Daily analysis 08.01.2015

, author:

Marcin Lipka

“Minutes” from the most recent Federal Reserve meeting confirm the will to hike the interest rates in mid 2015. Closer to 11-year lows on the EUR/USD. Williams and Evans fairly dovish, but it is currently ignored by the market. The zloty remains stable against the franc and the euro but losing value to the US dollar. Increasing probability of petrol getting closer to 4 PLN per liter.

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

  • 14.30 CET: Jobless claims from the US (survey 290k).

No surprise from Fed's minutes

The main macroeconomic event during the Wednesday's session was “minutes” publication. Opinions from Federal Reserve and the staff confirmed that the US economy is in fairly good shape. The best situation is observed on the jobs market. Not only the unemployment has dropped markedly but also the amount of part-time workers has diminished and the rate of employment to population increased. As a result the jobs slack has decreased which should translate into more wage pressure.

The Fed also emphasized the solid industrial production, government spending and robust consumer confidence. It translated to higher GDP growth in the third quarter. The economic outlook still looks pretty good despite some concerns regarding the oversees situation.

Investors pay most attention to the FOMC view on inflation. Whether the most recent oil slide and dollar value increase may reschedule the time of first lift-off? Despite some contradictory views and expectations in the medium term the Committee assumes “that inflation would rise gradually toward 2 percent as the labor market improves futher and the transitory effects of lower energy prices and other factors dissipate”.

What's pretty interesting is that in “minutes” we can also find a statement that “most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings”. This statement, which was also part of the Janet Yellen opening remarks and was heavily discussed during the Q&A session with journalists, is a compromise toward more hawkish side.

Overall the “minutes” were a bit more hawkish and confirm the broad view that the monetary policy is scheduled to be tightened in mid 2015. It is also in line with the December statement and Janet Yellnen press conference. It also should keep the dollar strong, but not increase the pace of its appreciation.

The EUR/USD is getting closer to 11-year lows

Besides Fed's “minutes” we had also the introduction to the Friday's government job report. According to the ADP private payrolls rose in December by 241k. Combing the results with the most recent revisions the number exceeded expectations by 35k. News from Paris were also against the euro.

As a result the EUR/USD dropped below 1.1780 in late morning trading. It means that new 9-year lows were set and the pair is only about 100 pips above the levels seen in November of 2003. It the speed of depreciation remains and the most heavily traded currency pair drops below 1.15 there may be some opinions that the slide is too fast and too deep. It may also raise some concern at the ECB and can also be a counter argument to monetary increase stimulus.

EUR/USD in the last 15 years

Chart Source: Bloomberg. EUR/USD fall means strengthening of the dollar against the euro.

Dovish comments from new voters

Lots of events which hit markets from the beginning of the year decreased the attention to statements from Fed's member. It is worth to note, however, that during current week two new-voting members expressed their remarks concerning the monetary policy.

On Monday John Williams (slightly dovish, close to the consensus) said that “I see no reason whatsoever to rush the tightening”. The Fed's chief from San Francisco also claims that “the pace of tightening will be pretty gradual over the next few years once we start the lift-off”. Williams also confirmed a view that it is better to keep the accommodative policy for longer that begin the tightening earlier.

Even more dovish was Charles Evans. The Chicago Fed president said (quotes from the “WSJ”) “the U.S might not hit the Fed's target inflation rate until 2018 and he doesn't advocate raising interest rates until 2016”.

Currently this opinions are ignored, but when the euro sell-off stops and we will be getting closer to the next FOMC meeting the similar statements may be a good starting point to weaken the US currency.

Foreign markets in few sentences

There are still too few arguments to sell the dollar and buy the euro. It means that any pretext is used to damp the EUR/USD. The market is getting ready to position itself to the “payrolls” reading. If the number hits range between 250-300k we should expect more pressure on the ERU/USD and the test of 1.17 cannot be excluded.

The zloty is slightly stronger. Cheaper gasoline

In the morning the Polish currency attempted to strengthen below 4.30 per the euro. The probe was not successful but the odds for EUR/PLN slide increased and it is possible that at the beginning of the next week it should drop to 4.28. Around two zloty-cents slide should also be observed also on CHF/PLN.

There is still no reason to see the PLN appreciation toward the USD. Besides short-term corrections we should see more dollar strength and the range may be moved toward 3.70-3.75 in the following weeks.

Since the beginning of the year Brent denominated in PLN dropped almost 10%. Taking into the account wholesale prices the cost at the pump should drop at least 10-15 zloty-cents. Moreover remembering that the gas stations margins are at historically high levels we may conclude that the competition should reduce the profits which can put the regular unleaded closer to 4.10-4,20 per liter and at some pumps we can see 3.99. Diesel is suppose to be around 10 zloty cents higher.

Today the zloty should continue the appreciation attempts bot to the euro and franc. The move, however, should not exceed 1-2 zloty cents. On the other hand the dollar will be fairly stable around 3.65.

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

Range EUR/USD 1.2050-1.2150 1.1950-1.2050 1.2150-1.2250
Range EUR/PLN 4.2800-4.3200 4.2800-4.3200 4.2800-4.3200
Range USD/PLN 3.5400-3.5800 3.5700-3.6100 3.5100-3.5500
Range CHF/PLN 3.5600-3.6000 3.5600-3.6000 3.5600-3.6000

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

Range GBP/USD 1.5450-1.5550 1.5350-1.5450 1.5550-1.5650
RangeGBP/PLN 5.5100-5.5500 5.4900-5.5300 5.5300-5.5700

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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