Daily analysis 28.07.2014

The dollar on multi-month highs. The US claims having pictures showing Russian military attacking Ukraine. More pressure on Europe to push the sanctions forward. Incoming data should be positive for the “greenback”. The zloty is getting closer to 4.15 mark and 3.09 on the dollar. The local currency can be under pressure in the following days.

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

• No major data which can affect the analyzed pairs.

The data. Resignation. Ruble

The EUR/USD is beginning the session close to 8-month lows. The capital flow from Euro to the dollar is confirmed also by the CFTC data showing that the speculation positions on the USD against its European counterpart rose to the highest level in almost two year. It happens sometimes that such a “one direction trade” is bringing us closer to a sharp rebound but a correction (above 1.3500) is not currently expected.

It is a result of two issues. Firstly, the dollar is supported by geopolitical risk. The situation in Gaza Strip hasn't improved and the US authorities are eager to support its European colleagues to push sectoral sanctions on Moscow. Yesterday, the US State Department published pictures which are believed to show that Russian forces directly using military action against Ukraine. The “Financial Times” quoted also General Martin Dempsey, chairman of the joint chiefs of staff, who said that Russia had “made the conscious decision to use its military force inside of another sovereign nation to achieve its objectives for first time, I think, probably, since 1939” - “a reference to Stalin's invasion of Poland in 1939” FT added.

There is also some “pick-up” regarding sanctions on the European side. The German public opinion is getting prepared for much tougher stance on Moscow. “The Wall Street Journal” reports that Angela Merkel's government officials are claiming that “sanctions against sectors of Russian economy were necessary for peace in Ukraine, even if they cost jobs at home”. The “WSJ” also notes that after the Malaysian jet crash “some prominent lobbyists” and “leading media outlets” have been putting much pressure on European leaders to push the measures against Kremlin forward.

The other side of the conflict is also trying pretty hard. The Russian state news agency Itar-Tass is reporting that US congressmen are suggesting to give Ukraine a “non-NATO ally status”. According to ITAR-TASS it would “entitle Kiev to bread financial aid from Washington to buy military equipment and weapons”.

The geopolitical issues are not the only ones to support the dollar. The US currency may get some boost from the incoming macro data. It is worth noting that Wednesday's ADP reading (the private agency numbers are getting closer to the official publication) and statement from the FOMC where even a slight change emphasizing job's improvement may give an additional support to the greenback. At the end of the week are are also having NFP and manufacturing ISM. It is possible, however, that the market would “front run” the action and push the dollar higher even before the actual data hit the wires.

Summarizing, the main catalysts on the EUR/USD this week would be geopolitical events and set of important macro data. There is a high probability that sectoral sanctions will be introduced on Tuesday, so the downside pressure on the most heavily traded pair should remain in place. There is also a chance that dollar-bullish market would like to push the greenback higher even before the actual data hit the wires.

The weakness is more probable

As we noted in the previous comments the sentiment deterioration in the region is starting to weight on the local currency. The moves are not rally significantly currently, but in the morning the EUR/PLN has tested 4.15 and USD/PLN topped 3.09.

The main element which may push a downside pressure on the zloty should come from aggressive actions between all parties of the conflict. The moment confirming heigher tensions between Moscow and Brussels may come as early as tomorrow when the EU imposes third level sanctions (financial, advanced technology, and military). Until we see the effect in the balance of trade, we should watch how the portfolio investors can deal with it (it will not rather support a scenario to buy Polish assets).

Summarizing, if the EU and US actions against the Russian Federation are tougher and Moscow does not withdraw from supporting separatists, the climate toward the zloty may worsen. In a few days period we can test the 4.17 level on the EUR/PLN and USD/PLN may exceed 3.10 mark. In the scenario of further escalation we can get toward 4.20 on EUR/PLN and 3.45 on CHF/PLN. The opposite move (slide back toward 4.10) is possibly only in case of Putin's support withdrawal to the Ukrainian rebels.

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

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