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Turkish lira after elections (Daily analysis 25.06.2018)

25 Jun 2018 11:59|Marcin Lipka

Relatively stable quotations are present at the EUR/USD pair despite weak Ifo readings and further increases in Italian debt yields. The lira is appreciating, but the Turkish currency remains structurally weak. The EUR/PLN pair close to the levels recorded at Friday's closing, i.e. around 4.32. There is risk of further weakening of the Polish zloty.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Ifo without surprises

Monday's first hours in the EUR/USD pair are relatively calm, but risks to emerging countries currencies remain. The Chinese yuan is still depreciating and the USD/CNY pair is testing the 6.55 boundary (a 0.5% increase). The weakening of the Middle Kingdom currency, with a relatively stable dollar, is a good indicator of concerns about the prospects of the global economy (trade disputes, oil prices, risks of the end of the current economic cycle).

There is also little positive information coming from the eurozone. The German Business Climate Index (Ifo) fell to its lowest level in more than a year. Although the reading coincided exactly with the consensus (101.8 points), there is little positive information in the Institute's data. The evaluation of the future condition of German enterprises is stabilising close to neutral (long-term average) levels, but at the same time, these are the lowest levels in less than a year and a half.

Trade (domestic) is also disturbing. The sub-index of trade, which measures the prospects for the next six months, fell below zero for the first time since February 2015. Apart from Germany, it is still worth noting that the situation in Italy is far from stabilising. The yields of 10-year Treasury bonds are about 100 basis points above the levels seen before the formation of the populist coalition and amount to about 2.8%.

Turkish lira

Apart from the events in the eurozone, it is also worth considering Turkey. There have been no major political changes. President Erdogan maintained power (after the constitutional changes it is even more concentrated in his hands ), and the AKP and nationalist MHP coalition received more than 50% of the vote and has a parliamentary majority without any problems.

Lira clearly appreciated in the morning (at some point even 2.5% to the dollar), but in the morning these increases were reduced to about 0.5%. Now investors will mainly observe the relations between the government and the central bank and subsequent decisions in the fiscal policy. Further stimulation (fiscal and monetary) will inevitably lead to the lira's depreciation, but if it is decided to cool down the economy and stabilise prices (currently Turkey suffer for double-digit core inflation) then it is possible to reduce the current account deficit and price risks. This could stabilize the lira quotations in the coming weeks. However, much will depend on real economic policy.

Weak but stable zloty

First hours on the domestic market pass with trading between 4.32 and 4.33 PLN per the euro. The Polish currency is weak, but relatively stable. However, external risks are still present (trade tensions, relatively expensive crude oil, weakening of the yuan and other EM currencies), therefore the prospects for the Polish currency remain unfavourable and there is still a relatively high risk of EUR/PLN going to new highs for many months (above the level of 4.35).

The next few hours will depend mainly on the global sentiment on the share market. Futures contracts for the US S&P 500 index look rather weak (over half a percent decreases), so the pressure on the zloty may persist, which increases the probability of testing the recent highs against the euro (4.34 PLN) in the coming hours.

25 Jun 2018 11:59|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.

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