Daily analysis 29.08.2014

Further geopolitical tension in the East and rumours of official Russian invasion into Ukrainian territory caused a significant sell-off in the region and stopped the correction on the EUR/USD. The Swiss franc appreciation trend to the Euro should fade. The zloty rebounded slightly, but the nervousness may quickly return.

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

• 14.30 CET: PCE inflation from the US (survey +0.1% m/m).
• 15.45 CET: Chicago PMI from the US (survey 56.4 points).

Ukraine again. Swiss franc and Russian rouble

Thursday's session was dominated, at least in Europe, by developments in Ukraine. The broad-based sell-off touched stocks, regional currencies (the rouble was the weakest to the dollar in history, the forint almost touched all-time-lows to the Euro and the zloty slided to year's lows to the USD) and the EUR/USD which had to pause its correction move.

Even the market participants who try to separate the “news noise” from market moving data have had hard time distinguishing which info are really valid yesterday. From Ukrainian President Poroshenko declaring that the Russian soldiers crossed the boarder, comments from Baltic authorities that it was “invasion” to UN Security Council special meeting and NATO comments ending with fairly calm speech from Obama who clearly didn't want to name the recent events “invasion”. Investors were clearly scared of a possible “official” invasion and the appearance of Russian soldiers on Ukrainian soil. It would probably push all sides to strengthen the sanctions further (maybe to the energy sector which could result to disruption o the gas supply from the East) or a direct involvement of the NATO military against separatists (such scenario is clearly dismissed by the Treaty).

There is still a question of whether the yesterday's events were not just another element of information war. It is worth quoting in that context the chief of National Security Bureau. General Koziej told IAR that besides the official military action we are also experiencing “the information war. Who is going to convince the public to its view”. He claims that “Ukraine is making progress regarding the information war”. A few days ago we wrote that Poroshenko getting more and more “marketing” sills. We cannot rule out that the Thursday information and action developments were a coordinated action aiming more decisive actions from the NATO meeting scheduled for the next week. It was also a good move to convince countries outside the so-called West to cut the ties with Russia and therefore put an additional pressure on Moscow. A kind of confirmation of that theory is the fact that the US was markets actually ended the day flat and the S&P 500 contracts are showing a stronger opening across the pond.

A significant increase of geopolitical tension caused the Swiss currency to strengthen. The EUR/CHF pair dropped to 1.2050 (almost two-year lows). However, a further Euro depreciation to the franc is highly improbable due to announced three-year ago promise from the Swiss central bank (SNB) to keep the EUR/CHF rate above 1.2000 mark. Because the floor was kept event during the most turbulent times in 2012 and the SNB purchased hundreds billions of Euro during the interventions it is extremely unlikely that during a fairly benign environment they would fail to keep CHF from strengthening.

Such “force” is not available at the Russian Central Bank (CBR). Firstly, due to the fact that it would have to prevent the rouble from weakening not from straightening like the SNB. Secondly, the CBR is getting to more flexible currency regime and thirdly the weaker rouble is not such a threat especially that Russia generates revenue from selling commodities denominated in dollar. Lower valuations of local currency allows Kremlin to get a fairly constant income in roubles, despite some weakness in the oil market. As a result of risk aversion and lack of action from the CBR we touched 37 level per the dollar. It is higher than our recent calls but we still expect that when the situation calms down the RUB should regain some value mainly due to surplus on the C/A, low debt-to-GDP ratio and high currency reserves (almost 1 and half year of import). A scenario with significant depreciation rouble (likewise described yesterday regarding the hryvnia or Argentinian peso) is still ruled out.

Summarizing, the EUR/USD markedly weakened due to the Ukrainian events, bet we didn't fell to new lows. Additionally, we received another set of weak data in the morning (German retail sales and unemployment in Italy). This issues also failed to bring the Euro to the new lows. Therefore, it is possible that paused in Thursday rebound should resume and we may get above 1.3200 before the Draghi conference.

Significant sell-off on the zloty

The zloty reacted pretty nervously (especially taking into account the recent volatility) on Thursday events in Ukraine. We topped 4.22 level for the Euro and 3.50 for the Swiss franc. However, taking into account the hypothetical scenario described in previous paragraphs that the recent events were mostly coordinated news rumors we may assume that the depreciation move should slow down and the return toward 4.20 level cannot be ruled out.

An important event regarding the CHF/PLN pair was an appreciation move toward 3.50 level which is the highest level in more than a year. It was a result of two moves. The EUR/CHF slided closer to the 1.2000 floor while the EUR/PLN soared above 4.22. As a result the CHF/PLN rise was a sum of both moves.

It is worth noting that the continuation of EUR/CHF slide is highly improbable (more details in previous paragraphs). Therefore, one element pushing the CHF/PLN higher should be dismissed and the franc-zloty pair will be only dependent on EUR/PLN move (at least regarding upside direction).

Summarizing the zloty is kind of hostage of situation in the East. However, if the negative data stops flowing we should return toward 4.20 level on the EUR/PLN and get further from 3.50 level. The USD/PLN should also benefit from improving situation and slide under 3.20 mark. On the other hand, in a scenario of official intervention by Russian forces we should expect around 3% slide of the zloty (PLN 0.10).

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

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