Daily analysis 28.07.2015

Another element of turmoil from Greece. Creditors have started negotiations with Athens, but the market attention is focused on an attempt to break into the tax system and create a parallel currency by the former finance minister. The pressure on commodity currencies is expected to remain. The zloty is stable to the euro but significantly stronger to the franc.

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

• 15.00: S&P/Case-Shiller index (survey: +5.6% y/y)
• 15.45: Preliminary services readings from the US (survey: 55 points)
• 16.00: Consumer confidence from the US (survey: 100 points)

Former Greek finance minister in focus again

Today negotiations between the creditors and Greece are expected to begin. They will pave the way to the first tranche from the ESM fund. However, attention is focused once again on the former finance minister. The conservative Ekathimerini newspaper firstly reported on a secret plan to introduce an alternative currency system in the Hellenic Republic.

Firstly the Greek press published only excerpts of the conversation but later the whole recording was revealed by the London think tank OMFIF, and the transcript was published in the “Financial Times”. The former UK Treasury Secretary Norman Lamont also took part in the informal talks recorded on July 16th.

The most surprising fact is that Varoufakis, before Syriza formally took power, agreed with Tsipras to prepare an alternative currency system, because the victory of the current coalition would have given a mandate to negotiate hard with the creditors and hypothetical Grexit would paralyse the banking system.

But Varoufakis wanted to run the operation by hacking into the computer system of the IRS bureau. Gaining access to unique taxpayers numbers would allow him to build an alternative currency system and omit the closed banks.

The former finance minister claimed that such an operation was inevitable because he didn't have access to the tax revenue system which was under the creditors' control. The EU Commission denied the allegation that it controls the internal tax system in Greece.

We analysed a similar plan in detail a month ago in our article “Parallel currency the only cure for Greece?”. At that time the details were unknown, but taking into account how the negotiations unfolded at the end of June we suggested that Syriza intentionally pushed for the impasse in the talks with the creditors.

Currently there is one major question. Will the leak have an impact on the negotiations and change its direction? It is quite possible. The trust between the two parties is almost nonexistent and when the creditors see that Greece uses “alternative” methods to run the country it is hard to talk about a credible agreement.

The Greek society’s reactions should also be interesting. Will people think that the Syriza negotiations have pushed the country to the brink of collapse or decide that Varoufakis was brave and fought against the creditors more than any other politician before.

It is easier to predict the reaction in the eurozone. Currently it is hard to expect that even Greek supporters are going to look at the Syriza government with sympathy especially that it broke all the rules of the common currency union. A solution between Greece and the creditors may be much harder to find and the Grexit issue can even return before the fall begins.

Commodity currencies under pressure

Since mid June Brent crude has fallen 18%. It has had a negative impact on currencies whose countries are depended on commodity export. The scale of the slump, however, has derived from the condition of particular economies and their monetary policy.

In one and half months the Russian rouble lost 11% to the dollar. The slide didn't omit also the Canadian and Norwegian currencies, but the scale wasn't as large. Both currencies fell around 5%.

The depreciation trend is expected to continue especially when we head towards a fall. Rising oil supply from Saudi Arabia and its allies, record high US inventories, expected higher export from Iran and fairly muted demand suggest that we can see new lows on crude. It might push the commodities currencies even lower.

The foreign market in a few sentences

The unexpected leak from the Fed and the confusion caused by the Varoufakis idea has brought some noise to the market. However, investors should be more focused on the current data from world economies, especially from the US where the FOMC statement is scheduled to be released on Wednesday and Q2 GDP is due on Thursday.

Franc markedly lower

The zloty in relation to the euro is stable and is expected to be traded around 4.11-4.13 in the following hours. The local currency is, however, much stronger to the franc. The Swiss currency is around 3.87 PLN.

There was not a concrete reason behind the CHF sales on the global market. The Swiss currency weakness might be a result of the SNB interventions managed in recent weeks. Also a lack of significant appreciation of CHF during the heights of the Greek crises, negative interest rates and negative yields on bonds might have pushed some investors out of the “safe haven” and pushed the franc lower.

The currency situation on the franc significantly reduces the odds for CHF/PLN to rise above 4.00. On the other hand, it increases the odds to keep the franc around 3.80-3.90.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: