Polish Zloty (EUR/PLN) – PLN retreats on weak local macro dataFrom the beginning of the week it seemed that the euphoria caused by central banks actions is gone and that markets realized this is not the end of the problems. Emerging markets’ currencies retreated, giving up their last week’s gains. The second half of the week though was much more optimistic with another central bank, this time the BoJ, adding stimuls to the economy (10 trillion yen to be exact). Also rumors that Spain might apply for financial aid (which in turn would make the ECB to buy its bonds) helped markets to recover. The Zloty market danced to that music played by foreign sentiment, but also local factors affecetd its movement this past week. Again in the spotlight were macro news that confirmed the Polish economy is slowing and that the MPC should strongly consider cutting interest rates. Industrial production increased only by 0,5% in August (on a yearly basis) whil core CPI inflation declined to 2,1% (from the previous reading of 2,3%). More MPC members acknowledge the direction of monetary policy might change and that an interest cut by even 50 bp could be considered. This does not move the Zloty market so much as one interest rate cut is already discounted by the market. The MPC at the same time denied the necessity of an intervention on the market if the Zloty starts to depreciate more.
Pic.1 EUR/PLN D1 Chart
Last week’s Zlotys appreciation against the Euro was stopped at the 4.05 level from which it rebounded. The market reached the resistance at 4.18 (38.2% retracement level of the last downward movement) in a very dynamic move where it was denied further advancement. This resistance is strong as that is the level where the 200 Moving Average runs (green line on the graph). Yestardy the market formed a bearish shooting star candlestick formation (with a small, lower shadow, circled area) causing the ERU/PLN to retreat to its closest support at 4.12. The market remains in the 4.12 – 4-18 range (yellow rectangle) and only breaking out of it would trigger a stronger move. It can happen next week as we will be closely watching news coming out from Spain and a possible bailout. Breaking 4.18 would make the market target 4.20 and then 4.22. On the other hand, if the rectangle is broken form the bottom, the EUR/PLN will try to test the 4.10 and then 4.05 support levels.
Hungarian Forint (EUR/HUF) – sovereign risk premium on yearly lowIn the region of Central Europe, Hungary has the highest debt to GDP ratio (80%) paired with the gloomiest economic growth outlook for this year but still the forint is the top performing emerging currency in 2012. The reason is simple, investors are playing in favor of an economic trend change, and are pricing in a positive turn in debt dynamics while all other nations are expanding fiscal and monetary stimulus programs.
The positive pricing is reflected in the CDS rates as sovereign risk premium hovers around one-year lows around 370 bps. Interest rates on the longer side of the yield curve are steady around 7,5% for several weeks now. What considers the forint crosses only the comments from government officials about the upcoming EU/IMF talks could cause bigger swings but even these moves were short lived.
On Friday the chief of the Government Debt Agency reiterated that no foreign currency bond issuance can be expected before the cabinet strikes a deal on a credit facility with the IMF/EU. The comment supported the market view that Hungary might acquire a 15 billion euro standby loan agreement to push down the current 4% GDP related debt financing costs.
Pic.2 EUR/HUF D1 Chart
Trend on the EUR/HUF chart is market out by the 100 DMA that in September has already stopped bulls twice. The evolved situation necessarily must lead to a break out as the price is squeezed into a tiny area by the upward trendline and the moving average and daily range is also declining. The continuation of the risk on trading mode on global markets can push the EUR/HUF chart towards the yearly lows around the local lows of 275 EUR/HUF level. The double top formation on the daily chart also increases the chance of a further downward move.
Romanian Leu (EUR/RON) – Happens to be on the riseIt was a slide (gentle, as previewed) for the Romanian Leu against the Euro last week. The rate return for the speculative mind has been decreasing since the NBR let go of its cap on liquidity measures, and that in turn left RON buyers with less energy. The Financial Stability Report for 2012 showed that nonperforming loans increased in first half of 2012 to 16.8% of total loans, though the pace of increase seems to be slowing, after a January bump. The exchange rate risks continued to cloud the banking system outlook, as about 70% of loans are FX-flavoured. That could only mean that the Bank would stand ready to “iron” out in due time any spikes in the exchange rate, but it does not preclude the market from instilling its own, larger trends. The talk of an increase in the 16% rate that is at the center of the tax system could prove disruptive for the RON, especially if actually put into practice. Low tax environment has been one of the main forces attracting FDI into Romania. Despite a risk-happy global feeling, the Leu might still prove to be on the retreat in front of the Euro.
Technical View: Since the market has been strolling closer to 4.5222, the famous 38.2% retracement of the previous downturn, it may now be time for a breach, that could take us either towards 4.5483, half of the fall or the upper trend channel line, around 5.5350; and then one has on his/her radar the inverted head and shoulders target of 4.5643. The place to go on a break below the trendline around 4.49 is the trough of 4.4416.
Pic.3 EUR/RON D1 Chart