Daily analysis 29.11.2016:
The referendum in Italy shouldn’t have a long-term impact on the currency market. There is still no breakthrough regarding the oil production limit by OPEC. The zloty, as well as the forint remain weak against the euro or the dollar.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: The second reading of the American GDP for the third quarter (positive 3.0% QoQ in annualized interpretation).
- 16.00: Consumer sentiment index by Conference Board (estimations: 101.5 points).
Referendum in Italy
The referendum in Italy is scheduled for November 4th. Some market participants consider it to be another element of uncertainty, next to Brexit and the American elections. However, it’s worth noting that this time the scale of potential changes should be significantly smaller.
The Italian referendum will concern constitutional changes (mostly a decrease in the Senate’s significance). Theoretically, these changes should make conducting reforms easier, by accelerating legislative procedures. However, opponents of this solution claim that it will reduce the quality of new regulations.
At the beginning of the year, the advantage in favor of the reform supporters was within the range of 20%-30%. However, it has been clearly decreasing over the following months. The referendum’s significance began to increase when the Italian Prime Minister, Matteo Renzi, declared that this result will determine whether he will resign from his office or not. Therefore, the referendum alone became more of a vote of confidence for the government, instead of society’s viewpoint regarding the reform.
Recent surveys show that the advantage in favor of reform supporters is within the range of 2% - 10%. However, surveys are the first element which should show that the reaction may be relatively limited, even if the reform opponents win. Moreover, the market has been estimating the negative scenario. In the first half of this year, the profitability of the Italian ten-year bonds were lower than the profitability of the Spanish ten-year bonds. Currently, the government has to pay approximately 0.5% more for its new debt than the government in Madrid.
The second element which indicates that the consequences of the forthcoming referendum may be relatively limited, are the weak perspectives for the Italian economy, regardless of the referendum’s result. According to the latest data from the European Commission, the Italian GDP growth will be at the level of 0.7% in 2016. Moreover, this index will not exceed the level of 1.0% until 2018. Also, the bank sector is in a weak condition, which has been indicated by its depreciation by approximately 50% since the beginning of the year.
As a result, if the changes are denied, this will most likely deteriorate the sentiment in the eurozone and overvalue the euro. However, we shouldn’t expect any global changes, like, for example, after Brexit or Trump’s victory in the American elections.
We haven’t received any information that could increase the likelihood of the oil production limit by OPEC over the past few hours. According to the Bloomberg agency, the technical meeting’s purpose was to establish the proportions of production decrease for particular countries. However, this didn’t end with any specific decisions.
The decision from the Russian minister of energy can be interpreted negatively regarding the expected agreement. He will not attend the meeting in Vienna on November 30th. He only said that Russia is ready to discuss with OPEC, but only when an agreement within the Cartel has been achieved. We may claim that the chances for the consensus have decreased. However, it still seems that they are above the level of 50%. The recent events may be a part of a negotiation strategy from the OPEC countries, as well as from Russia.
Pressure on the zloty
High evaluation of the USD continues to burden the emerging market currencies. The zloty and the forint are not only weaker against the dollar, but also against the euro and the pound. It’s possible that the anxieties over the result of the Italian referendum may impact evaluation of the PLN, as well as of the HUF. Even though we don’t expect this impact to be as strong as impact of Brexit or the American elections, we may observe an increased volatility in our region for the short-term.
The zloty should also be dependent on the decision from OPEC tomorrow. The oil production limit is negative for the Polish currency because of a larger likelihood of the dollar’s appreciation and due to the trade exchange. The opposite scenario should be positive for the PLN, especially if it’s combined with a depreciation of the USD.
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