Polish Zloty (EUR/PLN) – Weak macro outlook

As investors are being hit with mixed macro data from the major economies, local factors more and more affect emerging market currencies. This past week we have seen the continuation of weak macro data being published from the Polish economy. Retails sales dropped by 2.5% in December (on a yearly basis), a number not seen in a long time. The unemployment rate reached 13.4% (from the previous 12.9%) showing a weakening labor market. The retail sales figures are somehow disturbing as much of Polish GDP depends upon consumption. With this macro data being published (along with declining industrial production and lower PMI reports) I am anxiously awaiting for the MPC moves. It seems interest rates will be cut one more time (two at the most) and then the MPC will hold on with further monetary policy loosening and take time to analyze the situation. I would rather see a larger one-time cut (by 50 or 75bp) since I do not think there is time to waste. The economy will grow this year but I want to see the MPC reacting to the recent declines.

We are observing an interest situation on the EUR/PLN daily chart. The market, after breezing through the crucial resistance of 4.14, it continued the upward move to reach 4.1950 (we see that the 200 MA was also broken), which is 41.4% retracement level of the last downward move. If the bulls manage to break this resistance, the market can target the 4.22 – 4.23 area. If not, the EUR/PLN should retreat to 4.16, where is the first support. The stochastic oscillator suggests the market is overbought and that a corrective movement is expected. Much will depend on external factors. Macro news from the Polish economy do not provide any support to the PLN and only positive global sentiment can cause the Zloty to appreciate. Otherwise, we should see the EUR/PLN climbing to the resistances mentioned above.

Pic.1 EUR/PLN D1 Chart

Hungarian Forint (EUR/HUF) – forint weakness to hault rate cut?

The Hungarian forint remained to be the most vulnerable CE currency as the election of the new central bank president in March suggests unconventional monetary policy implementation including bond purchases on secondary market or even the use of foreign exchange reserves.

The forint depreciated 1.8 percent against the euro in five days reaching a 7-month low at the 298,50 level. The usual positive correlation with the euro did not work out most of the days. High pressure has hit the forint after the release of November retail sales figure on Friday that reported a 4.1 percent fall from a year earlier. The data points out long lasting weakness in domestic consumption a hardship that will most likely cause a headache for the monetary board ahead of the interest rate decision on Tuesday. Markets consensus is getting less dovish as EURHUF rate approaches the round 300 level but still 19 out of 20 economists surveyed by Bloomberg expect a cut to 5.5 percent.

Technically, the EUR/HUF chart presents a smooth long price action with a double top formation on H4 timeframe. The question of a new high above the current 298,50 resistance level is more fundamental driven than technical as volatility can easily break any level of forint pairs in case of breaking news. On shorter timeframes a quick correction is more than likely towards the ascending trendline and 100 period moving average around the 292.90 level. Ahead of the rate decision due to January 29th the continuation of the long trend is more likely.

Pic.2 EUR/HUF D1 Chart

Romanian Leu (EUR/RON) – Apparently moving closer to 4.40

EUR/RON has been on the rise, reversing from levels close to 4.30 that appeared too strong (fundamentally speaking) for the Leu. Once the JPMorgan EM index inclusion for (Romanian public debt) buzz faded, Euro got the market’s attention again. It is possible that the National Bank (that does not comment on its market intervention) may have put a line (of support) in the charts (well, sand if you wish) at 4.32, in order to keep the euphoria at a safe distance away from 4.30. As one of the officials put it, NBR does not defend specific levels, but insists on limiting volatility that can be harmful when reversed, and velocity might have increased radically on a break below 4.30.

On the “real” front, the government announced its budget plans for 2013. They are based on a growth of 1.6% this year and a 2.1% deficit, and appear to have supported the backtracking of the RON. The plan includes infrastructure spending cuts (except for those with non-returnable EU funding), a widening of the base of taxation (especially in the agricultural sector), a higher minimum wage and increase in overall public wage spending. It would also introduce higher taxation on special income from the liberalization of natural gas prices and bigger excise duties. The pack of higher fiscal pressure and more welfare and public sector pay did not actually get the market into an enthousiastic roll. Yet as global market feeling is going to be more important in deciding for the RON trajectory, a buoyant environment could help stabilize the rate; without such help, risks are to the EUR/RON upside.

A break of the downtrend channel occurred even before a true test of 4.30, and the 4.3469 resistance was also easy to break. Playing outside of the downward channel is always risky, and may lead to a test of the resistance at 4.4000 which happens to be the 38.2% retracement of the latest downtrend. More resistance is placed at 4.4410. A weekly close at or above 4.37 would send a candlestick bullish signal for the next 5 trading days. On the down path (a little less likely, but not to be ignored as a possibility) there is the low of 4.3090, followed by 4.3000, a former strong resistance level, and psychological anchor.