetary policy in the Euro area) are leveled off with earlier rate hikes across the pond and expected cuts in Poland. Moreover, issues in the East are compensated by the capital inflow to the bonds. As a result if any factors drops from the list, the equilibrium would be disturbed and a 1 percent move should be expected in either way.

Published at 10.00 CET data on retail sales was in line with expectations (2.1% y/y vs 2.1% y/y). However, taking into the account the composition the future looks a bit brighter with much stronger growth in many categories. On the other hand, the gasoline sales dropped significant but it was caused by higher crude oil prices recorded in July 2013.

Summarizing, the zloty should remain pretty stable and most trades will be made around 4.18 on the EUR/PLN and 3.45 on CHF/PLN. The retails sales data may be viewed as a bit positive (especially that recent surprises were only negative) but taking into account the interest rate policy, it would change nothing. Additionally, moves from other central banks (ECB or Bank of Israel) increase pressure on the MPC.

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

Range EUR/USD 1.3350-1.3450 1.3250-1.3350 1.3450-1.3550
Range EUR/PLN 4.1800-4.2200 4.2000-4.2400 4.1600-4.2000
Range USD/PLN 3.1000-3.1400 3.1400-3.1800 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4600-3.5000 3.4200-3.4600

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

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6950-1.7050
Range GBP/PLN 5.2500-5.2900 5.2700-5.3100 5.2900-5.3300

26 Aug 2014 12:36|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.

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