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Daily analysis 24.06.2015

, author:

Marcin Lipka

The market is speculating that the agreement between Greece and its creditors can cause a wear off of the euro, due to the dollar and the reactivation of carry trade. Statements from Jerome Powell from the Federal Reserve are rather hawkish. The zloty is still not “convinced” about a positive solution for the matter of Greece.

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

  • 14.30: The final GDP reading from the USA for the first quarter (estimations: minus 0.2%)
  • 17.00-19.00: Beginning of the Eurogroup and the IMF representatives regarding Greece (17.00 – the arrival of particular officials; 19.00 planned beginning)

Commotion on the euro

The common currency's behaviour in the past few days has provoked many speculations on the market. Especially the drop of the EUR/USD from the level of 1.1400 to the 1.1200 since Monday, when the viewpoints of Greece and its creditors came closer. Some observers claimed that the market is actually disappointed with the offers, and the negative scenario continues to endanger the euro.

However, this explanation seems less likely, because the stock markets in Europe have visibly increased, and there was a decrease in the spread between the German and the eurozone's peripheral bonds. This would mean that the aversion towards risk decreased, and the chances for the end of the crisis are growing.

The version that the decreasing fear related to Grexit increases attractiveness of the carry trade strategy is more convincing, although not entirely. Loaning a currency with low interest (e.g. the euro) and investing it in foreign markets with a better perspective of refund rates (e.g. the USA), has worked since the beginning of the year.

However, a part of these positions has been shut down, due to bigger variability on the market which is making the above game more hazardous. This is why the euro was increasing when Greece was in the headlines. Additionally, a bigger chance for the agreement can result in a more likely scenario of raising the American interest rates. Calmness is a perspective of a quick economic growth in the USA, and what follows the necessity of the monetary policy's tightening.

Does this mean that Grexit would help the euro? Probably not. The power of carry trade is big. However, the perspective of Grexit would definitely cause the capital to outflow much faster, than it would return due to the reversed carry trade.

Thus, is the agreement with Greece negative for the euro? If the carry trade will clearly gain strength, then probably yes, but in the short-term. It is less likely to happen in the long-term, if the plan for Greece will improve the sentiment in the region, and increase inflation expectations. The carry trade financed in the euro will then become less profitable because loaning this currency will simply be more expensive.

Powell's comments

Yesterday's interview with Jerome Powell broadcast live by The Wall Street Journal was interesting. A member of the Federal Reserve, who is considered as neutral, said that he is a supporter of two interest rate hikes this year. On the other hand, he claimed that likelihood of such a scenario is 50:50.

Powell also spoke a lot about the strong dollar. First of all, he is not surprised about its appreciation caused by the difference of the future interest rates. He also claimed that the dollar's price already contains the perspective of the monetary policy's tightening in the USA. The Fed member's statements could suggest that the Federal Reserve sacrifices a lot of attention to the dollar. He also spoke about a negative impact of the strong USD on the economic increase, export, and the current account.

As a result, the news that Powell is expecting two hikes hit the headlines. Despite this, such an approach will not appear so definite after gathering all the arguments. Some weaker macro data will be enough for the member of the Fed to postpone his expectations to December.

Few words about the currency market

The most important part of the Greek negotiations is ahead of us. Around noon some information appeared with a quote from Prime Minister Tsipras. He was to claim that the creditors do not accept his propositions. It can be an element of a negotiation strategy. Today's discussions will be crucial. According to us the base case scenario is that Greece will remain in the eurozone.

One should be more cautious when it comes to the currency market's reactions. A clear wear off of the euro can be expected only when the control of the capital's flow will be introduced to Greece. In the case of positive scenarios which assume faster or slower progress in negotiations, the reaction on the euro is unclear. It's due to the commotions caused by the carry trade.

The zloty remains weak

The national currency clearly awaits the solution regarding Greece. The rumour causing the increase in aversion towards risk has clearly determined the zloty's direction, in the case of the negotiations' intensification or when the agreement will be closer.

If there is no understanding after today's discussions, and the control of the capital's flow is introduced tomorrow, the EUR/PLN will quickly go to the area of 4.20, the franc will cross 4.05, and the USD/PLN will reach the area of 3.80.

On the other hand, if the base case scenario is fulfilled, or both sides' standpoints get closer, the zloty should become stronger. Acceptance of the Greek offer by the creditors gives a big chance for the EUR/USD to reach the range of 4.13-4.14, and the franc to go below 3.95.

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

Range EUR/USD 1.1150-1.1250 1.1050-1.1150 1.1250-1.1350
Range EUR/PLN 4.1500-4.1900 4.1500-4.1900 4.1500-4.1900
Range USD/PLN 3.6900-3.7300 3.7300-3.7700 3.6500-3.6900
Range CHF/PLN 3.9700-4.0100 3.9700-4.0100 3.9700-4.0100

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5750-1.5850 1.5650-1.5750 1.5850-1.5950
Range GBP/PLN 5.8400-5.8800 5.8000-5.8400 5.8800-5.9200

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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