Daily analysis 17.12.2014

, author:

Marcin Lipka

The twenty per cent loss of Russian currency from the afternoon poured over a wide market, and took many victims. Today's weakening of the rouble did not change a lot in that matter. Information from the East, should control the sentiments throughout the upcoming days. Crucial summit of Federal Reserve. A clear zloty weakening that can maintain for a longer time.

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

  • 14.00 CET: Industrial production from Poland: estimations +1.1% year to year.
  • 14.30 CET: CPI consumers' inflation from USA (estimations: minus 0.1% m/m and +0.1% with exclusion of food and fuels; in year to year relation +1.4%, and without fuel and food +1.8%).
  • 20.00 CET: Communicate from the summit of Federal Reserve and new economic projections.
  • 20.30 CET: Janet Yellen's press conference after the summit of Federal Reserve.

Historical breakdown of rouble's rate

We wrote yesterday, that we can observe the changes on the Russian market, that have not been observed for several years. We also noted that the probability of “pouring over” these problems on other economies is relatively small. However, the situation got much more complicated just after the previous comment was published. In less than two hours the rouble lost another 20% of its value, and USD/RUB and EUR/RUB pairs, reached the levels of 80 and 100 respectively.

Throughout whole months the market approached the news from Moscow calmly. The sanctions held upon Kremlin were not severe, the situation in Ukraine was not deteriorating, and the Russians clearly began to get used to slight difficulties. Some disturbances were caused by the increase of prices of oil and rouble's depreciation that followed. However, the balance of cheaper resources is positive for developed economies, so the effect of these events has also been ignored.

Recent days however, brought a clear acceleration of situation's development. It's culmination occurred yesterday afternoon. The paralysis of the Russian currency market, which reflected not only in the rouble's weakening but also in spreads circulating on interbank market in the limits of few per cent, recalled the memories from the crisis in 2008/2009.

Speculations about which banks have the biggest impact on Russia, began quickly. People were also wondering what will happen, if the government introduces the control of capital's liquidity, and will the citizens decide for a mass purchase of currencies, etc. The anxieties translated quickly onto quotations of European stock markets and a lot of currencies, although with exclusion of e.g. euro.

The Swedish krona was loosing two per cent of its value in a certain moment. The Norwegian currency recorded a very clear price reduction and it dropped by 5% in relation to both the euro or dollar for a moment. Sells did not omit the South African rand, Turkish lira, Brazilian real, forint or the zloty.

The Rouble's breakdown also provoked the meeting of representatives of the Russian government and central bank. Its effects are today's multiple interventions on currency market, conducted by the ministry of finance, as well as the monetary authorities. In a certain moment, they have led to a several dozen per cent appreciation on rouble, but the current quotations are again undergoing to the level of 70 on USD/RUB.

There is no doubt, that he situation is much more serious, than it was just by the end of previous week. Rouble's records will not calm down within a day, and another increased variability, will imprint on evaluation of assets on many markets. Introduction of control of capital's liquidity could be an ultimate solution. However, it would have negative consequences for years, and at the moment it is not a base case scenario.

It is worth paying attention to the situation behind our eastern boarder. The following days should bring explanations, on will there be any dismissals – e.g. the chiefs of central bank or the government, or how will the citizens react on the change of conditions (at the moment there is no panic, on contrary – foreign luxury goods, that probably will get more expensive soon, are being quickly purchased). Another important thing is, how will president Putin react during his meeting with the journalists tomorrow.

Fed's crucial summit

The Federal Reserve will hold an important summit this evening. There are a few points that will catch the market's attention.

First of all, what will happen with the statement “a longer time”, that would take place from the already finished purchase of assets, until the first increase of the interest rates. This term will be probably replaced by a suggestion, that will refer to relating the monetary policy with economy's condition, and not with time. However, this fact is already discounted by the market.

Second of all, it is interesting how will the Federal Reserve refer to the fall of oil prices. Will they take it as a positive element for the economy that will announce the increase of consumption or investments, or will they concentrate in a greater degree on the negative aspects, such as dangers on the credit market, or decreased activity of enterprises from the fuel branch?

The investors should also follow Fed's remarks concerning the situation in Russia and consequences of the rouble rate's breakdown. For now, this matter will probably not hit the statement, however, there will certainly be some questions about it during the press conference.

The new economic prognoses and the path of the future interest rates in shape of a famous punctual chart. Theoretically, the decrease of oil by almost 50%, should accelerate the economic growth, decrease the unemployment and also decrease the path of inflation, as well as the interest rates. There is a question though – how will the economic models of Federal Reserve react on this matter.

An optimal solution for the markets is for the Fed to underline the better condition of the American economy (a plus for the stock markets), a sightly lower inflation path, but without the withdrawal from raising the interest rates in the middle of the year (slightly positive for the dollar) and observing the situation in Russia, although without dramatizing too much. Such scenario should allow S&P 500 index, to come back above 2000 points, and give some fuel to the dollar for working off the recent losses.

Few words about the foreign market

Information from Russia will often appear in the headlines of the financial press, at least until the end of this year. Even if the situation is under control, the nervousness will remain, and every decrease of oil prices will lead us to evaluation of rouble and possible negative aspects of its depreciation. Today however, all eyes will be turned on Fed. According to us, the statement of the Federal Reserve will be “friendly” for the American shares market, and it should give a small increase impulse for the dollar.

Longer consequences

The afternoon's breakdown of the rouble's rate, speculations about changes of leading positions in Moscow, threats of introducing the control of capital's liquidity by Russia and a nervous reaction of many currencies from emerging markets caused euro to cost 4.24 PLN at one moment.

Despite the fact, that the Russian currency is not dependant from the Russian market as it was in the past, the further panic sell-off on the rouble, may increase pressure on the zloty. Return to yesterday's minimums on RUB can cause the increase of EUR/PLN or CHF/PLN in the limits of 4.25 and 3.55 respectively. In longer term, the positive aspects of cheaper oil or faster economic development in the country mentioned by us, are still current. However, this scenario is now much more endangered with a real breakdown of the Russian market.

Today's session on the currency market will still be nervous. For now, there are small chances for the return below the limit of 4.20 per euro and at least during the upcoming days, our national currency will eagerly use the moments for deepening its weakening and will approach the positive information with a certain distance. In this context, probably even today's data will be ignored by the market. Unless the reading will appear to be negative in year to year scale. Then, EUR/PLN or CHF/PLN can increase by another 0.01 - 0.02 PLN.

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

Range EUR/USD 1.2350-1.2450 1.2250-1.2350 1.2450-1.2550
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3800-3.4200 3.4000-3.4400 3.3600-3.3800
Range CHF/PLN 3.5000-3.5400 3.5000-3.5400 3.5000-3.5400

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

Range GBP/USD 1.5650-1.5750 1.5550-1.5650 1.5750-1.5850
Range GBP/PLN 5.2900-5.3300 5.2700-5.3100 5.3100-5.3500

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.

Return to the main list

See also: