Afternoon analysis 05.06.2015:
The last few days of the week were full of events, which have impacted the currency market. There were negotiations with Greece, changes on the European debt market and Friday's jobs report. From this turmoil the clear winner is the US dollar.
In the end, the dollar wins
During the first part of the week the dollar was under significant pressure. The US currency was sliding due to lower inflation across the pond, the higher price rise in the eurozone, better perspective regarding Greece and some dovish comments from Federal Reserve members. A strong impact on the EUR/USD valuation also come from the volatile debt market.
Higher yields on German bonds is partly caused by comments from Mario Draghi, and partly from the higher inflation perspective and lower profitability of carry trade strategy. As a result, the EUR/USD on Thursday's afternoon was approaching 1.1400, which translated into 400 pips appreciation in one week.
The situation changed a bit yesterday evening. It turned out that the deal with Greece is much further away than expected. Athens doesn't want to agree to the reforms offered by its creditors and additionally it moved the IMF payments to the end of month. It means that the government has either failed to secure enough money or it is another negotiation trick. Both solutions seem to be euro negative in the short term
The key was, however, the US data. The American economy generated 280k jobs in May. It was 50k more than expected. Additionally, two previous months were revised upward by the sum of 30k. Moreover, a dollar positive sign was an increase in wages, which exceeded the economists' surveys.
The better condition of the US economy brings higher odds for an interest rate hike by the Federal Reserve in September. It is also dollar positive news, which has pushed the EUR/USD below the 1.1100 mark. Despite the fact that it is still above the levels seen at the beginning of the week there is a higher chance for a firmer greenback in the forthcoming days.
All against the zloty
The EUR/PLN trading at the beginning of the week didn't predict high volatility in the following days, especially that it is traditionally the most stable currency pair. Both sessions on Monday and Tuesday were fairly calm but more weakness appeared on Wednesday.
It was mainly caused by the significant yield rises on the German 10 year yields. A lower spread between Polish and German bonds and increasing volatility on both instruments caused that some carry trade strategies have become more risky. It quickly turned to some pressure on the PLN from the foreign funds.
On Thursday, the tendency even deepened due to lower liquidity on the currency market caused by the absence of local players. Today, the situation calmed down but levels around 4.15-4.16 on the EUR/PLN should be regarded as fairly high.
How quickly they will be corrected depends on a few elements. Firstly, the situation on the debt market should be stabilized when higher yields are used to open new long positions rather than closing them. It is also crucial that the Greek situation will calm down. Higher risk aversion usually brings significant pressure on the EM currencies. Lastly, some better data from the Polish economy are supposed to benefit the PLN.
The most recent publications on retail sales or industrial production and Monday's PMI were significantly below expectations. However, if it was just a transitory issue and new readings return to the trend, the EUR/PLN should target levels around 4.00 again.
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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.
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