Local factors cause the moves

Polish Zloty (EUR/PLN): tape recording scandal continues

The main topic in Poland remains the tapes released by “Wprost” magazine, on which various politicians and businessmen discuss political, social, and economical issues. The ruling government received the vote of confidence from the parliament with all the opposition voting against. For financial markets the main question is if the independence of the central bank was compromised. On the recorded tapes, we can hear central bank governor, Marek Belka, discussing the possibility of the central bank helping the government to reduce the budget deficit (by printing money) just months before the upcoming parliamentary elections. The condition would be the resignation of the Minister of Finance at that time, Jacek Rostowski. Marek Belka denies any wrongdoing and has no intentions of resigning. The thing is, he is a decent central bank governor whose knowledge and experience is appreciated. All this is important as the MPC monetary policy decision is coming up. In light of the current events, I doubt the MPC will make any moves. Although an interest rate cut could really be a logical move. This past week we learned that retail sales increased only by 3.8% in May (yearly basis) and let’s not forget that consumption makes a large amount of Polish GDP. The unemployment rate remains high although it declined to 12.5%. The Zloty behaved in a strange way, rather differently than other emerging market currencies. The PLN regained ground after last week’s depreciation but it had to do with profit-taking by EUR/PLN long traders.

Looking at the daily chart we see that the EUR/PLN was unable to break 4.17 (61.8% retracement level of the longer downward move) the previous week and it started to correct its upward move. The correction took down all the way to 4.1325 from which the market rebounded to the 4.15 area (50% retracement of this past week’s downward move). What is next? If euro bulls win the battle, they will take the market up to the resistance of 4.17. If broken, the next target would be 4.20. For a downward move, the 4.13 support needs to broken. In this case the EUR/PLN is expect to reach 4.1150.

Hungarian Forint (EUR/HUF): above 308

There were a lot of factors which affected the EUR/HUF currency rate during the past week. One of the most important events was the foreign currency debt bailout. During the week we could have read some statements from the members of the government about their plans. The ultimate goal is to convert all debt which is in foreign currency into forint. On Friday morning, Viktor Orban, Hungary’s prime minister, was the guest in the public radio and he pointed out that in September the government will arrive to the final solution (public funds will be involved). On Tuesday, the National Bank of Hungary had its interest rate decision where the market was expecting to see further easing. The main interest rate was cut by 10 basis point to its record lows of 2.3%. Low inflation, ECB’s monetary easing and the international situation gave the MPC space to cut it for the 23rd time in a row (world record?). On Thursday, we observed a massive sellout of the HUF after one of the FED members, James Bullard, pointed that monetary tightening in the U.S could come sooner than the market expects. Next week what could affect the EUR/HUF are external factors. As we see on the chart, the forint reached its lowest level against the Euro this month - 309. In the near-term, we expect consolidation on the EUR/HUF chart and trading should be taking place in the 304-306 range.

Romanian Leu (EUR/RON): What it would take to stop RON from gaining

In its tortuously slow move, RON had the upper hand this week, as the market sentiment towards Romania improved proportionally to the increase in desperation for higher yields. A 335 bp difference in the policy rate between Romania and Eurozone is largely reflected throughout the yield curve, and the macro picture places the country on the higher end of growth and stability charts. The economy may grow at or above 2.5% this year, while the current account deficit is projected to dwindle to 2.2% of GDP. The political infighting and recent top-level investigation is not taken very seriously by traders accustomed to a certain level of “volatility” on the public arena. The National Bank has proven to be more worried of a return of hot money bringing in a false feeling of good times, such as in 2007, and deemed the RON rally as unfavorable for the exporters, but this was not enough to challenge the trend. Outright intervention may be the way to prevent further slide of EUR/RON, yet the National Bank, will be reluctant to do so, in our view, before levels closer to 4.30.

Technical analysis view redefines a downtrend with a few daring moves below 4.38. The market did not feel confident enough to break on a daily closing basis, which respects our view in this column, but next week odds for a continuation of the slide have improved markedly. Next support stands at the 127.2% projection of the relevant upside correction, providing the level 4.3681 whereas a cluster of projections and previous support around 4.36 makes it the strongest support candidate. On the upside, 4.40 is where a classic resistance meets the trendline, followed by 4.4150 and 4.4455 as potential barriers.