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Daily analysis 12.08.2015

, author:

Marcin Lipka

The market is getting more concerned that the yuan devaluation may push back the interest rate hike in the US. The German view about Greece is gaining attention. The EUR/PLN is slightly above the 4.20 mark.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.30: The New York Fed chief William Dudley is expected to deliver a speech.

Investors question interest rate hike in the US

Today the Chinese monetary authorities devalued the local currency for the second day in a row. This time the yuan lost 1.6% to the dollar what brings the 2-day loss to 3.5%. In line with the CNY weakness currencies, which are used in countries heavily dependent on Chinese import also lost some value. The global currency market, however, is much less concerned about the Korean won or Malaysian ringgit depreciation than the rumours that the PBOC action can push back the interest rate hike in the US.

Investors speculate that Beijing was pushed to devalue CNY mainly due to a softer local economy. If that is the main reason it may mean that the GDP growth around the world can be weaker. It will also quickly translate to softer readings from the US.

Additionally, the inflation perspective around the world (including the US) can be reduced by a lower demand in energy and industry commodities, of which China is the main user. As a result, taking into account the lower growth perspective in the US combined with another wave of commodities deflation the Fed may decide to halt its monetary tightening.

Bloomberg calculates the probability of interest rate hikes in the US. Last week, the chance for a September hike was approaching 60%. Today it is only 40%.

As a result, it might be interesting how William Dudley, who is scheduled to speak today, comments on the most recent PBOC move. Before his recent trip to China he had been sceptical about the Beijing economy, but after he returned from the second largest economy he changed his mind and claimed that it looked better from within. Any comments regarding the Chinese decisions and suggestions on future monetary policy are expected to be closely watched.

German view on Greece gaining attention

The Greek calendar did slightly change comparing to our comments yesterday. The parliament in Athens will probably not be able to vote on the agreement on Thursday, so the decision is set to move towards Friday. The other dates now appear unchanged – the Eurogroup discussion on Friday and voting in the European parliament at the beginning of the following weeks.

However, it is possible that the preliminary calendar can be changed again. The “Financial Times” writes that yesterday a 28 EU finance ministers video conference was held. It may be a sign that Germany is trying to force their view. Berlin would like to extend the bridge financing from the EFSF, so Athens might be able to buy back maturing debt from the ECB. The main negotiations on the 85 billion euro package will have to last longer to fully agree on all of the complex issues

If this solution gets more attention, it may worsen the positive sentiment on the EUR/CHF pair and the Swiss currency can get stronger again.

The foreign market in a few sentences

Due to the yuan devaluation the discussion on the interest rate hike in the US returns. As a result, investors are expected to closely listen to any comments from William Dudley. If the Fed member keeps his view on China the EUR/USD should correct its appreciation trend and even move towards 1.10.

On the other hand, if the New York Fed chief stresses negative consequences of weaker yuan on inflation and GDP growth then the market may really question the interest rate hike in the US which should push the dollar even lower.

The zloty remains stable to the euro

In the late morning the EUR/PLN rose slightly above 4.20. It was not, however, the effect of the PLN sell off but rather the fast appreciation of the euro on the global market. Still, the base case scenario is keeping the euro-zloty close to the current levels, but the odds for a weak zloty can rise, if the slump on developed equities continues and the capital outflow from EM currencies speeds up.

It is worth once again noting that the Polish export exposition on China is minimal comparing to other economies. The direct export to China is only 1% of total products sent abroad, whereas in the case of Australia, South Korea or Malaysia it is 35%, 32% and 18% respectively.

As a result, Polish minimal exposition to Beijing can now be regarded as an advantage. Of course, the PLN and the economy can be hurt indirectly – by a lower demand for German products from China. But it is a much longer route and less analysed by market participants.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.1050-1.1150 1.0950-1.1050 1.1150-1.1250
Range EUR/PLN 4.1700-4.2100 4.1700-4.2100 4.1700-4.2100
Range USD/PLN 3.7600-3.8000 3.8000-3.8400 3.7200-3.8600
Range CHF/PLN 3.8500-3.8900 3.8500-3.8900 3.8500-3.8900

Anticipated GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.5550-1.5650 1.5450-1.5550 1.5650-1.5750
Range GBP/PLN 5.8600-5.9000 5.8400-5.9000 5.9000-5.9600

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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