Daily analysis 07.03.2014

, author:

Marcin Lipka

Significant increase of Euro’s value after EBC maintained money rates on unchanged level and relatively hawkish Mario Draghi's conference. Today the market will concentrate on publications from American labour market. Zloty remains stable in relation to Euro but USD/PLN pair is once again getting closer to the level of 3.00.

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

  • 14.30 CET: New work places in non-farm industry in USA (survey: 149 thousand; forecasts range between 100 thousand and 220 thousand); according to economists the unemployment rate should remain on a constant level, which is 6.6%.

Draghi and Payrolls

Since many days the market speculated on possible scenarios of monetary policy loosening, which not only embraced the classic money rates decrease, but also announced other non-standard elements. The investors expected that Draghi can stop the SMP program's sterilization, reactivate LTRO or introduce negative deposit rate for banks (I wrote more about this in yesterday's comment). When at 13.45 CET it appeared that the money value remained on unchanged level, the reaction on EUR/USD was calm. It was due to the fact that those above mentioned non-standard elements could still be announced during the conference. Thus after 14.30 CET we had a real increase on EUR/USD which ended in limits of 1.3850 (100 pips higher). Where did such significant increases come from? Apart from introducing a standard formula of maintaining the money rates on “current or lower level for a longer period of time”, ECB chairman held an exceptionally hawkish pose during the whole summit. He was explaining, that central bank did not perform any movement as the base scenario realizes itself due to the continuation of slow economic increase, unemployment level stabilization, or correct sentiment, examined by PMI indexes among others. When asked about the inflation, Draghi declared, that it will of course remain below ECB aim for a longer time. However, it will slowly get closer to the limits of 2% (1.0% in 2014; 1.3% in 2015; 1.5% in 2016 and 1.7% in fourth quarter of 2016). The underlining of this last value in the communicate itself (considering the present level of HICP in limits of 0.8%) was clearly hawkish. It quickly inspired a non-standard question from one of the reporters, who provocatively stated “hey people, 1.7% (in fourth quarter of 2016 – author's note), we're almost home, close, but below 2% - mission accomplished?”. But Draghi stayed calm and held on to his scenario, that the inflation will be slowly coming back to its goal. He was also underlining that maintenance of prices increase on a low level, is caused by decreasing prices of energetic raw materials, and also the increase of euro's value in relation to the dollar (which in significant degree are temporary elements, whose effect will expire with time or it can even turn around – author's ote). Other elements proving that Draghi is currently far from further monetary policy loosening are: denying the suggestions that Europe will be stuck in stagnative-deflative environment as it happened in Japan in the 90s and the beginning of 21st century and also depreciating hypothetical influence of stopping the sterilization program of peripheral countries' obligations that were bought few years ago. All the factors mentioned above caused Draghi to sound exceptionally hawkish as for current economic situation in the Euro Zone. What goes behind it are small chances for any changes in monetary policy during following month.

New working places in non-farm industry in USA is, after ECB decision, second most important reading of this weak, and it is planned for today. The market is prepared for payrolls in limits of 150k. The basic question that FX participants are asking themselves is how low should the NFP publication be in order to make Federal Reserve seriously consider the possibility of stopping the exiting from quantitative easing. According to “market's pulse” this figure would have to descend at least below 100k. In such case we would receive the three-month average that would also be below 100k (considering that there would be no revision for previous two months), what would be hard to blame on severe winter. Such development should cause further USD weakening going above 1.3900 on EUR/USD and maintenance of negative sentiment towards “the buck” before Federal Reserve will introduce the results of its March summit. On the other hand, if we will receive a reading which will be close to current consensus, then we can expect that the probability of Fed maintaining the tempo of exiting from QE will be much bigger. Thus the pressure on dollar's value decrease may slowly expire.

The fact that the disturbance from beginning of the week left no trace on the market (maybe except for rouble and Moscow stock market) does not mean that this topic is ignored. On contrary – foreign journals (Financial Times and The Wall Street Journal among others) report the informations about the West vs Russia conflict on everyday headlines. However, the market assumes that the situation will be slowly stabilizing which in investors' understanding means e.g. acknowledgement of Crimea bigger autonomy (unofficially it will unite with Russia) and Moscow will accept the government in Kiev and the future presidential elections in Ukraine. The situation's development that would be negative for risk dependable assets is a military confrontation (that will bring victims), especially if Western armies would become involved in the conflict on the Ukraine's territory (considering the signals being sent from both sides, this scenario is very unlikely at the moment).

In conclusion, yesterday's conference of Mario Draghi, decisively decreases the chances for any changes in ECB monetary policy during following months. This fact should also keep supporting the Euro. When it comes to payrolls, only the reading below 100k could cause a real discussion about the pause from exiting from quantitative easing. Data close to the forecasts or higher (especially in limits of 200k) should enforce the dollar and decisively bring Federal Reserve closer to another cutting of QE in March.

Draghi referred to Belka's statement

In yesterday's comment I presented the chairman Belka's statement about increased economic safety of a country which is a member of the euro zone. In brief, the membership in Currency Union causes, quick reactions to economic problems of one country, to prevent the crisis spreading on the whole union and deteriorating the situation in whole zone at the same time. During yesterday's ECB conference, one of the reporters asked Mario Draghi about a comment on this statement. ECB chairman declared that the Euro Zone is currently an “island of stabilization” (according to him, it was earlier also a place of wealth and “employment creation”), thus it seems attractive for the countries that may “feel threatened”. However Draghi did not develop his statement claiming that he has to “stop here as foreign affairs policy and geopolitical ranges of such decisions are exceeding the mind of a humble/modest central banker”.

In the following hours EUR/PLN and CHF/PLN pairs should remain stable. More variabilities is expected on USD/PLN. If the data from USA would appear to be very weak – below 100k, then a strong movement wearing off the dollar would be not excluded. This would cause a test of levels 3.00 on the zloty-dollar pair.

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

Range EUR/USD 1.3750-1.3850 1.3850-1.3950 1.3650-1.3750
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0100-3.0500 2.9900-3.0300 3.0400-3.0800
Range CHF/PLN 3.4200-3.4600 3.4200-3.4600 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 1.6650-1.6750
Range GBP/PLN 5.0500-5.0900 5.0700-5.1100 5.0300-5.0700

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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