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Daily analysis 11.05.2016

, author:

Marcin Lipka

The British think-tank, NIESR, forecasts that in the case of Brexit, the pound will depreciate 20%. EIA makes a significant revision in forecasts of oil prices. The zloty remains in a tight range of fluctuations before Moody's decision. Eryk Lon of the MPC on the Polish interest rates.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • No macro data that could significantly impact the analyzed currency pairs.

Discussion regarding Brexit continues

The matter of Brexit is continuously dominating on the pound. The market continues to estimate, how may the British currency behave, if the United Kingdom leaves the European Union. The analysis from the National Institute of Economic and Social Research published by the Financial Times, is worth noting regarding this topic.

The NIESR warns that in case of Brexit, the UK may experience “a significant economic shock.” It may decrease the country's economic growth by 0.8% in 2017. Moreover, the value of the British GDP in 2030 may decrease between 1.5% and 7.8%, against the base case scenario.

The Institute takes note that in case of Brexit, the pound may lose even 20% of its value. This may lead to an increase in inflation by 2%-4% more than it is assumed in the base case scenario. Moreover, the Financial Times reminds that the depreciating pound would increase the risk of financing a clear account deficit. This would force the Bank of England to raise interest rates.

Economists of the NIESR also think that the weaker pound will not bring any advantages for the export sector. This is because the access to the EU market will be limited, if the United Kingdom leaves its structures.

The Institute's report is similar to a general approach of the majority of economists, who speak about the possible consequences of Brexit in public. However, it is worth noting that even if the pessimism regarding the long-term economic effects is exaggerated, the reaction of the currency market may be very intense.

Investors may fear that a significant part of the prognoses regarding devaluation of the pound within the range of 15-20, may become true in case of Brexit. This may even cause an effect of a self-fulfilling prophecy.

The current surveys remain practically the same. This refers to the average of the recent surveys, as well as the comparison of particular institutions from the past few weeks. The online surveys show that the amount of Brexit supporters as well as its opponents, is approximately equal. The last phone survey so far, has been conducted more than two weeks ago. At that time, the opponents of Brexit had 8% of advantage over supporters of leaving the European Union.

Investors will probably focus on phone surveys within the following days. The situation on the pound could deteriorate, if the percentage of Brexit opponents decreases (5% or less). In this scenario the EUR/GBP should return above the level of 0.80, and the GBP/USD could go towards the area of 1.42.

New EIA estimations

Yesterday, we have yet again received contradictory information regarding oil. On one hand, the American EIA published the new estimations of the global demand and supply. These estimations indicate that overproduction of oil may reduce faster than previously expected. In mid-2017 demand for oil may exceed its mining.

The EIA also increased significantly the average forecast for the WTI and Brent for the next year. In April the expectations for 2017 were 40 USD per barrel. Currently, the expectations are at 50 USD. The Agency increased the average production in the USA for the next year. However, this release was relatively small, considering a significant positive revision of prices.

On the other hand, the API report regarding the supplies is less positive for oil. According to the Institute, the supplies increased by 3.45 million barrels. To compare, the highest forecast given by economists surveyed by Bloomberg before today's weekly EIA data, was 2.1 million barrels. Even though the API and EIA data do not always overlap in short-term, we can expect that oil should stop increasing.

Stabilization at a low level

The Polish national currency remains at a low level. The EUR/PLN went above 4.40, and the USD/PLN is near the level of 3.90. However, despite its general weakness, the zloty remains stable against the main currencies, as well as against, for example, the forint. The market participants are clearly anticipating the decision of Moody's on Friday.

Currently, the comments from the MPC members should not have a significant impact on evaluation of the PLN, especially if they are consistent with their previously presented views. In his interview with the Polish Press Agency, Eryk Lon did not exclude a decrease in interest rates. However, it is currently not necessary in his opinion.

The next few hours in the zloty market should be relatively calm. Chances for a clearer decrease in the EUR/PLN, and a test of 4.40, is quite small. A clearer depreciation of the Polish currency is also very unlikely. Thus, trade at the current level remains the base case scenario.


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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