Daily analysis 01.04.2015

, author:

Marcin Lipka

Weak Chicago PMI increases the uncertainty before ISM reading. There is still a high probability to struck a deal with Iran despite failing to meet the deadline. Another lows on EUR/PLN after solid PMI data from Poland.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.15 CET: ADP private payrolls form the US economy (survey: +225k).
  • 16.00 CET: Manufacturing ISM from the US (survey: 52.5).

The ISM reading in focus

It was the worst quarter for the European currency since its inception in 1999. The euro lost almost 12 per cent to the dollar. Additionally, yesterday the IMF published central banks currency reserves data for Q4. Despite the fact that the report does not include China it may be a good benchmark for the long term trends.

In the second half of the last decade the share of the euro in the reserves was rising while the dollar was sliding. This change was confirmed by the EUR/USD trend. On the other hand, since several quarters the demand for common currency from central banks has been diminishing and currently accounts only for 22.2% reserves (the lowest since 2002). Contrary the dollar reserves have been climbing and in one quarter its share rose from 62.3 to 62.9% (the highest since 2008)

Market participants sometimes pay attention to historical data, but a much higher impact should have leading reports. As a result investors got concerned after Tuesday's Chicago PMI publication. According to the MNI data it stayed at quite low level around 46 points while the consensus was close to 52. In February the slowdown in Midwest was contributed to harsh winter and strikes in West Coast post. However, March was supposed to be much stronger.

A comparison of the Chicago PMI vs ISM

Chart Source: Bloomberg, own calculation. The white line represents the Chicago PMI (the March reading). The yellow line represents the industrial ISM (last reading in February, today the March reading is published). The corelation between indices is quite strong and positive, but the indicator from the Middle West is more volatile and not always reflects the current condition of the whole country.

Moreover there has been some concerns regarding today's ISM reading. If the leading manufacturing index drops below 50 points (survey 52.5) it might generate significant repercussions on the US economy conditions especially taking into the account second and third quarter of the year. It would also be a good argument to push higher the EUR/USD especially that economic indicators in the euro area have been improving recently.

The deal with Iran

We have spent quite a lot of time regarding the Iran issue. Despite the fact that the preliminary deal was not agreed yesterday and the world leaders failed to meet the self imposed deadline, there is still a high probability that the agreement will be announced in the near future. It is beneficial for all side and the long discussion is rather a game for the societies than a real threat for the deal.

In consequence, we are still expecting a significant sliding pressure on oil in the medium term. Moreover the longer the discussion on the issue the lower the odds for a rebound because there is no opportunity to discount the information. However, besides the market game the key in this issue are also fundamentals. The persistent oil glut may push both the WTI and Brent prices to new lows in a matter of months.

The foreign market in a few sentences

The market should be pretty focus on the headline ISM number and subindexes. If it turns out that the publication is lower than 50, it would generate a selling pressure on the dollar and we might expect a rise toward 1.0800. On the other hand in case of higher reading (53 points and above) we should expect a significant dollar appreciation especially that the sentiment after Chicago PMI is quite bleak.

Further zloty appreciation to the euro

The local currency has been strengthening since the morning and the euro is currently the chaepast since January of 2013. Good sentiment on the zloty was also confirmed by solid Polish manufacturing reading. Despite that the publication was slightly below the consensus numbers around 55 are historically quite high and indicating a significant improvement in the Polish manufacturing in the coming months.

Not only the headline number was good but also the subindexes are pretty solid. Companies indicate that orders has increased, foreign demand improved and the employment rose almost at record level.

The strong PMI, significant improvement in the euro zone and definitive end of monetary easing suggest that the EUR/PLN may slide toward 4.00 level even in April. It is also possible that as early as this quarter the euro will be worth between 3.80-3.90 what may provoke an intervention form the central bank. This should stop the local currency appreciation.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.0750-1.0850 1.0650-1.0750 1.0850-1.0950
Range EUR/PLN 4.0600-4.1000 4.0600-4.1000 4.0600-4.1000
Range USD/PLN 3.7400-3.7800 3.7800-3.8200 3.7000-3.7400
Range CHF/PLN 3.8700-3.9100 3.8700-3.9100 3.8700-3.9100

Anticipated GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.4850-1.4950 1.4750-1.4850 1.4950-1.5050
Range GBP/PLN 5.6000-5.6400 5.5600-5.6000 5.6200-5.6600

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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