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Daily analysis 27.06.2016

27 Jun 2016 13:33|Marcin Lipka

Uncertainty within the United Kingdom, as well as between London and Brussels, has a negative impact on the pound, as well as the euro. It is possible that investors are afraid of the most negative scenario. Overvalue of the zloty against the dollar, as well as the franc is visible. However, it is not bigger that overvalue of the forint against the main currencies.

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

  • 19.30: Mario Draghi's testimony on the central bankers forum in Sintra, Portugal. However, it is not clear whether the ECB chairman will refer to the situation regarding Brexit.

UK and EU are in the center of attention

The global market is focusing mostly on information from the United Kingdom. However, announcements from Brussels, as well as from Berlin, are also significant for the pound, as well as for the euro. Investors are mostly seeking information on whether Brexit will occur in order, or will we be accompanied by chaos and uncertainty for months.

For the time being, the situation is becoming more intense, instead of calming down. Serious crisis within the Conservative Party, danger of the United Kingdom breakdown and scenarios of the economic slowdown, are being followed by problems within the opposition.

During the entire Sunday, the British media were reporting live on what the Financial Times described as, “the most bloody civil war within the Labor Party in decades.” Jeremy Corby, the leader of the Labor Party, dismissed the shadow cabinet Minister of Foreign Affairs, Hilary Ben at 1.30 A.M.

Later on, twelve more members of the hypothetical government left. Moreover, the Financial Times informs that it is possible that twenty more will resign today. On the other hand, Corbyn will undergo a vote of confidence tomorrow. The main charge against Corbyn is the fact that the campaign for staying within the EU was not effective enough. Moreover, many people that vote for the Labor Party had supported Brexit. This may mean that they have been attracted by the option that is represented by the conservatists that are focused near Boris Johnson.

Thus, a new negative front line in the British policy opens. This may complicate the negotiations with the EU that were to include the representatives of the entire political scene. As a result, the pound increased its 30-year minimum against the dollar in the afternoon, and went to the area of 1.32. This is 12% less than on the Thursday night.

No positive information for the market is coming from the EU either. It is not clear, whether the European Union wants to part ways with the United Kingdom quickly, or does it want to extend this process to use the option of a new referendum, for example. No unambiguous standpoint of Brussels has a negative impact on the euro as well. The EUR/USD is testing the area of 1.10, and went approximately 1% down since the Friday closing.

If we want to look at the matter in a more positive way, we could say that apart from Brexit, danger of the Northern Ireland, as well as Scotland leaving the UK, or serious arguments within two main political camps, nothing worse can happen. However, this is not true. The global investors, entrepreneurs and consumers are observing the situation, and it is possible that a lot of them is starting to believe that the most negative scenario will occur.

It would mean extending negotiations that would result in basing the UK-EU relations on the WTO trade regulations. This could cause the negative scenario that was presented by the International Monetary Fund (IMF) to occur.

It assumes that in 2017 the GDP of the United Kingdom will reduce by 0.8%. This result is approximately 3% worse than the base case scenario. On the other hand, the market uncertainty would be similar to the one related to the 2008/2009 financial crisis. However, “going to its top would be slower, as well as it would fade out slower.”

Zloty under pressure

The zloty began to wear-off clearly due to the pressure of the global markets in the afternoon. The EUR/PLN reached the area of 4.47, and the franc was testing the 4.15 level. Overvalue of the Polish currency is related to the new 30-year minimum of the pound against the dollar, as well as an increasing uncertainty regarding fate of the United Kingdom and its relations with the EU.

A certain consolation is the fact that the zloty is not losing more than the forint against the main currencies. The zloty was behaving worse than the HUF before the referendum, when the anxieties regarding Brexit were growing due to the surveys. However, consolidation of the zloty will not be likely, until the situation within the United Kingdom does not become clear, and the EU will not present a common standpoint regarding Britain. On the other hand, the risk that the CHF/PLN, as well as the EUR/PLN will go towards the peaks that were quoted when Brexit became a fact, will increase.

27 Jun 2016 13:33|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 22.06.2016

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