Daily analysis 01.09.2014

, author:

Marcin Lipka

More tensions in the East – Putin's “statehood” and Europeans are preparing the new sanctions. Germans opposing additional stimulation from the ECB. Goldman Sachs sees EUR/USD at parity. Another weak PMI from Poland. The zloty remains under pressure regarding the Ukrainian issues.

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

  • US markets are closed – Labor Day.

Ukraine. Germany. Goldman Sachs

This week opened at lower levels than the last one. The EUR/USD has successfully tested 1.3150 and still there is no significant demand from the European currency. Interest in the euro is also presented by speculators who, according to the CFTC data, opened 150k (until Tuesday evening) short positions on the EUR/USD (two year high; last week it was 138k). Usually such a cumulation of bearishness may provoke a “short-squeeze” which should result in a rapid and fairly significant correction.

The rebound move, however, is currently quite hard to play due to the remaining fundamental pressure on the European currency. Firstly, some turmoil is expected in the East of the continent. As Bloomberg reports, in the Russian President’s interview on Channel One TV, Putin used the word “statehood” regarding the status of Donetsk or Lugansk regions. It was understood as the Kremlin wanting to create an autonomous territory with tight connections to Moscow. Despite the fact that Putin's spokesman denied such an interpretation the news was aired

In line with military escalation, (during the weekend separatists attacked coast guard vessels close to Marioupol) economic issues should be mentioned . Despite this, “The Wall Street Journal” reports that some countries oppose new sanctions (Hungary, Slovakia, Cyprus, Austria) and may bring about an expectation of (according to the comments from German chancellor) affecting the same sectors as previously – finance, energy and defense.

Further restrictions in goods and services exchanged from the EU will result in counter actions from Kremlin. Taking into account the zero growth in the Union, it will further deteriorate projections for the following quarters and it puts additional pressure on the ECB. This links directly to the monetary decisions, which are key with regard to the currency rates. Mario Draghi at his Jackson Hole symposium suggested (albeit not as directly as some reports claim) that stimulated growth with ABS purchases is getting closer.

Only one factor can prevent a faster slide and it has not tested the 1.30 level yet. This is the fairly conservative German stance and Berlin's reluctance toward monetary policy loosening (opposite to the Paris and Rome views). Using the finance ministry authority they sent(?) a message to the ECB aiming Draghi to pause his dovish ideas. Wolfgang Schaeuble said last week that the “monetary policy can only buy time” and the eurozone needs reforms improving its competitiveness. As Bloomberg reports, quoting Der Spiegel, German opinion was  also clarified by Angela Merkel during her telephone conversation with Draghi.

The approach which will win the majority at the ECB may be disclosed not earlier than Thursday during the interest rate decision. , However, today reports hit the wire that Goldman Sachs has significantly changed it’s view on EUR/USD. Bloomberg published new forecasts prepared by Robin Brooks, the New York based chief currency strategist, who claims that the most heavily traded currency pair would end March of 2015 at 1.25 (previously it predicted 1.34 level). Robin Brooks says that “The ECB will ease more, I don't know what easing that will be, but that the direction of policy is pretty clear”. He also adds that “People had doubts about whether the ECB is going to take low inflation seriously or not. However, those expectations are being updated”. Goldman also claims that in 12 months the EUR/USD should stand at 1.20 and in 2017 at 1.0000. The last projection seems to be aimed at creating a “media buzz”, nonetheless, overall their views seem to be accurately connected to the current sentiment.

In summary, the EUR/USD has been continuing to slide. If bears choose to exploit the situation more and try to use incoming data from the US (in a scenario in which they are solid) a slide toward 1.30XX before the ECB meeting may be expected. But the central bank conference should be less dovish than market participants expect (too much conclusion was taken from Jackson Hole) and a rebound exceeding the 1.3200 level should be anticipated.

Local data disappoints again

Political euphoria from the weekend didn't  expel happiness from currency traders, who are still pretty cautious concerning the PLN. The zloty is also under pressure from the East and depressed by another set of disappointing data from the local macro data.

Markit and HSBC published Purchasing Managers Index for Poland which dropped for the 7th time in a row (49.4 to 49.0) deepening the distance from 50 mark which separates expanding from contracting. Polish manufacturing PMI is showing a decreasing amount of new orders which caused “the first drop in output since June 2013. No rebound signals have been seen regarding the prices and exporting orders. The comments from Agata Urbanska-Giner were also quite grim. Commenting on the data, the economist from HSBC said that, “on balance this is a negative survey pointing to extended weakness in the manufacturing sector and weak inflationary pressure”. Regarding the monetary policy she claims that, “the MPC will most likely debate the policy easing in September and while it is a close call a rate cut before the end of the year is very likely”.

The approaching hours should be relatively calm for the zloty especially due to the US being out of session. The EUR/PLN will probably be traded in 4.20-4.22 range and CHF/PLN should stay below 3.50 mark. In the forthcoming days investors should focus on reports from the East and, of course, will scrutinize the MPC statement and the Belka conference.

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

Range EUR/USD 1.3350-1.3450 1.3250-1.3350 1.3450-1.3550
Range EUR/PLN 4.1800-4.2200 4.2000-4.2400 4.1600-4.2000
Range USD/PLN 3.1000-3.1400 3.1400-3.1800 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4600-3.5000 3.4200-3.4600

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

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6950-1.7050
Range GBP/PLN 5.2500-5.2900 5.2700-5.3100 5.2900-5.3300

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.

Return to the main list

See also: