Daily analysis 21.07.2016

, author:

Marcin Lipka

The decision of Standard & Poor's, as well as the state of emergency in Turkey, caused the Turkish lira to reach its new weakness record. The ECB will probably not make decide of any serious changes at today's meeting. The zloty remains stable due to a positive global sentiment.

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

  • 14.30: Mario Draghi's press conference after the ECB meeting.
  • 14.30: Weekly jobless claims from the USA (estimations: 265k).
  • 16.00: Sale of houses in the secondary market in the USA (estimations: 5.48 million).

Lira at its historic minimum

Many investors were yet again focused on the situation in Turkey yesterday afternoon. First of all, Standard & Poor's decided to downgrade the country's rating from the BB+ level (one rank below investment level) to the BB level. Moreover, the agency rated Turkey's perspective as negative. Ankara implied the state of emergency for the next three months last evening. As a result, the USD/TRY went to the 3.10 area and reached the highest level in its history. This also increased overvalue of the lira by 6-7%, in comparison to the past week.

It is easy to name the reasons of Turkey's lower loan credibility. The S&P wrote that, “after an attempt of coup d'etat in Turkey on the 15th of July, we claim that polarization of the political scene weakened the authorities control, as well as their balance.” Further on, the agency adds that, “we foresee a period of increased unpredictability that would limit the capital inflow to an externally leveraged economy.”

The negative perspective assumes that, “economic, fiscal and debt indexes may deteriorate beyond expectations, if the political uncertainty weakens more the investment environment, by potentially intensifying pressure on payment balance.”

It is also worth noting that the S&P rates Turkey two levels below the rates given by Moody's, as well as Fitch. Moreover, the two other agencies still rate Turkey's loan credibility at the investment level. For the time being, it seems determined that the other institutions will downgrade Turkey's rating to the junk level as well.

There were also speculations regarding Turkey implying the capital control. However, the Turkish authorities definitively denied this scenario. On one hand, it truly is unlikely for the time being. On the other hand, the capital control is never announced, because it would cause panic.

Our remarks on how mild overvalue of the lira was, considering the wide political, as well as economic consequences of the weekend events, are beginning to confirm. For the time being, it seems that the market will increasingly focus on the conflict between Ankara and western countries. If it expands, pressure on the currency will increase. Moreover, it will be difficult to estimate the scale of lira's further overvalue.

However, if the tension between Turkey and the USA, as well as the European Union does not increase, we may expect decrease pressure to exhaust slowly. Moreover, the total short-term overvalue of the lira against the dollar will not exceed 10%, in comparison to its quotations from before the past weekend. Thus, the USD/TRY beyond 3.20 is not the base case scenario for the time being.

ECB will rather not surprise

It is quite unlikely that the ECB will modify any parameters of its monetary policy today. Thus, deposit rates, as well as the scale of assets purchase should remain unchanged. Moreover, Mario Draghi will rather not suggest any future moves during his press conference.

The questions & answers series is most likely to include the matters regarding rules of assets purchase. For example, the German treasury bonds of increasingly longer maturity date currently do not fit the conditions of their purchase. These conditions assume that the profitability cannot be lower than the ECB deposit rates. The condition that the central bank cannot purchase more than 33% of a particular issue, is most likely to be discussed as well.

However, the discussion will rather not have an impact on the currency market, as well as it will probably not force a decrease in deposit rates. We don not expect Draghi's suggestions during the press conference, to cause a more durable move in any direction.

Zloty sustains its recent growths

Quotations of the Polish currency remain calm. At approximately noon, we even could observe an attempt of a descent to the 4.36 area on the EUR/PLN. Perhaps it was caused by the statement from the Minister of Finance, Paweł Szałamacha. According to Bloomberg he claimed that, “the discussion regarding retirement age is not finished yet.” However, the zloty, as well as other regional currencies continue to be supported by a positive global sentiment. Yesterday, the main index of the American stock market has yet again increased to the highest level in its history.

Moreover, we do not expect today's ECB meeting to clearly disturb the PLN quotations. However, investors may focus more on tomorrows PMI data from the euro zone, as well as the United Kingdom. They will show the scale of fear among investors, that was caused by Brexit. If it's significant, it may have a negative, though limited impact on the zloty.

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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