Daily analysis 19.09.2014

, author:

Marcin Lipka

Scottish “no” improves sentiment on markets. Yen may bring much more attention in the following weeks. Another “contact group” meeting in Minsk. The zloty remains stable to the euro. Changes on other currencies are a result on more volatility globally.

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

  • No macro data which may affect the analyzed currencies.

Scotland. Japan. Ukraine

According to the official results, most Scots decided to remain inside union. The status quo was supported by 55% of voters while “yes” was chosen by 45% of the population. The difference between two camps was wider than most recent opinion polls predicted which may be contributed to quite aggressive “no” campaign in final days.

From the beginning of Thursday's session the market was less and less concerned with a potential separatists' victory. We also clearly emphasized that “yes” camp has much slimmer chances to succeed. As a result the GDP?USD in the last 24h rose more than 100 pips and topped 1.6500 level. Later there was some profit taking and we corrected some gains.

In the coming weeks the market should stabilize around the current levels. A slight threat to the cable may be incoming economic data. Discussions on independence could have weighted on both consumers and business, and therefore slightly extended the period with zero-interest-rate policy. Taking into account all issues the appreciation of the pound (especially to the dollar) in the future is not that certain. The situation should be more clear if we get more economic data, which should either keep the BoE on track or slightly modify the central bank strategy.

Exactly a week ago we wrote about the reasons of yen's weakness (ultra accommodative monetary policy, changes in investment strategy of the state pension fund and current account deficit). We also set the target around 110 yens per dollar. We didn't expect, however, that the Japanese currency slide would be so rapid that after a few days we might test 109.5.

Such fast depreciation might have been beneficial for the economy (at least in the short run), but there is one problem. After the 2011 earthquakes the country resigned from exploiting nuclear power plants. The industrial-oriented economy which soaks up lots of energy had to accept much higher production cots. The currency weakness was supportive for the economy in short time (pushed the foreign profits denominated JPY higher), but in scenario of more expensive energy (also other commodities are more expensive due to currency slump) negatively affected current account (pushed the balanced of trade below zero) and weighted on results on local business.

The problems seem to be confirmed by Reuters survey where 75% Japanese companies would like stronger rather than weaker currency. The optimal USD/JPY rate is between 100 and 104 for 47% firms. Only 25% entities would like to see dollar to trade above 105 yens.

Incoming quarters may be difficult for the Japanese currency. A significant yen weakening combined with high demand for imported energy (according to JP Morgan Securities analyst Yuji Nishiyama only half of 48 nuclear power plants will be operating in 2018) may worsen the economic conditions. In case of still ultra expansionary monetary and fiscal policies we may witness pretty challenging period for the Abenomics policy.

The culmination of mentioned issues may bring more problems to the yen. Markets love to exploit such weaknesses. As a result we confirm our estimate that after rising above 110 level we should fairly quickly (within a year) reach another important mark – 120.

According to the Russian press agency RIA Novosti a new “contact group” meeting should begin today in Minsk. The next phase of talks between Kiev authorities, separatists and the OSCE will probably focus on implementing previous agreement (borders security, Donbas status, demilitarization and etc). The markets will be slightly affected by the talks' outcome unless some major disagreements hit the wires or the situation on the ground worsens significantly. The base case scenario is still very gradual improvement of the conditions in east part of Ukraine.

We have been observing attempts to generate some rebound for several days. Slight corrections were, however, used probably to open short positions on a bit higher levels. As a result the market may try to test the strong technical support around 1.27XX level. The move may be provoked by macro data from Europe. The first attempt may be observed on Tuesday, when eurozone PMIs hit the wires.

No changes on EUR/PLN

Some zloty's strength in the morning should not be connected with the new Polish government. A similar move was observed on South African rand, lira or forint (in two first examples it is hard to make any connections to Polish politics). A slight sentiment improvement was caused by some “relief” after Scottish voting another bullish session across the pond.

Similar to the GBP/USD the pound, also the-zloty soared in early morning to the level set by us yesterday (5.35). The further GBP/PLN moves will be mainly affected by EUR/GBP (making a fairly good assumption that EUR/PLN stays rather flat). In case of “the cable” we could have some doubts regrading further moves but appreciation towards euro concerning this issue is much more probable. As a result, after the situation settles down, we should expect higher levels on the GBP/PLN.

Summarizing, in the following weeks we should observe the continuation of recent trends. Both dollar and the pound should strengthen to the zloty while EUR/PLN and CHF/PLN will be traded in a pretty narrow range.

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

Range EUR/USD 1.2950-1.3050 1.2850-1.2950 1.3050-1.3150
Range EUR/PLN 4.1800-4.2200 4.1800-4.2200 4.1800-4.2200
Range USD/PLN 3.2200-3.2600 3.2400-3.2800 3.2000-3.2400
Range CHF/PLN 3.4400-3.4800 3.4400-3.4800 3.4400-3.4800

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

Range GBP/USD 1.6250-1.6350 1.6150-1.6250 1.6350-1.6450
Range GBP/PLN 5.2700-5.3100 5.2500-5.2900 5.2900-5.3400

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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