Daily analysis 27.08.2014

Positive messages from Minsk, but the breakthrough is still far away. Unlimited-in-time ceasefire in Gaza Strip. The market has started rumoring on interest rate cuts at the incoming ECB meeting. The zloty remains stable but the progress between Russia and Ukraine combined with positive news from Middle East failed to give additional boost to the PLN,

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

• No macroeconomic data that may significantly affect the analyzed pairs.

Geopolitics and interest rate cuts rumors

We reached another record high level on the US markets and the S&P 500 closed above 2K for the first time ever yesterday. We also received some encouraging reports from Minsk (especially taking into account the expectations) and unlimited in time (first time during the current conflict) ceasefire in Gaza Strip. Most EM currencies reacted pretty positive for the messages but the demand has failed to boost the PLN.

Comments before the Minsk meeting were pretty cautious and even some upfront rejected that positive resolution can be achieved. However, it seems that some progress has been made and the perspective of further talks was set. The current situation was skillfully painted but Petro Proshenko who said (actually in Russian) that “I understand that all players who've been drawn into the situation would like to exit with dignity”. Probably this issues was discussed both during the talks between all parties (Russia, Belarus, Ukraine, EU) and during the bilateral meeting between Putin and Poroshenko (the fact that the discussion took place and lasted two hours can be regarded as an achievement). Additionally, all sides announced commitment to build a road map which allows finishing the violence as quickly as possible. According to Poroshenko the ceasefire will be watched by the OSCE.

A small progress was also made regarding the gas issues. Negotiations aiming to restore the supply toward Ukraine (Kiev has not received the commodity since June and stopped paying around a half year ago) are supposed to begin in two days. Overall, the talks should be regarded as positive but the breakthrough seems to be quite away. Actually, the incoming winter might speed up the discussion. A threat of pausing the gas supply to Europe and the risks that reserves might be not enough to survive the winter combined with the threat of humanitarian catastrophe.

Encouraging information came also from the Middle East. Both Palestinian and Israeli sides reached an agreement and unlimited in time (first time during the current conflict) as reached. If the agreement is respected we should expected that it should be no longer threat the market sentiment.

Geopolitical improvement wasn't equally transferred to all currencies depended on the risk sentiment. In recent days (since Thursday) both Korean won and Turkish lira were lading the gains and rose around 1% to the dollar. Much weaker performance was recorded on Mexican peso (no change) or Hungarian forint (slightly weaker). In this “club” the worse performance was recorded on the zloty which lost around a half of one percent in during the last 5 days. Omitting the local issues (lower odds for interest rate cut in Turkey or a high demand from exporters for local currency) the overall condition of EM currency seem to be going into different directions – the Mexican currency is feeling the pain from earlier rate rises bu the FOMC but get some supporter from improving economic situation in the US. On the other hand, some investors on the PLN survived the turmoil in the east untouched so the reaction in other direction may take much more time and some may even use it to leave the local market

Recent hours pushed the EUR/USD lower and we slided toward one-year lows to around 1.3150. The dollar appreciation was caused by relative solid US data (especially consumer confidence which rose to 7-year highs; and the durable goods orders taking into the account the revision from previous month). Moreover, the Euro depreciation is the result of market rumors that the ECB may cut the rates on next Thursday. However, it seems that such a resolution is not really probable. The recent Draghi comments brought too many expectations. As a result we should may see some short covering rally (may start even before the ECB conference) and can be continued after the conference when it turns out that he is not as dovish as anticipated.

No demand for the zloty

The zloty is not really eager to gain the value despite some positive geopolitical events (Ukraine, Israel), new record high levels on US equities and a good performance of many EM currencies. Currently it is too early to conclude that we are expecting a further PLN appreciation, but it is worth observing the local currency pretty closely, whether it is a short-term deviation or a beginning of something more meaningful.

The base case scenario is a range trend but the odds to rise above 4.20 significantly increased in the recent hours. The other subject is a performance of the USD/PLN which is close to one-year highs. If we trust the TA (the recent move form 3.00 through 3.07 and toward 3.15 was perfectly coherent with the TA) another stop may be 3.30 level. To see such elevated levels for the greenback, we will have to experience a slide on EUR/USD toward 1.2700 (assuming that EUR/PLN stays around 4.20). In the short term such a move is highly improbable but such a move until the year's end should be excluded.

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

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