Daily analysis 12.12.2014

, author:

Marcin Lipka

The scenario of lower inflation is pushing the yields lower and preventing the dollar from strengthening. Abe fights for 2/3 votes in the Sunday election. Another rouble sell-off. Norwegian krone slumps to 11-year lows. Intervention on Mexian peso. The zloty remains fairly stable to most currencies with a slight bias toward weakness.

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

  • No macro data which may significantly affect the analyzed pairs.

Correction extedned

The US equities finished Thursday's session on the weaker side. There is also a significant downward pressure on Treasuries yields. As a result, both EUR/USD and USD/JPY continue their corrections and trade above 1.2400 and 118.50 respectively. Currently the only element which may change the situation is the FOMC meeting.

For many years the benign monetary policy was boosting the equities. This time, however, the market would not only like to see a longer accommodative policy, but also some bullish projections regarding the economic growth. As a result market participants would like to get optimist GDP projections from the Fed and positive outcome from the oil slump. If Fed announces that the lower petrol prices will not change their monetary policy action, it would be an optimal scenario for the both equities and yields to go up. It should also boost the dollar.

We will have to wait until Wednesday to see whether the scenario is going to materialize. Until the next Fed meeting most of the trades will be made fairly close to the current levels.

Japanese election

The most recent dollar weakness and some rebirth of “yen-safe-haven-trade” decreased the hypothetical impact from the weekend election. It does not mean that the event will be omitted but the reaction might be much weaker than previously thought.

According to the most recent polls published by the Nikkei news agency, the LDP party is going to secure more than 296 out of 475 available seats in the lower house of the parliament. Prime minister Abe with is coalition parter should secure 2/3 of all votes.

The election results should give a stronger mandate to the current government and the central bank to use the available tools and push both fiscal and monetary measures further. In the medium and long run it will be yen negative, but it does not mean that the yen is going to weaken on Monday. Global trends may significantly reduce the overall impact.

Commodity currencies under pressure – rouble, krone and peso sell-off

In the late morning the rouble was slumping even 4% and the USD/RUB was testing 58 level. Recently we have quoted a joke circulating on the market that the rouble / dollar pair will reach 63 mark on 63rd Putin's birthday. When the idea was spreading the rate was 53, so it is exactly halfway to this “target” level.

Traditionally, the rouble depreciation is directly related to the oil dive. In the recent month it was almost ideal correlation between the Russian currency and the Brent. The central bank interventions are only aimed to calm the market in moments of heightened volatility and interest rates decisions serve as a reaction to rising inflation. There is also much less of speculation and geopolitical effect on the rouble. It was also confirmed yesterday by CBR chief. Elivra Nabiullina said that speculators are only responsible for only 8-10 percent of the rouble depreciation in 2014. It is not really much regarding the fact that Russian currency lost 43% of its value in recent months.

Similar problems, but on smaller scale, are seen on the Norwegian krone. The recent central bank decision to cut the interest rates during a period of slumping currency, smaller budget income and planned for 2015 tax cuts concerned the market participants. The local currency quickly slided to the lowest level in 11-years to the dollar and the USD/NOK rate topped 7.35.

It means that the Nordic currency lost around 20% to the “greenback”. It is possible that the sell-off may continue because both government and central bank are rather keen to stimulate the economy than tighten the belt and the weaker currency will be one of their tool to reach the goal.

Market participants also targeted the Mexican peso. Only a few days ago we wrote that the central bank is ready to intervene on the market when the local currency weakens more than 1.5% on the daily basis. For months the MXN was relatively calm and the lower oil prices were supposed to be compensated by better health of US economy.

But the short-term capital clearly wants to exploit some weaknesses of the second largest Latin American economy. The peso lost around 7% since the beginning of December and yesterday the central bank intervened on the market. Additionally, we are getting closer to the all-time-lows on the MXN/USD pair (15.50). If the lower oil prices persist the new sell-off will be inevitable.

Foreign market in a few senteces

There are still no signs of the comeback to the yen or the euro depreciation towards the dollar. More game-changing events may occur in mid next week regarding the new Fed meeting. No change is expected regarding the oil-depended currencies. Most of them will be under pressure regardless their economies were well maintained or not.

Calm market but with weakness bias

Taking into account the variety of events on global currency market, the zloty looks like an oasis. Calm PLN trading should not change quickly, but if the US equities continue the correction, we will rather see a stabilization or slight weakness rather than a comeback to the appreciation trend.

Next week besides the Fed's meeting the zloty may react to the production data (Wednesday) or inflation (Monday). According to the Bloomberg consensus prices in November should fall 0.5% on y/y basis. Lower reading – a fall below minus 0.6% - may be a negative sign for the currency. Industrial activity also looks pretty pale. Ministry of economy analysts are expecting only a 1% rise y/y. Partly it is the effect of lower working days number in November in comparison to the same months last year.

Today the zloty may be a bit weaker again (around 1 PLN), especially when the S&P 500 index starts falling below 2k mark. On the other hand if the US session is on the “green-side” both EUR/PLN and CHF/PLN should be traded around 4.18 and 3.48 respectively.

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

Range EUR/USD 1.2250-1.2350 1.2150-1.2250 1.2350-1.2450
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000
Range CHF/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000

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

Range GBP/USD 1.5650-1.5750 1.5550-1.5650 1.5750-1.6850
Range GBP/PLN 5.2500-5.2900 5.2300-5.2700 5.2700-5.3100

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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