Daily analysis 29.07.2014

Waiting for the sanctions and further geopolitical events. Worsening investment climate in Russia and the ruling of Arbitration Tribunal. Israeli central bank cuts interest rates but the shekel remains stable. The zloty has been weakening after a fairly calm session yesterday.

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

• Early afternoon the EU sanction decision is expected to be announced.
• 16.00 CET: Conference Board consumer confidence index (survey: 85.5 points).

Sanctions and geopolitical events. Rouble. Shekel

We had pretty calm session on the EUR/USD yesterday. The most heavily traded currency pair was moving in a narrow range, close to 8-months lows. Currency investors have been waiting for macro data (mostly from the US, in the second part of the week) and the announcement of sectoral sanctions on Russia. These will be the key issues which should decide whether we finish the week below 1.3400 or the EUR/USD is able to generate a stronger correction (weaker readings, less severe restrictions on Russia) and approach 1.3500 level.

Today both equities and currency market participants will be waiting for the decision regarding restrictions on goods/services exchange between Russia and the EU. There is an increasing amount of sources (on Monday it was also suggested by the US authorities) confirming that third-level sanctions would be introduced. However, we should not anticipate that the Brussels decision is fully priced in. Therefore, when the restrictions are actually announced we may expect a further Euro depreciation. How severe the slide can be may depend on the conditions in what way the measures are extended in the future (whether it would be automatically or every time all members would have to confirm the document again).

We did observe a significant rouble slide on Monday. The Russian currency lost more than one percent to the dollar soaring above 35.5 on USD/RUB. Despite that we are still pretty far from the 2014 H1 highs the conditions of the rouble worsened. The depreciation accelerated when the Arbitrage Court in Hague ruled 50 billion dollars in compensation to former Yukos shareholders. Leaving the probability that Russian will pay such amount of money (around 10% of its budget or 10% of exchange reserve) aside, it looks that the West is really trying harder to isolate Moscow on the international scene and show the Kremlin as an untrusted partner. Additionally, as “The Wall Street Journal” reports we should expected another ruling against Russia. On Thursday the European Court of Human Rights may rule on behalf of minority Yukos shareholders $38 billion compensation from Russia. In result, we should not expect that the rouble return under 35 level and most probable range for the RUB will be trade between 35.50-36.00 per the dollar.

Despite a ground Israeli operation on the Gaza Strip the shekel is really stable and moves around multi-year highs both against the dollar and the Euro. The local currency remained strong even after the central bank announced an unexpected rate cut yesterday. Low inflation (0.5% y/y) and slightly slower growth (2.9% vs 3.3% in 2013) pushed the MPC to lower the benchmark by 25 bps to 0.5%. The shekel should remain quite stable thanks to improving export of its gas (thanks to new fields Tel Aviv is managed to move from importer to exporter of natural gas). The only threat for the stable ILS is an idea to set a floor on the shekel (kind of Czech Republic idea) to help exporters. However, as Bloomberg reports, quoting Modi Shafrir, chief economist at Mizrahi Tefahot Bank, “chances that the Bank of Israel may set a shekel floor have increased though they are still not high, and it won't happen in the next few months”.

Summarizing, the Tuesday's session will be dominated by geopolitical events and especially the EU decision to impose third-level sanctions on Russia. It is possible that we may see a 1.3400 test in hours to come if Brussels introduces traded/services restrictions on Moscow. In the following days the market will focus again on macro data especially from the US.

On the weaker side

Monday's losses on the PLN were unexpectedly leveled off pretty quickly and we ended the day around 4.14 per the Euro and below 3.08 on the dollar. However, since the morning we have been moving lower on the zloty and both the Euro and dollar heading higher toward 4.16 and 3.10 respectively. We are not seeing a dramatic depreciation of the local currency but the PLN may weaken during risk off sentiment but not gaining much when the risk appetite increases. The expected levels for the zloty are 4.17 per the Euro, 3.11 on the dollar and 3.43 regarding the Swiss franc.

Today the most attention will be put on EU sanctions announcement against Russia. If the current rumors turns to be true we should see a further zloty weakness by around 0.25%. On the other hand, if Brussels fails to “punish” Moscow (less probable), we can return toward 4.14 on the EUR/PLN and 3.07 per the US currency.

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

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