Daily analysis 12.05.2014:
The market has been waiting for Putin's reaction after referendums in Donetsk and Lugansk regions. There are still plenty of comments after Draghi's recent suggestions to “act” in June. The zloty has been stable to most counterparts with a limited pressure to weaken against the dollar.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- No major macro news that can affect the analyzed pairs.
Ukraine and the ECB
After a strong slide on the EUR/USD on Thursday the move was continued on Friday afternoon and we ended the week on 1-month lows around 1.3750. We can conclude that the EUR/USD has already priced in most of the Draghi's suggestions that the ECB may act in June if the staff projections on inflation warrants such a move.
During the weekend pro-Russian separatists in Lugansk and Donetsk run secession referendums. Despite the fact that the result of the voting was easy to predict, the event brought another set of problems which may emerge pretty soon. Firstly, it is worth to point out that the turnout was pretty high (at least taking into the account long lines in front of polling stations – reported not only by Russian media), which can be an indicator that the increasing part of society shows dissatisfaction with how Kiev handles the issue (being unable to bring back the order combined with many casualties in Odessa or Mariupol). More importantly, it generates questions about how Ukraine will be able to run the presidential election on May 25 if some part of the country is controlled (and partly backed by local communities) by separatists.
For markets in the short term the key element will be how the Russian president communicates his view of the separatists voting in Ukraine. Last week he suggested postponing the voting but the pro-Russian separatists rejected the Putin's call. Shortly after the polling stations closed we had short comments from Putin's spokesman Dmitry Peskov who told Kommersant newspaper (according to Russia Today website) that the president “did not urge but recommended” delaying the voting. Today we also had some unclear comments from Kremlin which on one hand “respected the will of people from Donetsk and Lugansk regions” but on the other it urged the dialogue between the separatists, Kiev authorities and OCSE representatives.
Coming back to the ECB latest comments, it is worth to point out the editorial “Financial Times” comments published on late Friday. The “FT” clearly urges Draghi to cut both refinance rate and deposit rates (below zero) on June's meeting. The paper also wonders whether it will be enough to “weaken the Euro and slay the dragon of falling prices”. If not, he will have to consider the US style of QE but due to his credibility the QE would not have to be implemented to create positive “virtuous circle” that helped Europe emerging from crises in 2012 (this time such an action will be also needed). The market is also getting more convinced that the ECB will cut the interest rates on the next meeting but the negative deposit rate is probably not yet fully priced in.
Summarizing, the current levels of the EUR/USD are slowly pricing in the possible ECB “act”. The market will also listen closely to any ECB members' speeches and fully analyze any incoming data from the Euro area (especially on inflation). Today, despite some scheduled statements from Vitor Constancio and Ewald Nowotny (they will mostly talk about the banking union), we should remain close to 1.3750 level.
The zloty has still been stable, ignoring most impulses from the East. We also did not observe any reactions after Andrzej Kazmierczak comments. The MPC member told Bloomberg that the interest rates will remain at current level until the end of the year and the chances for the hike in Q1 of 2015 is also limited. Kazimierczak is more keen to initiate the first hike in the Q2 to match the inflation estimates, which is supposed to return closer to the NBP target in 2016. The comments are in line with expectations that the benchmark will remain at unchanged level for about a year but will be raised in the first half of 2015.
Summarizing, the zloty should be fairly stable in the following hours with the EUR/PLN hovering around 4.18 and CHF/PLN under 3.43. Slightly more volatility is expected on the USD/PLN but rate should not exceed 3.05.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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