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Daily analysis 18.01.2016

, author:

Marcin Lipka

Next overvalue of the raw materials currencies, although its scale is significantly different. The zloty is seriously overvalued due to a decrease in Poland's long-term credit rating by the S&P. Nervous atmosphere on the Polish treasury bonds' market. The base case scenario for following days and weeks.

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

  • No macro data, which could have a significant impact on the analysed currency pairs.

Overvalue of the raw materials currencies increases

The topic of raw materials currencies appeared here many times. The past Tuesday we took notice that the pace of their value's depreciation is significantly smaller than in the past months, considering the percentage overvalue of oil. This situation is still observed on some of these currencies, but these with weaker economic perspectives lose significantly more than the others.

Since the beginning of the year, the Brent oil depreciated by 22%. However, at the same time, the Norwegian krone (NOK) lost only 0.5%. This is a very small overvalue, considering that the average pace of the NOK depreciation to the USD was approximately 3/7 of percentage overvalue of oil. On the other hand, the Mexican peso and the Canadian dollar are doing slightly worse, although their depreciation is significantly slower than it was during the past one-and-a-half year. These currencies lost respectively 4.7% and 4.2% to the dollar.

The situation on the Russian rouble (RUB) seems to be the worst. Since the beginning of January it lost 6.7% to the dollar. Apart from one minute on December 16th 2014, the American currency in Russia is most expensive in history. At that time, panic on the Russian market caused a rebound of the USD/RUB slightly above the level of 79.

The recent movements on the raw materials currencies may suggest that even if overvalue on oil market maintains, the market participants will focus more on economic foundations, and the actual negative impact of further Brent depreciations, than it was im previous stages of oil's sale.

Cutting of rating is a problem for the zloty

Overvalue of the zloty which was observed during the past few days, has clearly increased on Friday evening. The market found out then about the Standard & Poor's agency cutting Poland's rating. After today's market opening the situation did not clearly changed. However, the zloty remains close to its 4-year minimums to the euro, and the EUR/PLN pair is not far from the area of 4.50.

The situation on the dollar looks even more spectacular. Last time when the American currency was so expensive was in March 2003. Today, the USD/PLN crossed the level of 4.12. The debt market is also very nervous. Before noon the profitability of 10-year treasury bonds increased by 24 base case points, and reached the level of 3.22%. This shows a significant tension on the national market. Especially that the sings from abroad are relatively neutral today, and the difference between other debt instruments on the European market and the German bonds, did not clearly change. Thus, information about a decrease in rating, takes practically the whole responsibility for overvalue.

Of course, there is a basic question: how will the national currency behave during the following days. There is a great probability that the following sessions will be quite volatile. It is possible that some of the more conservative capital will abandon the Polish treasury bonds, because some pension funds or central banks avoid to invest in the assets with a rating which is lower than “A”.

This goes for the Swiss National Bank among others. In the third quarter, its investments in treasury bonds with the rating below “A” were only 5% of the whole wallet. On the other hand, bonds estimated for “A” were 10%, “AA” 25%, and “AAA” 60%.

On the other hand, it is possible that lower evaluation of the zloty and higher profitability may attract a short-term speculative capital. It may consider that there is a possibility of gaining a significant profit, if the positions on the zloty and the national treasury bonds are taken at a right moment. This may mean achieving profit from enforcement of the PLN, as well as a decrease in bonds' profitability, which will be revealed in an increase of their price. 2% appreciation on the zloty, and 20 base case points of decrease in 10-year bonds, means an earning withing the limits of 4% of the capital.

Thus, we can expect the currency market to be unstable. This nervousness is most likely to be overlapped with unstable situation on the stock markets in developed countries. It is possible that the range of fluctuations on the EUR/PLN pair, among others, may be even 4.30-4.60 until the end of the month.

However, during the following weeks the situation should calm down to such degree that we will be able to talk about the return to stabilisation. But any data worse than expected, commotion abroad, or hypothetical cutting of the rating's perspective by, for example, other agencies, will cause that the negative reaction will be significantly bigger than it was recently. This is a result of the fact that the whole market is still aware that the S&P may be justified to a certain degree, despite how brave and controversial it is.

On the other hand, the fact that the chances for cutting of interest rates decrease significantly, may be an element of a stabilisation. When the rating is decreased and the national currency is being sold, the central banks of the developed countries consider even an increase in currency rates, in order to stop the outflow of capital. Thus, there is a small chance that the Monetary Policy Council would decide for any movement during the following months in such environment.


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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