Polish Zloty (EUR/PLN) – Corrective movement on the PLN, but the 4.00 level still in sight

It is summertime and we can be experiencing this when trading on emerging market currencies this past week. Volatility was low since most traders are waiting for actions (or announcements of lack of action) by major central banks. Also, Wednesday was a major holiday in Poland (and other various countries in europe) so local traders were out of the market. Sometimes this kind of holidays are occassion for foreign traders (mostly London based institutions) to speculate on the Zloty, but this time trading volumes were dramatically low. But the whole week was not so boring as it might sound. The debt crisis in Europe is affecting the local economy and CPI inflation keeps declining, this time to 4% (from the previous 4,3% reading) on a yearly basis. A very clear statement was made by Elzbieta Chojna-Duch, Polish MPC member – the current economic situation makes it for the MPC to strongly consider and interest rate cut, even this year. From the macroeconomic perspective: Minister of Finance, Jacek Rostowski, confirmed the Ministry of Finance (MF) expects a 2,5% GDP growth this year and no recession in 2013 (MF’s Chief Economists, Ludwik Kotecki, forecasts GDP growth in the 2%-2,5% range). Also, in the 2012 Convergence Program Actualization, the governmetn announced that the public finances deficit will be reduced below 3% of GDP in 2012, to 2,2% in 2013 and to 1,6% in 2014. In 2015 the deficit should be at the average budgeted target of 0,9% of GDP. All good news, taking into account recession will not hit hard the Eurozone.

Pic.1 EUR/PLN D1Chart

The EUR/PLN experienced a slight corrective movement this past rebounding from its yearly lows of 4.03. As we can observe on the graph, the upward move lost power at 4.10, which at this moment is the closest resistance to be tested by the market. If broken, the PLN should depreciate to 4.12, 23.6% retracement of the last downward move and where the downward trendline runs. Breaking that resistance would push the EUR/PLN much higher, all the way to 4.18 (38.2% retracement level). In the oppostie scenario, the Zloty will regain ground and test the local lows of 4.03. If this support is broken,the next target would be the crucial 4.00, and here is where the real fight amogn bulls and bears will happen. If the Zloty breathes through that level, traders should target 3.90. Even in case of a rebound from 4.00, I would expect another try of the market to break it.

Hungarian Forint (EUR/HUF) – growth and debt both get slimmer

The end of the 2012 London summer Olympics fills all Hungarians with pleasurable memories especially as the country having less than 10 million citizens finished on the 9th place in overall medal rankings. On the FX front the forint still deserves respect, at least among traders that prefer currencies for carry trade as it is still in top 10 rankings compared to the greenback since the beginning of this year. During this week’s trading forint lost value compared to the dollar four days out of five but thanks to Angela Merkel’s Thursday comments it still can finish the week with only slight loss. In the book of fundamental tales main focus was on the CEE GDP data, where Hungary didn’t amuse investors at al. Following the Czechs the economy is technically in recession with the -0,2% Q2 figure. Officially the Ministry of Economy blamed the external environment for the slowdown which is partially true as export figures didn’t contribute to growth as much as in the previous figure. The Achilles heel of the Hungarian economy is still the domestic consumption which was hit this year with EU’s highest VAT rate (27%) and increased excise taxes by the government. As a result the National Bank will also face a big dilemma on the August 28th rate setting meeting as inflation accelerated to 5,8% in July. This stagflation like situation is the nightmare of central bankers, as a rate cutting can be counterproductive. On the positive side, the media embraced that Hungary’s gross government debt fell to 77.6 compared to GDP from March when it was 79% as the forint appreciated.

Pic.2 EUR/HUF W1 Chart

Technically a noteworthy picture forms on the EUR/HUF weekly chart in the form of bullish Gartley pattern. Local low (point D) is just the 78,6% Fibonacci retracement level of the low-high levels of 2011. A spinning top candlestick formation also indicates a reversal, a short squeeze therefore is a rational decision of many long term traders as speculators might find a low risk entry opportunity in recent price levels.

For the next week the forint will have a clear trading corridor between the levels of 274,70-282 compared to the euro but signs favor the higher price levels.

Romanian Leu (EUR/RON) – A feeling of the good old days

The Romanian Leu performed well this week, returning a feeling of the good old days, with low volatility and a favourable market opinion with not much news agitating the small RON ship in the big exchange waters. The National Bank could be largely “blamed” for this, as the decision to limit market liquidity again, offering a maximum of 5 bn. RON at its financing operations scared off most speculators. However it is unlikely that tool would be used for the longer term, as it would drive borrowing costs higher, an unlikely outcome for the weak economy. Markets now wait for the Constitutional Court decision on the referendum, due next week on Tuesday. It is likely that that formal opinion will put an end to this round of skirmishing, but not really end the war. On the macro side, current account deficit shrank by 29% this year through June, yet it was only funded about 25% out of FDI. Romania remains vulnerable to sudden dryups in liquidity, and the IMF suggested the MoF raise its buffer to more comfortable levels. EUR/RON has gotten a lot more breathing space recently, yet its downside potential starts to look limited. A risk-off approach would however likely be balanced by further distancing from the political turmoil, leaving room for some volatility around 4.50.

Moving to technical analysis views, the market has been pushing for a test of the trendline, and it almost got what it wanted. Support there at 4.46 for the first part of the week appears quite strong, yet a temporary break towards 4.4343, previous support area is not out of the range of possibilities. The main, favoured scenario would lead to a rising move in the logic of the inverted hammer, aiming for the 41.4% retracement of the last down push, toward 4.5462. From there, it would take angry investors or very determined speculators to get back over 4.60, and that appears a bit too much for the time being. A consolidation in the lower half of the trend channel appears the more likely option afterwards.

Pic.3 EUR/RON D1 Chart