Polish Zloty (EUR/PLN) – Support at 4.15 sustain the attack
The recently published macro reports do not give us a reason to be optimistic. U.S data shows the slowdown in the world’s largest economy is still unfolding. The bond auction in Spain reminded us of the issue in Europe and the decision of the German parliament giving a green light to the transfer of funds to Spanish banks does not solve the problem. On the other hand, technology companies have been showing slighlty better results but this is not enough to sustain the negative sentiment, which was created by Bernanke’s speeches. How does the Zloty react to this negative news and increased risk aversion? It keeps rallying and gaining in value. Despite the not so promising macro data publications from the local economy – Core CPI remained at 2.3% but industrial production increased only by 1.2% in June (on a yearly basis). The demand of foreing capital for Polish Treasuries remain high, which already caused the yields on 10y Treasuries to keep reaching record lows, this time 4.84% (lowest since the year 2006). This Zloty rally cannot last long. The local economy is showing signs of fatigue and it will be even more affected by external factors (China, Eurozone, U.S – so called „fiscal cliff” where a large amount of tax cuts is about to expire). The good news is the MPC has one more powerful weapon it might use (but has not yet) if the slowdown is drastic – interest rate cuts. The PLN will be affected but the sellout should not be dramatic – the local economy exhibits growth potential that other EU countries cannnot match at this point.
Pic.1 EUR/PLN D1Chart
From the technical analysis standpoint, the Zloty extended its gains from last week. The market continued the descent all the way to the crucial support at 4.15. This support is not only the lows from May, but also the lower limit of the falling wedge price formation and so far it sustained the attack. It was another test of the lower limit of the falling wedge, again unsuccessful. We can expect a rebound now, which should take the EUR/PLN to 4.19, the area where the upper limit runs. The stochastic oscillator being below 20 also suggest a rebound since the market seems oversold. Breaking the resistance of 4.19 would take the market right away to 4.20 and if this resistance is surpassed, 4.22 will be the next target. On the other hand, if the EUR/PLN manages to break the crucial support of 4.15 (permanently, not just testing it like this past week) the next supports (targets) would be at 4.12 and 4.10.
Hungarian Forint (EUR/HUF) – IMF making itself at home in Budapest
Global investors are getting hungry for greater economic activity around the world but besides monetary stimulus, hope for other lifebelts is still not visible. Economic sentiment in Germany and the Eurozone further declined for the third month in row. On the other side of the Atlantic Philly Fed index, payrolls and Fed’s Beige Book all depicted a less upbeat situation.
Meanwhile investors chose to park their money in safe haven bonds even with negative interest rates but interestingly Central-European markets also were popular with Hungarian 10Y bonds dropping to 18 month low at 7,25% secondary market level. Looking at the 5 day HUF performance before the close of European stock markets a moderate 1,4% depreciation can be seen against the euro and the greenback that was rather technically driven.
On the fundamental side the ongoing EU/IMF credit facility talks are running in polite silence as both parties agreed not to comment the negotiations. Yet the portal index.hu brought down some pictures about the IMF delegation walking around casually on the streets of Budapest, having lunch and once even crossing the pedestrian red light during the visit to the National Development Agency.
Pic.2 EUR/HUF D1 Chart
As it is seen on the daily EURHUF chart the price has reached the crucial 284,35 support level and made a rebound on Friday. For the future most market participants are expecting tensions to rise around the loan agreement talks in which scenario the EUR/HUF rate would climb toward the 38.2% fib resistance zone. Also the MNB might surprise with a rate cut on Tuesday, reducing the swap (interest rate) appeal of the forint. A bigger sell off might even lead to a retest of the 200 day moving average above the 295 rate.
Romanian Leu (EUR/RON) – Referendum on the impeachment boosts Euro buyers
The speculators got the message: the NBR is not aggressively defending the Leu, and until the referendum on the impeachment of the President, next Sunday, uncertainty is likely to prevail, providing grounds for a sliding currency. Local issues concerning the political turmoil and respect for the rule of law have been the focus of media both at home and in the main European capitals have helped push the Euro towards record levels against RON. Liquidity is abundant at short maturities, with low interest rates a further drag for the currency that used to be attractive because of its yield differential. The NBR would likely avoid spending too much of its reserves to defend the currency as it forecasts volatile European environment and it will have to repay directly out of its chest part of the IMF loans, this year and more so in 2013. And even after the vote on the matter of should the President go, in both possible outcomes, some sort of political risks remain. The market seems eager to capitalize on those risks before the fact, and that may mean 4,60 would not stand for too long.
Uptrend on, and 4,60 is within reach. The attack of the Euro buyers could possibly be hampered by the upper line of the larger trend channel offering the next resistance of importance, around 4,6150. A break above this mark would lead the prices towards a push inside the more dynamic, shorter term channel, meaning a possible impulse up to 4.65. The market looks really volatile in the end of the week, and that may bring some quick developments as the date of the referendum nears. Though the upside is favored, with RSI in the overbought area but not flashing red through a divergence with the price, proper risk control means taking into account the technical possibility of a move towards 4.5373 on a break of the support at 4.5688.
Pic.3 EUR/RON D1 Chart