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Daily analysis 28.06.2016

28 Jun 2016 13:29|Marcin Lipka

Rating of the United Kingdom has been downgraded by Fitch, as well as Standard&Poor's. Will the market pick up the possibility of a new referendum in the UK, as well as the hypothesis of avoiding Brexit? The zloty is taking advantage of an improved global sentiment, and the dollar is going below the limit of 4 PLN.

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

  • The European Union summit. Discussions will regard the future relations between the United Kingdom and the EU.

Downgrade of the United Kingdom rating

Each out of three main rating agencies have published the review of the United Kingdom loan credibility, barely few days after the referendum. Moody's was the mildest, and only reduced the rating perspective. On the other hand, Fitch made a one rank downgrade, while Standard&Poor's downgraded the rating by two ranks.

Fitch claims that, “uncertainty concerning Brexit will cause a sudden slowdown in the economic growth in short-term, due to the fact that enterprises will postpone their investments.” Currently, Fitch estimates that the amassed lower economic growth will be at the 2.3% level before 2018, in comparison to the scenario of the United Kingdom staying within the EU.

According to Fitch, the average deficit of the public finance sector will be amounting 3.6% GDP for three following years. The previous forecasts spoke of a 2.8% level. Moreover, a negative perspective given by Fitch was determined by an assumption that the loan credibility may be decreased. This may happen if political uncertainty leads to the United Kingdom breakdown, for example.

Standard&Poor's focused its decision around possible difficulties in financing a large deficit from the current account. Apart from a two-rank downgrade of the loan credibility (from AAA to AA), the agency had given a negative perspective as well. It claimed that role of the pound as a reserve currency can be endangered. Moreover, there is a threat for, “constitutional, as well as economic integrity of the United Kingdom, if another independence referendum occurs in Scotland.”

Improvement of sentiments

However, reaction of the pound market for a downgrade was not extremely negative. Perhaps it is because Standard&Poor's has already warned that Brexit would cause a downgrade in the loan credibility. Moreover, a two-day 10% overvalue of the GBP has probably caused the pressure (at least the short-term) on further depreciation to exhaust.

The global sentiment is also improving due to the rumors about a possibility of stopping Brexit by a new referendum, or new parliament elections. Two our of three most popular articles in the Financial Times, were the analyses regarding scenarios of avoiding Brexit, written by recognizable authors.

In his article „I do not believe that Brexit will happen”, Gideon Rachman speculated that Boris Johnson could eventually announce a new referendum. He referred to Johnson's statement from February. Johnson was to say that, “the history of the European Union shows that it only listens when people are saying No.”

Regardless of likelihood of reversing Brexit, some of the market participants may interpret it as a positive element to generate a correction on the pound, as well as shares. However, an excessive faith in this scenario (especially only a few days after the referendum) may be deceiving. Even if the Brexit supporters have a plan B as well, it will rather be difficult to use it for the time being. The Brussels seems to sustain a firm attitude regarding London as well, rather than make the situation softer.

For the time being, there are no views for establishing a common front for the political forces of the United Kingdom. The Conservative Party is divided, because its members were for, as well as against Brexit. On the other hand, the Labor Party is experiencing internal problems, as well as fight for the leadership. You can find more details in yesterday's Daily analysis.

Thus, it is very unlikely that a breakthrough that could reverse the events from the past week for the time being. A rebound of the pound is most likely temporary, and its power will exhaust rather quickly.

Zloty is taking advantage of global trends

Zloty is taking advantage of an improvement in sentiment, just as the pound, stock markets and the other emerging markets currencies. Before noon it was strengthening against the euro, as well as the dollar, even more than the forint. This may suggest that assets denominated in the PLN are more valuable than assets denominated in the HUF.

However, if these growths are determined by a hope for a new referendum or presentation of the plan to avoid Brexit, appreciation of the zloty will be rather temporary, and its power will exhaust quickly. It is definitely more likely that the standpoints London, as well as Brussels will become more firm in the following weeks. Especially considering that the political interests may take advantage over economic interests. None of the parties does not want to lose in this complicated comflict.

The zloty may continue to gain in the following hours. However, we do not expect the EUR/PLN will go below 4.40, as well as the CHF/PLN below 4.05. It is also unlikely that we will pay clearly less than 4.00 PLN for the dollar.

28 Jun 2016 13:29|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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