Daily analysis 25.02.2014

The EUR/USD has been trading in the mid-1.37 level. Goldman Sachs predicts Ukrainian currency to hit 12 per the dollar. Chinese currency is no more “one way trade”. Turkish lira weakens on new corruption reports. The zloty is being traded at 4.16 per the euro.

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

• No major economic data which can affect the analyzed pairs

Euro, yuan, hryvnia, lira

We started the Monday session with bullish sentiment on the EUR/USD. The most heavily traded currency pair even strengthened further after solid Ifo data and topped 1.3770. However, after a few hours we gradually dropped by 50 pips with no major economic data. It turned out that bulls were not strong enough to test 1.3800 level (on one side some fears before the ECB March meeting emerged again and on the other side investors are not getting convinced that the Federal Reserve can pause the taper due to weak economic data from the US). In the afternoon with a help of bullish stock market and weaker-than-estimated services PMI (dropped from 56.7 in January to 52.7 in February; not really significant index in the because the management index is traditionally measured by ISM) it made up for earlier losses. In result, we ended the day in mid 1.37 level and we begin the trading in Europe and the similar levels.

We can observe some stabilization regarding political issues in Ukraine. The calmness, however, is far form the financial markets. The bonds and stocks soared in expectations for EU-IMF-US financial assistance. The opposite direction is taken by hryvnia which dropped almost 10% since Friday’s closed (currency USD/UAH is traded at 9.84 according to Bloomberg data), testing the lowest levels ever (news agency Interfax claims that on December 2008 trades were made above 10 level). Moreover, Reuters reports that Goldman Sachs predicts that currency reserves dropped to 12-14 billion USD in February from 17.8 billion reported in January and 30 billion one and a half year ago. Taking into account the dramatic level of the current account deficit (in 2012 – 8% GDP and 8.9% in 2013; according to the official central bank website) it is possible that “GS” estimates will be fulfilled and the US dollar will be bought by 12 hryvnia.

In the recent days we are observing a visible depreciation of the yuan. The Chinese currency is not as volatile as lira or rupee, but in lost around 1.5% in a few sessions, which is the largest depreciation move in at least a year. The CNY was considered as a one way trade for long time now. With a significant current account surplus and large investments (both FDI and financial) it was also a perfect destination for “hot money”, which has benefited from currency appreciation and interest rate differences. There are rumors on market that the PBOC decided to break that easy trade and decided to weaken the currency. In the future it also plans to increase the daily prices changes (currently the yuan can fluctuate no more than 1% a day and the POBC may increase the range to 2%).

The Monday trading wasn't really successful for the Turkish lira which dropped to the US dollar around 1.5% since the beginning of the week. The move was mainly caused by another set of corruption details which hit political scene. A new corruption record was published on the Internet, where the current prime minister and his son are discussion how to hide money from the law enforcement. Erdogan denied all the allegations and claims that the conversation didn't take place. It is another part of months-long series when almost half of the government was changed due to corruption allegations. The political issues ware also partly responsible for a significant lira deprecation at the beginning of the year and central banks moves with increased the interest rates and intervened on the currency markets.

If no additional data hits the market (the eco calendar is almost empty), the day should be pretty calm on the EUR/USD. There is much more volatility expected on most exposed currencies (lira or hryvnia) where political and economic issues play a larger role.

Still pretty stable

After a slight zloty depreciation at the beginning of the session (mainly caused by weaker lira), we can see quite calm trading and a fall under 4.16 per the euro. The similar situation is observed on other currency pairs connected with the zloty – Swiss franc, USD or GBP. Only more volatility on major assets can move the zloty and change the range traded around 4.16 level.

Summarizing, the base case scenario for incoming hours is a range trade at around 4.16 per the euro and 3.41 per the franc with plus/minus 0.01 PLN.

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

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