FX Update: Poland downgraded as new gov't goes after banks

• Friday session sees S&P 500 hit support around 1,860

• China releases new measures to combat currency speculation

• S&P release downgrade of Polish sovereign debt rating

Friday's market action saw fresh lows in the major equity indices and oil prices though there was an attempt to bounce in the dying minutes of the session when the S&P 500 briefly poked below the key lows for 2015.

That support – about 1,860 in the cash index – is likely to coincide with USDJPY in the 116.00/25 area if risk appetite continues to sour this week.

China was out over the weekend with new measures aimed at making it more difficult to speculate against the currency, again taking aim at offshore yuan speculation as officials are likely very disgruntled that foreign hedge funds are in a feeding frenzy looking to profit on a further devaluation of the yuan. The risk of extreme policy measures remains very high.

Poland saws its sovereign debt rating downgraded by Standard & Poor, which cited the weakening of the independence of major institutions and threatened further downgrades. This saw EURPLN pulling to new highs not seen since late 2011.

Polish authorities are trying to put on a brave face in the wake of the decline, but the new government’s stance on the media, clear intentions to interfere with the central bank’s independence, and punitive measures on banks (new taxes and a possible revaluation of legacy CHF-denominated mortgages), many of them foreign owned, are a dangerous cocktail for PLN on the risk to capital flows leaving the country.

Much of the trading in EURPLN in recent years has been about the convergence with the euro area, but it is now clear that the market is justified in revisiting that complacent assumption. Let’s not let the range of the last several years in EURPLN fool us – there is risk of serious further PLN weakness if the new government continues down this path and foreign capital flees.

Chart: GBPUSD

Cable has descended all the way to the lows of 2010 below 1.4250 as the outlook on sterling has changed so dramatically from the days of the pro-cyclical focus when it was all about the Bank of England eventually joining the Federal Reserve as the only other central bank hiking rates.

The USD retains some safe haven status in times of trouble, while the UK clearly has none. For sterling’s prospects to improve, we need a bounce in risk appetite and some solid data out of the UK this week.

The G10 rundown

USD: US markets closed today and little data this week as the greenback has performed relatively well, given that the market has reduced the anticipated Fed funds rate for the end of this year by a full 25 basis points in the first two trading weeks of the year.

EUR: interesting this week to see how the euro performs, both in terms of the correlation with gyrations in risk appetite, and around the European Central Bank meeting on Thursday, where ECB president Mario Draghi has a tough task to don the armor of a real currency warrior after the December 3 debacle.

JPY: Remains the market’s favoured “safe haven” on adverse developments in risk appetite, with Kuroda not doing much to discourage this over the weekend with bland comments. USDJPY around 116.00/25 critical as a technical level, while 118.00/50 is the key upside zone.

GBP: No relief in sight for GBP on Brexit worries and focus on the risk-off trade. This week’s employment/earnings data and general risk sentiment the key drivers for GBP, as well as GBPUSD poking at the 2010 lows below 1.4250.

CHF: The market doesn’t have much of an angle on the CHF, which doesn’t perform in any notable correlation with risk appetite . Encouraging for USDCHF bulls that we remain above parity to start the week after all of the recent turmoil – watching the 1.0120 area there.

AUD: New lows for the cycle after 0.6900 gave way late Friday in illiquid trading conditions. That level is the key resistance now as we watch how the risk cookie crumbles this week.

CAD: Bank of Canada meeting in focus this week as market has priced in slightly better than 50/50 odds of a rate cut. The guidance is likely to be as important as an actual rate move, and the direction of oil prices after the recent collapse will also play a strong role, as ever.

NZD: The kiwi takes a stab at bouncing after AUDNZD tried to break higher and NZDUSD touched below 0.6430 area support, but hard to see any bounce lasting if risk appetite remains nervous. Note the CPI up on Thursday as the key event risk of the week for NZD, as a downside miss could see anticipation of Reserve Bank of New Zealand rate cuts picking up again.

SEK: The rally in EURSEK picked up pace Friday amid the risk-off tone and we have taken out key resistance in the 9.30/35 area, as well as the rejecting our assumption that the recent lack of upside suggested SEK resilience. Let’s see what happens this week, but we see more upside risk now after the Friday rally, particularly if risk appetite remains on a nervous footing.

NOK: The collapse in oil prices – particularly Brent, which is now trading well below US-based WTI prices – keeping EURNOK from trying to follow through lower. A sustained low oil price, even if we manage to stabilise here and bounce back a bit, will do profound damage to Norway’s economy, so recovery may be somewhat limited for NOK.

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