Crimea affects emerging market currencies

Polish Zloty (EUR/PLN) – 4.2250 broken

The turmoil in Crimea continues causing a flight to safety, which in turn hurts emerging market currencies. I do not believe that we will have a war but the longer it takes to bring the situation to normality, the longer we will be experiencing increased volatility on financial markets. In Poland, the Zloty depreciated against all the major currencies throughout the week. We can say that Vladimir Putin, Russia’s President, has more influence on the Zloty than Marek Belka, Polish MPC President. The engagement of Poland in the eastern conflict is not bringing anything good to the economy. Recently, there is a possibility of Russia introducing an embargo on Polish meat and food. If that scenario happens, prices in Poland will fall, causing downward pressure on inflation. Inflation remains low, which was confirmed by Friday’s reading of the CPI index – in February, inflation was 0.7% (against the 0.8% forecast) while the January reading was corrected down to 0.5% (from 0.7%). Taking all this into account (Ukraine, embargo, low inflation), interest rates in Poland might be kept it its historic lows even beyond 2014. The Zloty should be under pressure in the upcoming weeks. Still, what movements we will see on currencies on Monday, will depend upon the referendum that will take part during the weekend in Crimea.

Looking at the daily chart we see the EUR/PLN opened in the 4.20 and instantly increase. The crucial 4.2250 resistance was broken on Thursday, with the Zloty reaching 4.24, where the upward trendline runs. If the market breaks this resistance, it will attack 4.26. On the other hand, the market might be overbought a little (confirmed by the stochastic oscillator). A corrective movement could take the EUR/PLN down to 4.2250. Levels at 4.09 and lower could be reached if the Crimea conflict is solved peacefully. Otherwise, the EUR/PLN is expected to continue the upward move.

Pic.1 EUR/PLN D1 Chart

Hungarian Forint (EUR/HUF) – NBH is walking on very thin ice

Ukraine and Russia were the main determinants of the Hungarian currency. Due to the proximity of Ukraine to Hungary, the Forint felt every little vibration from the Crimea conflict. The other factor that can bring more downward pressure to the Forint is the National Bank of Hungary. The interest rate decision is coming soon and it is impatiently awaited. On the previous meeting, only two rate setters voted against the NBH's governor, György Matolcsy. One of them, Gyula Pleschinger, member of the central bank’s Monetary Council said "there is a way to to lower interest rates further, but risks would already be exponentially increased by the fact that another reduction is no longer in harmony with the potential minimum advantage the next rate cut could bring about". NBH will be walking on very thin ice if next week it cuts rates to their record lows of 2.70%. Pleschinger also said that the current Forint exchange rate does not jeopardize the inflation target. In fact, the target remains safely achievable even if the EUR/HUF hovers around the weekend of its recent fluctuation range. At the moment, the Forint is touching its 2 years low against the Euro at 315.

Taking a look at the H4 chart we see how the Euro bulls are trying to break the 315 resistance again. The EUR/HUF could abandon the triangle formation, in which it has been trading for the past few weeks. Also, it is important to note that the ATR indicator starts to rise again. The upcoming week, the main factors affecting the HUF will the NBH interest decision and the news from the Crimea conflict.

Pic.2 EUR/HUF H4 Chart

Romanian Leu (EUR/RON) – Minor upside EUR/RON pressure

EUR/RON floated around 4.50 this week as well, in a bout of low volatility that may pre-sage stormier waterways. Construction work fell by 4.3% in January, yet exports continued to outpace imports, with 6.3% vs. 4.6% in Jan 2014 vs. 2013. Even though on the internal political scene the curtain has been let down – no show currently going on – and there is hope that flows from exports and EU cohesion funds will prop up the RON, the drama unfolding in Crimea just a few hundred kilometres away may not be insulated from the market much longer. We view above normal risk of RON weakness ahead.

The technical view is of a rising trend, enhancing importance of 4.50 as a support area. There is enough playground between 4.50 and 4.5195 for this pair next week, if the game is to become lateral. We view however reasonable chances for a push towards 4.52, within the uptrend. Support is found lower at 4.4850 while resistance is at 4.5368 and then the pointed local high of 4.5510.

Pic. 3 EUR/RON Daily Chart