Thursday, 18 December 2014

Contagion - contagion - contagion - CONTAGION

Yes I did once take a phone call from someone in America convinced that Yugoslavia is the capital of Poland.

The Russian economy is tanking - estimates of a 4%-5% contraction of GDP next year coupled with 10% plus inflation. The Polish economy is sturdy - analysts are still holding to a forecast of 3% GDP growth next year while inflation is invisible. So why did the zloty perform so strangely today?

Opening at 5.34 to the pound, at the time I write it is 5.42, a change of over 1.5% in a day. (How would you like to earn 1.5% return on your capital - not over the space of a year, but during one trading session?)

The word is 'contagion'. Look at these graphs: The first one shows the rouble's performance against the pound today. Note what happened when Putin began his press conference this morning - the rouble began to slide (shown as a rise in the value of the pound on this graph). The pound cost eight roubles more by the middle of the performance than it did when he started. After he announced no foreign exchange controls on exporters, the rouble regained its composure somewhat. [All graphs courtesy of]

The zloty (considered by FX traders in New York and London as the currency of a former Soviet republic or something like that) did that same dip as the rouble - but then kept on falling. The zloty is traded around the clock, so while rouble trading ceased for the day at 18:00 CET, zlotys are still being bought and sold as I write.

Let's look at other parts of the former Soviet Union, as perceived by dimmer members of the foreign exchange community... Czechoslovakia - (hang on - consults Wikipedia) - er... Czech Republic...

Uh... and...err... Hungaria...

See the resemblance? What's the difference between these countries? They are somewhere between the eurozone and Russia. Never mind the different fundamentals and forecasts, it's perceptions that count.

Having galloped along towards their Christmas bonuses, the FX traders sniffed an opportunity to make a very quick (and not insignificant) buck. The weakening of the three Central European currencies are good news to exporters in the region, but somehow I doubt it will hold. Having breeched the 5.40 = 1 GBP barrier, the zloty is stabilising and my bet is that market fundamentals will see some profit-taking and a return to 5.25 = 1 GBP before the New Year. The strong pound is also good news to the hundreds of thousands of Poles working in the UK who remit money to their families in Poland - an extra 15 grosze for every pound they send home.

I took advantage of today's sharp move spotting an opportunity to sell sterling at the top of the tree. If you want to shift GBPs into PLNs, don't - whatever you do - use the services of the UK high street banks - they will fleece you. I used the services of OneMoneyMail (Sami Swoi), negotiating a far better exchange rate than the high street banks would offer (like 10+ grosze to the pound better), and a mere fiver for next-day transfer to my Polish bank account. Very easy and convenient service - I was amazed at how quickly it all went.

Back to macroeconomic fundamentals though. Politicians can huff and puff and make all sorts of pronouncements. But, to quote Daniel Gross from the Daily Beast: "The currency markets can't be bought off... They are faceless, merciless and swift. Every day, they are passing judgment on regimes around the world. Russia's caving rouble doesn't just make Putin look bad, it has real and instant effects at home...
[the] hedge funds, financial institutions, individual investors, companies and central banks that make up the vast foreign-currency exchange market are turning against Putin. They are not punishing Russia because they don't like the country's geopolitics. They are doing so because they don't like the underlying trends that dictate the relative value of the rouble."

So - are the markets punishing Poland, Hungary and the Czech Republic because of their underlying trends?

In Poland's case, the value of exports match the value of imports. There is good economic growth (3.3% in the third quarter of this year), falling unemployment, price stability and political stability. Which is why I've bet on the zloty regaining its lost ground by the end of this year.

Let's take a long-term view then - here's the Polish zloty against the pound over the past ten years:

...And here's the rouble:

This is the underlying fundamental story - one economy has diversified, globalised, opened up to foreign investment, innovated - the other is totally dependent on the sale of natural resources, plundered from the state by a gang of ex-spooks hell-bent on enriching themselves.

This time last year:
Muddy Karczunkowska

This time three years ago:
Ul. Trombity - a step closer to dry feet?

This time four years ago:
Matters of style

This time five years ago:
Real winter hits Warsaw

This time six years ago:
This is not Mazowsze, no?

No comments: