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Daily analysis 28.08.2014

28 Aug 2014 12:22|Marcin Lipka

Lower chance for monetary easing in September after ECB rumours. Historical weakness of Argentinian peso and Ukrainian hryvnia. The zloty slide with other currencies in the region and the EUR/PLN soars above 4.20 level.

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

  • 14.00 CET: Preliminary inflation data (HICP) from Germany (survey: +0.8% y/y).
  • 14.30 CET: US GDP data from the Q2 (second reading: +4.0% SAAR).
  • 14.30 CET: Weekly jobless claims from the US (survey 300k).

The ECB. Inflation. Peso and hryvnia

The EUR/USD after reaching one-year-lows at 1.3150 rebounded around a half percent and started the European session above 1.3200. The first catalyst for the correction was Wolfgan Schaeuble comments of “wrong interpretation” of Mario Draghi words at Jackson Hole symposium (we covered the issue in the afternoon commentary).

The second element which improved the condition of the European currency was Reuters' reports. The news agency claims, citing its own sources, that “the ECB is unlikely to take new policy action next week unless inflation figures on Friday show the Euro Zone sinking significantly towards deflation”. Yesterday before the Reuters reports we wrote that the expectations for a monetary easing in Europe ballooned to fast.

Continuing on inflation tomorrow we have the HICP reading from the Euro area. The market expects the slowdown to 0.3% y/y from 0.4% recorded in July. The 1/10 of one percent decrease may not be regarded as “sinking significantly toward deflation”. The reading should be much lower (probably around 0.1% y/y) to increase the odds for a cut in September and additionally it cannot be caused only by the transitory events (such as food price drop). A good indicator (but not perfect) will be afternoon HICP German reading. If the Poland's western neighbor publishes data markedly below 0.8% y/y (for example 0.6% y/y), then we should expect some turmoil on the EUR/USD but still we should not return to the sliding trend.

Quite dramatic events has been happening on Ukrainian and Argentinian currency. The hryvnia was traded (real transaction, which are published on the central bank page since several days) at 14.40 per the dollar. It was the lowest valuation in history. It is also worth to note that how illiquid the market is. The spread between buy and sell offers was 1 hryvnia (7%) what is unimaginable high level as for interbank feeds (at the beginning of the month it was 0.08 hryvnia according to the “Minfin” portal). The recent data also showing that both retail sales and industrial production dropped in double digits last month on y/y basis and the inflation soared to 12 percent. The further destabilization in the east may result in another wave of sell-off. The rise toward 16 hryvnia to the dollar would mean that the Ukrainian currency weakened exactly 50% since the political shift in February.

The rapid slide (but due to completely different reasons) was recorded on Argentinian currency. Currently, according to “The Wall Street Journal”, one dollar is worth at the black market 14.4 peso (the official rate is 8.4). The government runs an extremely populist economic policy (next year the presidential election is scheduled), falsify statistics (the official inflation rate is around 10% whereas economists claim the real CPI is even around 40%) and the recent turmoil with technical bankruptcy result that the county which should be a regional leader has the opinion of “banana republic”. It is good that the citizens remain pretty happy and, as the “WSJ” reports, joke that “their peso has gone this year from Dollar Messi to the Dollar Mascherano – a reference to the number 10 worn by Argentine soccer superstar Lionel Messi to the number 14 worn by the standout midfielder Javier Mascherano.

Summarizing the EUR/USD will be waiting for the incoming inflation data from Germany and Friday's HICP reading from the euro area. The base case scenario until the next week ECB meeting is trading around the current levels with possibility of rebound extension. In the medium-term (few weeks) the test of 1.30 level seems to be inevitable.

The broad weakness

Wednesday's zloty aversion to gain some value in line with forint and other EM currencies resulted today in a broader weakness (this time also HUF, CZK, and TRY also slided) which translated into testing 4.21 level on the EUR/PLN. The main reason behind the weakness is another set of nervousness regarding the Ukrainian conflict and rumors before the MPC rate meeting (the odds for a cut are pretty low but markets eagerly exploit the uncertainty before the next week MPC conference).

Returning to the yesterday's weakness we may connect it with prime minister Tusk speech and his promises to increase the social spending. Bloomberg and Financial Times reported on the parliamentary appearance and the “FT” even included phrase “Tusk takes populist route to re-election” in the article title. On the one hand, it is hard to argue with the British paper that the government actions are highly correlated with the incoming election but on the other hand the spending increases / tax cuts are not that dramatic. According to the Polish Press Agency and Ministry of Finance the pension increase will cost 1.7 billion PLN and the additional cuts around 1.1 billion PLN. It sums up to 2.8 billion which is less than 0.2% of the GDP (actually the “FT” author overstated the spendings adding the usual readjustments which gave him 4.7 billion PLN). Further, even it was really the reason of the zloty's weakness it should be short-lived and much important will be the geopolitical issues and domestic monetary policy.

Summarizing, the further escalation of the Russian-Ukrainian conflict, global sentiment deterioration, and rumors on Polish MPC rate cut may push the EUR/PLN, CHF/PLN and USD/PLN toward 4.22, 3.50 and 3.20 respectively.

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

Range EUR/USD 1.3350-1.3450 1.3250-1.3350 1.3450-1.3550
Range EUR/PLN 4.1800-4.2200 4.2000-4.2400 4.1600-4.2000
Range USD/PLN 3.1000-3.1400 3.1400-3.1800 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4600-3.5000 3.4200-3.4600

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

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6950-1.7050
Range GBP/PLN 5.2500-5.2900 5.2700-5.3100 5.2900-5.3300

28 Aug 2014 12:22|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 26.08.2014

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Attractive exchange rates of 27 currencies