Back to low volatility

Polish Zloty (EUR/PLN) – boring PLN market

Currency markets calmed down and we are back to low volatility times. The EU officials are discussing further sanctions against Russia but even if such are introduced, they should not affect the markets. There are little occasions to trade big as even supposedly volatile currencies like the PLN, move in really narrow ranges. The future monetary policy by the MPC will be determined by macro data from the Polish economy, but the one published this past week do not change the outlook. Unemployment rate slightly declined to 12% while retails sales in June (yearly basis) increased by 1.2%, which was much less than the forecasted 4.3%. So, inflation will remain low and no sudden moves by the MPC are expected at this moment. In this environment it is hard to expect any big movements on the PLN market. This past week the EUR/PLN traded in a very narrow 100 pips range.

Looking at the daily chart we see that after bouncing back from the downward trendline, the EUR/PLN declined to the 4.1350 support. It is trying to rebound but it was able to reach only 4.1450. For an extended downward move, the 4.1350 support need to be broken – then the target for the market would be 4.12. If the 4.1450 resistance is broken though, I expect a more dynamic upward movement, even towards 4.17.

Pic.1 EUR/PLN D1 Chart

Hungarian Forint (EUR/HUF) – The final cut?

The National Bank of Hungary stated it will end the interest rate cuts cycle. This past week, the NBH decreased interest rates one more time - by 20 basis points to 2.10%, which was more than the market expected. After a long period (from August 2012) NBH's Monetary Council this seems the moment interest rate reduction could come to a halt. According to the bank’s officials, the current level could ensure the achievement of the CPI target. The larger than expected rate cut did not have much effect on the Hungarian currency. Market reaction was milder than we expected. The EUR/HUF fell under the 310 levels and the Forint has still some power to show. However, there is one area of the market which needs to be closely observed - we see that demand for government bonds has dropped. Furthermore,– as the Government Debt Management Agency (ÁKK) has published, yields started to increase. Anyhow, there is no crucial macro data for next week so we can focus on the technical levels.

Taking a look at the daily chart we can see the 78.6% Fibonacci retracement level stopped the euro bulls again. As we said previously, the 310 level was the key support for the Forint. When it was broken, the Hungarian currency got back to the 306 zone really quickly. Next week we should focus on the 306.50 support because if it is broken, the decline could speed up. Next week we do not expect huge movements on the EUR/HUF, only a little shuttle between the 306 and 310 levels.

Pic.2 EUR/HUF D1 Chart

Romanian Leu (EUR/RON) – Help from outside

The previous week showed the Romanian Leu can offer good playground for speculation against the currency, while this one proved this opposite may be true as well, given the right conditions. A source of worries in the time of the journey past 4.40, the cut in wage tax is seen as less of a threat to the deficit now that the government displayed a more definite determination to find added revenue to balance the national chest. A strong helping hand was lent by JPMorgan’s inclusion of Romanian bonds into the GBI-EM Global Diversified Investment Grade Index. A similar measure last year led to gains of more than 2% over a few weeks, and the market both remembered and acted upon that outcome. A new round of worry over Ukraine – given the governmental situation and Russian troop positioning – organizes a regional contrast working for the RON. We view next week EUR/RON as open to fluctuation around 4.40.

Technical analysis view defines a reasonably deep correction of the upside breakout. We are talking again about support at 4.3902 and 4.3804, while the closest relevant resistance is placed at 4.4150 and then 4.42. Could there be a reason to see a morning star formation on the chart, with a decent degree of approximation? We believe so, therefore at least the beginning of next week may bring a little swing above 4.40. Yet such a powerful reversal clearly shows the bears may soon regain control.