Daily analysis 11.08.2015:
After several hours of negotiations the working groups from Greece and its creditors have reached a deal. China devalues the yuan around 2% to the dollar. The zloty remains weak to the euro and tests the 4.20 range.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- No macro data which may significantly affect the analysed pairs.
Greek deal is getting closer
For the last few days we have informed that the odds of coming to an agreement between Greece and the creditors has risen. We also noted, however, that the most important cases have not yet been resolved.
Today, the Greek authorities and the EU officials, who were not mentioned by name, reported that an agreement with the Hellenic Republic had been reached. Investors are also aware about the calendar which is expected to be followed in the next few days.
On Wednesday, discussions within the Greek parties are expected while on Thursday Athens are scheduled to run voting on the deal. In the following days, the Eurogroup is going to discuss the issue, while early next week the agreement should be voted on in the eurozone parliaments. As a result, Athens will be able to buy back the maturing debt which is currently held by the ECB on August 20th.
There are still many issues. Firstly, it is unclear how the agreed reforms on July 12th are going to be implemented. No decisions have been made on the more elastic job market, cuts in administration, reduction of pensions and privatization. There are speculations that these issues may be agreed on in October.
This is, however, contradictory to the agreement where Athens is firstly supposed to vote on the major issues and later get the bailout money. As a result, the German reaction should not be surprising. The deputy finance minister said that we have to look at this agreement closer. Jens Saphan added that the deal has to confirm that it is not only about the August 20th, but also about a long term solution for Greece.
Regarding the market reaction it should mainly be visible on the franc. The Swiss currency should weaken in line with the higher probability of an agreement. It lessens the argument to put assets into the CHF when the risks for the eurozone are scheduled to diminish.
The Yuan devaluation
Today's yuan devaluation has many aspects. Firstly, China would probably like to increase its competitiveness, especially given that the other Asian currencies lost more than 10 percent to the dollar last year and the yuan was unchanged to the USD.
Another element, which pushed the central bank to devalue is that Beijing would like to join the reserve currency club. But one of the major requirements is to trade the currency freely. The first element to unpeg the CNY to the dollar may be today's PBOC decision which generates volatility risk to the market participants.
In the medium term the central bank would also like to push the currency lower, especially that in the last 10 years, taking into the account the nominal rate and inflation difference between its trading partners, the CNY strengthened around 40%. This may give more room to manoeuvre and correct this move and then later to manage the currency in more marketable way.
Export and commodities driven currencies in the region reacted negatively to this news. Firstly, the devaluation of the yuan may suggest that China has more trouble with the economy than many expected. A lower demand from Beijing can put pressure on other economies. Investors are trying to price in these issues.
The foreign market in a few sentences
Theoretically the decision from the Chinese monetary policy makers might even decrease the odds for the interest rates hike in the US. The Fed may be afraid to increase the rates and push the dollar higher, which can push the competitiveness lower. As a result, there is a slight depreciation of the dollar. On the other hand, the Swiss franc is sold to the euro in the perspective of the Greek deal. Both moves have pushed the EUR/USD above 1.10.
The zloty is weak but stable
The PLN valuation remains close to the 4.20 level per euro, but there is still not a strong will to push the Polish currency lower. Additionally, the deal with the Greek creditors should be regarded as positive for the zloty.
It is, however, not clear how the Polish currency should react to the PBOC decision. On one hand the yuan devaluation pushes other EM currencies to follow the move. This is, however, most visible in the case of direct Chinese competitors. Poland imports from China 10 times more than exports. If agreements are set in CNY and the demand for Chinese goods is fairly fixed (similar to the energy commodities), then we may even expect an improvement in the balance of trade. So, it can even be positive for the PLN.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/PLN rate:
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