Daily analysis 04.06.2014

, author:

Marcin Lipka

Exhausting anticipation before Thursday's ECB summit. A range of options and reactions on the market for hypothetical decisions of Draghi. Macro data from USA. Surprising suggestions of Monetary Policy Council move zloty in the areas of 4.15 per Euro.

Most important macro data (CET). Estimations of macro data are based on Bloomberg's informations, unless marked otherwise.

  • 14.15 CET: New jobs in the private sector according to ADP data (survey: 210k).
  • 16.00 CET: American ISM from the services sector (survey: 55.3).

Anticipation. Options. Data

The only relatively interesting element (considering the fact that lately the market quotations were those of a very small variability) of yesterday's session was the market's reaction for a very low reading of inflation from the Euro Zone (+0.5% r/r vs expectations in limits of 0.7/0.6%). Due to the fact that during few quarters of an hour we have not seen any clearer common currency's weakening after Eurostat's publication, those players who took positions against Euro and did not see the falls began to slowly reduce the “short positions”. It caused the necessity of repurchasing of EUR and the consequence of such actions was its 40-50 pips increase in relation to the dollar. This slightly artificial optimism on the common currency did not last long and during the next hours we slowly fell lower, just to start today morning again near the round level of 1.3600.

Similar “market games” and “contest” can come Thursday's afternoon. As it usually takes place, before the uniquely anticipated data, the investors speculate on several different scenarios. Most probably the market discounted the fall of interest rates and the announcement or introduction of liquidity operations for banks and also a special program of loans for small and medium companies in the peripheral countries of Euro Zone. Because of that some claim that after the conference we can witness working off of recent falls. Such probability truly exists, especially if after the publication of the communicate we will not receive any new information apart from the ones concerning this, what is included in prices anyway. However, we should also remember, that Mario Draghi is a seasoned participant of market events and he knows very well what to say and when to say it in order to limit the hypothetical increases of Euro’s value (just as he did on May's summit). So it would be enough if during tomorrow's conference he constantly underlines the option of introducing QE or suggest, that e.g. it is not the last cutting of interest rates and we can “fall” even lower. Such message should clearly limit the “drives” of euro-dollar bulls on the market and maintain the fall pressure on the common currency.

However, before we finally “roll” onto Thursday's afternoon, it is worth remembering about two readings from USA – ADP and ISM. Despite the fact that the ADP report publication is not a perfect prediction before Friday's “payrolls”, the investors will surely pay their attention to it, if we will deflect from the base case scenario by more than 30 thousand (downwards – disadvantageously for USD and upwards, on contrary). After Monday's image-setbacks of Institute of Liquidity Management, today's ISM from services sector will be received with reserve (Bloomberg even reports that the calculations will be performed manually after the previous problems with the software) but nothing indicates that we should receive a clearly worse publication. Also at a certain moment a cumulation of positives for USD should be noticed (perhaps on Friday, after NFP and ECB) and the comments of more hawkish members of FOMC that appear here and there, should cause a clearer enforcement of the American currency.

In conclusion, despite the speculations, the base case scenario is still EUR/USD maintenance in limits of 1.3600 until tomorrow's ECB summit. It is also good to use the iron rule of not making the transactions directly during such important events, because even if we will succeed in exact foreseeing everything, the market conditions and positioning of bigger players may still cause some totally unpredictable changes.

Council's decoding

Yesterday we had a very interesting MPC summit. Just after publishing the communicate it was clear that the Council begins to withdraw from forward guidance (most probably it will not be increased beyond Q3) and does not exclude changing the interest rates after getting familiar with July's inflation projection and the information hitting the wire. Not more than a while ago “changes” would suggest a possibility of faster increase of money value. However, after very low readings of inflation with the perspective of monetary policy's easing in the Euro Zone and worse than expected PMI index, president Belka does not exclude lowering the interest.

During the press conference itself president emphasized that the base case scenario is to maintain interest rates on the constant level until the end of 2014 Q3. However, he also claimed that the probability of hypothetical fall or falls is not zero. Belka also reminded that he is not a supporter of pro-cycle actions (which means the stimulation of economic growth by easing the monetary policy in times of revival). However, how it has been noticed such low inflation (0.3% r/r) causes the real interest rates to grow, what can be considered as tightening.

An interesting matter has been touched at the end of the conference by Jacek Barszczewski from Polish Press Agency. He asked is zloty's rate (not its strengthening) a key to the answer for the question about the future monetary policy. President answered this question quite evasively – we have an unstable rate and the existing possibility of intervention when the dynamics of changes is excessive. However, after a short thought, it truly can be the main reason of MPC approach change. The evaluation of currency (just like in case of ECB) is important in the context of leading the monetary policy. Too big PLN strengthening (and such is not excluded if we consider lowering the interes rates in Euro Zone and the inflow of wallet capital to the emerging markets) would cause the inflation to dive even deeper through the import channel, creating a threat of falling even in the negative regions or clearly increasing the period of its reaching the NBP goal. Thus it is probable, that the members, by not willing to materialize such risk, have decided to cause a certain pressure (not too big) on zloty just to at least hamper its appreciative appetites.

This trick might work. Just after the conference zloty lost approximately 0.01 PLN in relation to Euro (earlier we have had also slightly weakening because of a slight deterioration of sentiments in relation to EM). Additionally, in a longer term the investors who remember the chairman's words will consider the risk of interest rates' lowering, thus the further strengthening of PLN should be limited. In the end Belka, by mentioning the intervention, only sealed the undertone of the summit, which was negative for zloty.

In conclusion, yesterday's conference should weaken the appreciative drives of zloty in mid term. However, in the perspective of several hours, EUR/PLN will probably move in the limits of 4.15, and CHF/PLN close to the 3.40.

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

Rate EUR/USD 1.3650-1.3750 1.3750-1.3850 1.3550-1.3650
Rate EUR/PLN 4.1400-4.1800 4.1400-4.1800 4.1400-4.1800
Rate USD/PLN 3.0200-3.0600 3.0000-3.0400 3.0400-3.0800
Rate CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Rate GBP/USD 1.6850-1.6950 1.6950-1.7050 1.6750-1.6850
Rate GBP/PLN 5.0900-5.1300 5.1100-5.1500 5.0700-5.1100

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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