Afternoon analysis 14.08.2015:
The Eurogroup moved closer to a deal with Greece. Mixed reports from the US industry. The zloty dropped after some weak reports on the GDP.
On Friday the People's Bank of China set the yuan's reference rate above its previous close. As a result, the currency was supported after the week when it dropped to the lowest level since 2011 and the volatility in the markets was limited.
The emerging market currencies were heavily pressured after the PBOC decided to devalue its currency. According to Bloomberg data, the Asian currencies posted the worst weekly decline in four years.
Although the market anxiety was limited, it is hard to believe that any major problems have been resolved. The Chinese economy is slowing down, thus the PBOC may be more eager to take further actions to support growth. Moreover, the Asian currencies and other emerging market currencies have to face the monetary policy tightening in the US.
In July industrial production increased 0.6 percent on a monthly basis. The report was significantly better than the 0.3 percent that was forecast. The market optimism was somewhat limited by the fact that the numbers from the prior month were revised down (to 0.1 percent from the 0.3 percent that was previously reported).
Nevertheless, the dollar increased against the euro. Yesterday, the report on retail sales was quite good. The latest reports have built the picture of sustainable growth. As a result, the probability of an interest rate hike in September increased.
The Greek parliament accepted a set of bills that pave the way for the bailout program. Now, the next steps are the Eurogroup decision and votes in the national parliaments of the eurozone members.
Before the talks, the German Finance Minister Wolfgang Schaeuble said although there are some discrepancies, he believes in a positive outcome of the meeting. Quite a dovish statement from the major representative of the Berlin government signals that the probability of a final agreement is very high.
After the Eurogroup decision, there will be a series of votes in the national parliaments. The highest risk is associated with the German politicians' stance as they were against the bailout during the previous crucial vote. All in all, the likelihood that Greece will miss the European Central Bank payment on 20 August is minimal.
However, in the long term there is a threat of political destabilization in Greece. The information agencies cited an unofficial Greek lawmaker who said Prime Minister Alexis Tsipras is going to seek a vote of confidence in parliament. Given the situation, it will lead to a snap election. As a result, the process of the reforms implementation may be in danger. Thus Athens may once again face a default scenario.
On Friday, the zloty dropped against all its major pairs. The weakness of the Polish GDP was coupled with poor reports from the major European countries. The progress on the Greek bailout program has positive influence, but this factor will only impact the zloty in the short term.
Given the limitation of Chinese turmoil and some positive reports from the US, the likelihood of an interest rate hike in September increased. This factor will continue to negatively affect the zloty and other emerging market currencies.
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