It is summertime and despite all the events through which economies are going right now, volatility is lower on the Zloty market. It also seems the known correlation of the Zloty market to the EUR/USD has been broken (a EUR/USD decline, usually caused by increased risk aversion, would make emerging markets’ currencies depreciate). As for the Zloty market, its appreciation this past week was partially caused by foreing investors’ increased demand for Polish debt instruments. It seems in search for safer investments, investors appreciate Polish bonds which are being bought heavily for some time already. The 10-year Treasuries yields declined below 5% on Friday for the first time since March of 2006. Bond trading volumes are high, which confirms that foreing capital is enganged on the market. The increased interest in local bonds (which in turn helps the Zloty) can be explained by the positive outlook of the economy, growth perspectives but also because of hte recent ECB decision which decreased the deposit rate to zero. The market ignored the news about higher CPI inflation in June (reading of 4.3%, higher than the 4.1% forecast) since if the MPC plans any changes of monetary policy right now, it would be an interest rate cut. That was actually mentioned by MPC’s president, Marek Belka, who stated if the economy will need a boost, the MPC is ready to step in.
Enough of the macro background, let’s take a look what is going on on the graph (daily chart). The EUR/ PLN has beed declining since the beginning of June and currently is systematically approaching the upper limit of the falling wedge after testing the line running through the bottoms. The stochastic oscillator is showing the market might be oversold and the 4.22 are could be the first resistance for bulls. Only a breakthrough from the wedge formation should trigger a stronger move towards 4.25. On the other hand if the EUR/PLN remains in the falling wedge formation, the next support for the market could be the 4.15 low.
Pic.1 EUR/PLN D1Chart
Hungarian Forint (EUR/HUF) –IMF arrives to Hungary
Hungarian forint market became lively on the week after speculation about a possible rate cut on July 24th MNB rate setting appeared in financial media related to external MPC member’s comments. Janos Cinkotai and Gyorgy Kocziszky believe the ignition of easing is possible even before assuring the €15 billion IMF credit line is in the budgetary safe.
The delegation from Washington will arrive to Budapest on July 17th with a plan to secure a relatively strict Stand By Arrangment facility which the Hungarian government rhetorically refused to accept so far, aiming for a less stringent loan instruments. The negotiations will certainly have sensitive points when they arrive to the “obligations part” of the borrower causing greater volatility in Hungarian money market instruments.
In the meantime consumer prices rose to 5.6 percent in June compared to previous year making Hungarian inflation highest in the European Union. This kind of price action makes it rather hard to justify dovish monetary views nevertheless the EURHUF rate remained relatively stable during the week, hovering around the 286-290 range.
Pic.2 EUR/HUF D1 Chart
Technically the EUR/HUF pair is in sideways since the end of June. On Friday the top of the rectangle has stopped long positions leading to additional gains against the troubled euro. Next week the improvement of the deeply negative sentiment can bring down the EUR/HUF rate back to the 284.30 level from which it already retraced twice in two weeks.
Further break down is less expected since it would mean the retest of 2012 lows even before tangible EU/IMF talks results. Also the early speculation on monetary easing is playing on hands of EUR/HUF long positions therefore a corrective scenario can turn the pair back above the 290 levels. On D1 chart traders might eye the 50% fibo retracement level around the 295.60 level.
Romanian Leu (EUR/RON) – Full sail to record highs
Checks and controls off, and the EUR/RON departed on a journey to uncharted waters. Driving the steamboat now turned speedboat of the exchange rate is the political storm that created high waves in Brussels, Paris and Berlin over the swift changes in Bucharest that appear borderline unconstitutional. Talk of political change leading to economic measures derailing the IMF accord spooked investors and forced the MoF to pay higher rates at its 400 mln RON issue. The minor increase in the inflation rate to 2.04% still allows for a neutral stance of the National Bank, and this doesn’t push the RON higher. Foreign Direct Investment is falling, and only covers about ¼ of the current account deficit in the first 5 months. Consumption is likely to remain weak, because of increasing cost of imports, and agriculture may boost the economy only as much as to avoid contraction. Governor Isarescu suggested that the Bank would not be aggressive in protecting the RON, while avoiding direct talk of the political situation, allowing for a shoot above 4,56 for the first time in history. Market pressure could continue at first next week, although changing the government decision to set the referendum according to the Constitutional Court might bring temporary relief for the Leu.
A consolidation pattern almost fulfilled its target on Friday, the day of the breakout. Resistance of 4.5668 will be watched by bulls, being both the 261.8% extension of the previous correction and the aim in the assumption of the rectangle. A break above only gets everyone thinking about 4.60 area, where upper limits of two trend channels intersect. Consolidation could be an option, as long as the market stays above 4.5375, while support below is placed at 4.5075.
Pic.3 EUR/RON D1 Chart