Afternoon analysis 05.07.2016

, author:

Marcin Lipka

Overvalue of the pound increased in the afternoon. The British currency is at its lowest level against the dollar and the zloty in more than thirty years and almost two years, respectively. Tension in the Italian bank sector. The zloty remains weak against the main currencies, as well as against the forint.

Pound increases it depreciation

This may be one of the weakest days for the pound. That is, of course, if we exclude the period shortly after announcing the British referendum results. The GBP/USD depreciation is reaching 250 pbs. The pair has yet again increased its thirty-year minimum and went to the 1.3050 area.

Mark Carney's press conference, as well as publication of the Bank of England six-month Financial Stability Report occurred this afternoon. The pound was not increasing its overvalue during the reports presentation, as well as during the questions&answers session. However, statement from the central bank chairman was not optimistic. Carney said that, “there is a perspective of a significant economic slowdown.”

The Financial Stability Report's summary contained a graphic that explains well the weakness of the British economy, as well as the fundamental reasons for the pound's wear-off (that was only increased by Brexit). The United Kingdom has a very high deficit of its current account. It is at the level of approximately 7% of the GDP.

Moreover, it has experienced unfavorable changes for a few quarters. They were not only a result of a trade deficit, but, to an increasing degree, of primary income (income gained by foreign investors in the United Kingdom) as well. These incomes are more than 3% of the GDP. In 2010 the primary income balance was positive.

It is also worth noting that the United Kingdom's balance of trade in goods, indicates the country's low competitiveness. In the first quarter it was negative 7.2% of the GDP, and was reduced due to a positive balance of services sector (mainly financial). Currently, with a risk of hampered acces to the common market, the balance may deteriorate. This will not allow a clear reduction of a large current account deficit, despite the weaker pound.

Overvalue of banks shares. Zloty remains weak

The a quite fierce discussion on whether the Italian banks will require additional capital, has been raging on for a few days. This situation does not have a significant impact on sentiment in the region for the time being. However, overvalue of some of the institutions is rather significant. We can read in the previously mentioned Bank of England's Financial Stability report that shares from the Italian banks, are currently by 60% lower than they were in 2015.

According to the calculations from the Bank of England, share from ten of the biggest banks in the euro zone, are currently by approximately 35% cheaper than their average rates in 2015 as well. There are anxieties that the Brexit related worse economic condition of the region, may cause an increase in negative tendencies in the bank sector, especially in Italy.

The zloty remains weak in the afternoon. The EUR/PLN is at the 4.45 level, the dollar costs approximately 4 PLN, and the franc is slightly above the 4.10 PLN level. On the other hand, the pound has clearly lost against the Polish currency, and it is slightly above 5.20. This is its lowest level since September 2014.

Apart from the pound that impacts negatively the general sentiment against the zloty, it is worth noting today's behavior of the American stock market as well. If overvalue in the USA increases, the main currencies may gain 0.01.-0.02 PLN more against the zloty in the evening. We also need to remember today's government meeting, as well as the decision regarding retirement age. If it is decrease, it will be an additional element of pressure on the zloty.

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 Sp. z o.o is prohibited.

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