Afternoon analysis 31.12.2015

, автор:

Marcin Lipka

Low oil prices and weak PMIs from Russia are pushing the rouble lower. China tries to fight with arbitrage transactions on the currency. Low liquidity on the zloty negatively affects its rate. Weekly summary of the most important events on the currency markets and its impact on future FX rates.

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

    No macroeconomic data which may significantly affect the analyzed pairs.

Further rouble depreciation

There is not much action on the global currency market. The EUR/USD is slightly above the 1.0900 level. Close to the recent levels are other dollar pairs with JPY, GBP or CHF. On the other hand, the ruble slump continues and the USD/RUB pair is quoted around 74 level.

Besides the historic day in Russian finance – December 16th 2014 – when fears about capital control and panic rouble sell off pushed the currency lower by 20% at one moment, the rouble is currently at lowest level in history.

Other statistics regarding this currency also look dramatic. Since the beginning of the oil slump the rouble is the weakest currency comparing 153 currencies in the world. In one and half year the RUB lost 53% of the value to the dollar while the USD/RUB pair rose from 34 to 74 level.

The oil slide also affects the real economy. According to the PMI readings published today both manufacturing and services suggest contraction in the coming months. Additionally Markit, which runs the survey claims that “production contracts at sharpest pace since May 2009”.

Moreover the “Financial Times” cites today the state run-owend pollster “VtsIOM” that “39 per cent of Russian households cannot afford to buy either sufficient food or clothing – up from 22 per cent a year ago”. Other major macroeconomic indicators also don't look impressive. The inflation remains at 15% y/y, the GDP shrinks around 4% this year and the retail sales dropped in November by 13.1% y/y. Additionally, according to the December Russian Central Bank statement the economy is expected to shrink by another 0.5-1% in 2016. If there is not major rebound on the oil the odds for significant ruble rebound, similar to that observed in mid-year, are slim.

China wants to limit the yuan speculation

Investors are trying to evaluate what consequences for the yuan might bring the decision from People's Bank of China (PBOC) to curb the speculative moves on the currency. Bloomberg claims, citing its own sources, that the PBOC “has suspended at least two foreign banks from conducting some cross-border yuan business until late March”. It is probably a result of widening spread between the official and offshore yuan valuation.

Several years ago China allowed to exchange the yuan currency outside the mainland. It was supposed to lessen the limits of capital controls. This system, however, has also some disadvantages. When market expects either appreciation or depreciation of the yuan the offshore market may deviate from the official rate.

The similar situation is being observed currently. The official USD/CNY rate is at 6.5 while the offshore tops 6.6. Theoretically some arbitrate transactions should push both rates to the same level, but with capital controls the difference may be long lasting and the market expectations might even widen it and bring more turmoil on the market. As a result the PBOC wanted to curb some arbitrage strategies. It is also possible that the role of CNH rate would be diminished in the future. Recently the PBOC extended the mainland yuan trading and the CNY inclusion to the SDR rate should further liberalize the Chinese currency trading.

The zloty is weaker

The zloty in some limited liquidity trading lost some value. Yesterday the EUR/PLN began the session around 4.23 while today around late morning the euro is worth around 4.27 PLN. The main reason behind the zloty weakness is some slight sentiment deterioration and low liquidity. The bond market is closed and the spread on FX market was approaching around 0.01 PLN which markedly higher than usually.

On Monday the Polish manufacturing PMI reading is scheduled. Economists surveyed by Bloomberg expect that the Markit index would rise to 52.3 points. Considering solid preliminary publications from the euro area (53.1) we may expected even some better data of the Polish PMI and rising also toward 53 points market. If that scenario is realized the EUR/PLN might drop on Monday below 4.25 mark.

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

Range EUR/USD 1.0850-1.0950 1.0750-1.0850 1.0950-1.1050
Range EUR/PLN 4.2400-4.2800 4.2400-4.2800 4.2400-4.2800
Range USD/PLN 3.8800-3.9200 3.9200-3.9600 3.8400-3.8800
Range CHF/PLN 3.9000-3.9400 3.9000-3.9400 3.9000-3.4900

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

Range GBP/USD 1.4850-1.4950 1.4750-1.4850 1.4950-1.5050
Range GBP/PLN 5.7800-5.8200 5.7400-5.7800 5.8200-5.8600

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