Daily analysis 16.12.2014:
Real currency crisis in Russia. Rouble is hit by a significant sell-off despite central bank intervention and nightly interest rate hike to 17% per annum. Risk aversion rises but not on all assets. The zloty is loosing value but the slide seems to be contained comparing to other currencies.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30 CET: Housing starts in the US (1.04 million; seasonally adjusted, annualized data).
- 14.30 CET: Housing permits (1.065 million; seasonally adjusted, annualized data.
- 15.45 CET: Preliminary PMI reading from the US (survey: 55.2 points).
Situation in Russia
Events which took place on rouble in the recent 24 hours happens once in several years. From early morning yesterday the Russian currency was losing value despite the fact that crude experienced the rebound. Firstly the slide was fairly muted and contained by the central bank intervention. In the next hours the sequence of events speed up markedly.
In early afternoon the USD/RUB pair rose above 60 first time in history. Central bank also published a short report where it was mentioned that if the Brent remains around 60 USD per barrel we may see a 4.5% contraction in the economy in 2015. Investors also started to speculate that more sanctions agreed by US senate against the Kremlin pushed the local currency lower or the risk of default described by the CDS instruments rose to 500 mark.
After a few hours the oil returned to a sliding trend. It pushed the rouble even lower despite the fact that it was at least one intervention in the meantime valued around 1 billion USD. As a result the USD/RUB pair rose to 64 mark.
Monetary policy makers in Moscow decided that the situation is getting so serious that there is a need to gather an emergency meeting during the night and hike interest rate by 650 bps to 17%. According to the official statement from Bank published on its website the decision “is aimed at limiting substantially increased rouble depreciation risks and inflation risks”.
Such strong monetary tightening is not only a sign of capitulation regarding the rouble defence but it will have a significant consequence for the economy. When a country is balancing on the risk of recession, a tighter monetary policy is a significant hurdle for both the investments and the consumption. It is also a big pain for indebted population or companies.
Theoretically higher interest rates should lure the capital or at least decrease the outflow. However, the first movers are clearly exposed to a volatile currency market which may result in fast value slump for assets denominated in RUB.
As a result there were speculations during the night that the central bank will decide to start a strong currency interventions valued around 10-20 billions. Such rumours pushed the rouble higher by 10% at the open today. However, when it turned out that the intervention didn't materialize the upside move was quickly levelled off and the rouble resumed the slide. The USD/RUB rose to 66 level. It means that the Russian currency lost around 14% in value from the beginning of the week and around half of the value YTD.
During the moment of some stabilization of the crude oil the central bank will probably sell around 10-20 billion USD on the market and push the USD/RUB rate under 60 level. For longer stabilization we will have to wait until the Brent settles.
And beyond Russia
Investors are highly concerned with the situation in Russia and discuss whether we are facing a 90's style bankruptcy which hit both Asian and Russian economy 16 year ago.
But back in the 90s many countries had fixed currency regimes, large current account deficits and were short of reserves. Currently most EM economies have low foreign-denominated debt, central banks collected lots of USD and EUR and most of the economies should benefit from lower energy costs.
On the global currency markets besides a negative oil impact on commodity currencies – Norwegian krone, Mexican peso, Canadian dollar and rouble – we are also observing the continuation of earlier trends.
The dollar is losing value due to worsening global growth and lower inflation and therefore more accommodative monetary policy. Such theory is also confirmed by sliding yields on US 10-year treasuries which dropped below 2.10%.
Three is also a return toward a “safe haven” trade where the benefits the most. The euro is relatively stable due to a broader dollar weakness. However, both regarding the yen and the euro it is a short term move which should be reversed in early 2015.
From macro data it is worth noting that the US production was pretty solid yesterday, we had PMI data from the euro area and fairly high ZEW. Currently, however, the data has very limited impact and we will have to wait for the Federal Reserve meeting.
Foreign market in a few senteces
The turmoil on oil and rouble keeps the risk off sentiment and extends the correction on major currencies. At that context it will be really interested to observe the Federal Reserve meeting scheduled for tomorrow. We still assume that it should be positive for shares. The dollar also should benefit especially when the new economic projections give more robust outlook.
The rouble slump, risk aversion increase and speculations on “contagion effect” pushed the zloty to around 4.20 per the euro and 3.50 on the franc.
It is worth noting that the slide is more benign on the zloty than regarding the Swedish krone on the forint. There is a significant probability that the local currency return below 4.20 per the euro when we see some sings of the stabilization on the rouble. In the medium term we still assume that the 2015 growth should be much better than anticipated due to a falling oil price. Additionally, we should also see a positive effect on the current account. Lastly the zloty should benefited from fairly restrictive monetary policy.
As a result there is still higher probability that the zloty should take advantage from the current situation and positive aspects of the cheaper energy should outweigh the risks.
Today, however, the local currency may be still under pressure but in base case scenario we should not assume that the EUR/PLN or CHF/PLN may significantly rose above 4.20 and 3.50 respectively.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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