Daily analysis 27.05.2014

Low volatility. Getting closer to a gas deal between Russia and Ukraine. European elections with no impact on the markets. Turkish monetary policy. The zloty remains stable but the intensification of military operation in the east of Ukraine may prevent the PLN from continuing the appreciation move.

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

• 14.30 CET: Durable goods orders from the US (survey: minus 0.8% ; excluding transportation: minus 0.1% m/m).
• 15.45 CET: PMI services preliminary readings from the US (survey 55.4 points).
• 16.00 CET: Conference Board consumer confidence (survey 83 points).

Low volatility. Deal. Election. Turkey

Lack of traders from London and New York caused fairly calm trading on the Monday afternoon and most transactions were made around 1.3650. Today's morning is also pretty laid back but due to some more geopolitical tensions regarding Ukraine and scheduled US readings we may see more volatility as the day progresses.

Firstly, it is worth noting the Ukrainian issues. There are some signs that we may expect a gas deal between Kiev and Moscow. According to Bloomberg reports, during Berlin talks between Gazprom and Naftogaz it was proposed that Ukraine will pay around 2 billion USD until May 30th and another 500 million in the following week (the whole debt is 3.5 billion USD). On the other hand, the Russian minister of economy suggested that if the deal is set, there should be some room for price negotiations (probably the commodity price will be significantly lower than current rate but higher than the agreement during Yanukovych era). If the talks turns in into a deal, we will have another issue resolved and tension in the region, which is the most sensitive to energy dispute, should diminish.

A significantly higher representation of nationalistic parties in the European Parliament spurred some discussion on future integration and relations inside the Union. However, there was no reaction on the markets. There are at least few reasons why investors were reluctant to sale stocks or the currency after the news hit the wires. Firstly, the voting results were highly anticipated and the actual data does not differ from the opinion polls (the impact, if there was any, is already included in the price). Secondly, the radical organizations brought the most attention where economy is either weak or fails to grow (Greece or France). We may anticipate that when the situation improves (unemployment drops and consumer confidence rises), there should be a comeback to more balanced views. Thirdly, and probably most importantly, the radical left or right leaning groups won up to 20% of the seats. The rest (80%) still is in hands of the parties with more benign views.

The Turkish central bank is all over the news again. After a significant capital outflow at the beginning of the year and aggressive rate hike by the monetary body, the lira rebounded markedly. Last week, however, the TCMB unexpectedly lowered the interest rates. It is rumored that the Prime Minister Erdogan tries to impact the central bank again and get as much support as possible before the August presidential election (he is supposed to be the main candidate). “The Wall Street Journal” cites Tim Ash, emerging market chief from Standard Bank, who claims that "with headline and core inflation close to double digits and doubled central bank target, it is really hard to argue that the MPC is particularly focused on inflation at this stage”. It is possible that after the recent calmness we may expect again some problems regarding the Turkish economy and it should be quickly visible in the local currency – lira.

Summarizing, the EUR/USD should remain pretty close to the recent levels. The situation may only change if the ECB's expectations are reshuffled (low probability today, even though we have some MPC members speeches scheduled for today). Smaller moves are possible after better/worse data from the US but in either scenario we would probably not slide under 1.3600.

Slightly weaker

Ukrainian military operation in the East and reports on several casualties put some pressure on currencies in the EM region. The zloty is also getting hurt a bit and the PLN is giving back some of the last week's rally. It also decreases probability of achieving a target at 4.13 per the Euro mentioned in the last analysis. However, if we look on the case from the other angle, it is probable that when the military operation turns out to be successful and the gas agreement is set, we may expect the Ukrainian negative effect to diminish visibly and give 0.02 PLN boost.

Today, however, the trading should be fairly calm and most trades will be made around 4.16 on the EUR/PLN and 3.40 on CHF/PLN. Only in case of solid data from the US we may rise to 3.06 on the dollar-zloty pair.

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

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