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Daily analysis 08.11.2013

, author:

Marcin Lipka

A day full of surprises: ECB interest rate cut, headline GDP reading from US on the upside, and the Czech Central Bank intervention weakened the koruna most in its history. Today there is more volatility expected – NFP reading. The Polish zloty was kind of awkward yesterday, but in the morning we came back to the well know territory – 4.18 per the euro.

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

  • 14.30 CET: Jobs data from the US (survey: NFP - 120k; private 125k; unemployment 7.3%).

The cut. Mixed GDP. Czech koruna

People tend to remember days like last Thursday. The EUR/USD fell 200 pips in one hour. It was caused by three issues – the ECB rate cut, dovish statement and solid headline GDP reading from the US. The day was also full of emotions in the CEE region where the Czech koruna on central bank intervetion dropped over 4% to the euro and 5% to the dollar. In a few hours the NFP is going to hit the wires which can turn out to be another hit for the EUR/USD (in case of better than estimated reading).

Only 3 out of 70 economists surveyed by Bloomberg expected the ECB rate cut on Thursday's meeting. The surprising decision, which additionally was strengthened by the dovish comments, significantly lower the European currency. Bloomberg found out that the decision was not unanimous. Jens Weidmann and at least two other ECB members were against the cut. It didn't stop Mario Draghi to proceed the decision and in favor of the Southern Europe the benchmark was decreased by 25 bps to 0.25%. The direct reason behind the cut was record low inflation, but on the market there are rumors that the Governing Council was also pushed but two-year highs on EUR/USD. Too strong euro could have pushed the peripheries back to the recession and deflation. Additionally Mario Draghi repeated his few months old statement that “interest rates to remain at present or lower levels for an extended period of time”. However, currently it is hard to imagine another cut, because it would have to push the deposit rate into the negative territory.

Additional pressure on the EUR/USD was generated from better-than-estimated headline GDP reading. The US economy grew by 2.8% in the Q3. However, as Neil Shah and Noelle Knox from The Wall Street Journal claim that a substantial part of the solid number was due to one time event – rising inventories. The authors also write that “Ssripping out those inventory gains, the underlying third-quarter growth rate was 2%—below the comparable 2.1% pace in the second quarter”.

Yesterday we had quite interesting event on the Czech koruna. It weakened by around 5% to most major currencies. It was caused by the Central Bank intervention to push the local currency lower and keep it around 27 level per the euro. The MPC has hesitated for a long time whether to use monetary tools to help the depressed economy and push the inflation higher. Moreover, the Bank governor Miroslav Singer, told reporters that (Reuters quotes) “the bank had unlimited means to intervene against its own currency and would not end the campaign until it was very confident it would not have to start intervening again”. The Czech action reminds a similar move from the SNB which has successfully kept the EUR/CHF rate above 1.20 level.

Today we have another highly anticipated economic report – NFP. The data will be carefully scrutinize, because we are having only two job readings before the Fed's December meeting. Traditionally stronger reading gives a chance for the dollar to gain more value on expectations that the Federal Reserve begin the tapering earlier than estimated. On the other hand weak data can give the EUR/USD to correct some of the recent slides.

Summarizing, despite the Thursday nervous reaction we came back to around 1.3400 at the beginning of the European session. In case of solid NFP reading w can expect the retest of the recent lows and more vocal discussion on December tapering.

More volatile zloty

The zloty on Thursday wasn't sure which direction to choose. Firstly it was fairly unchanged after the intervention on the Czech koruna. Later, after the ECB cut, it strengthened a bit but the technical support (or equity slide or tapering issues after solid GDP) at 4.16 stopped the move and we ended the day around 4.19

Today, in the morning we came back to the well known level – around 4.18. There was also a strong move on the GBP/PLN, which was directly caused by EUR/GBP slide. The GBP/PLN rose above 5.00 and until the euro bounces back to the pound we will not return to the recent levels (around 4.95).

Summarizing, the ECB rate cut should give a slight boost to the Polish currency to the euro. On the other hand a higher probability of tapering in December should be playing against the PLN. Combining two cases the zloty should remain stable. Today we are also having the NFP data which should either push the EUR/PLN to around 4.17 (worse than expected Payrolls) or move it toward 4.19 (stronger than anticipated job report).

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

Range EUR/USD 1.3450-1.3550 1.3550-1.3650 1.3350-1.3450
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0800-3.1200 3.0500-3.0900 3.1100-3.1500
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Range GBP/USD 1.5950-1.6050 1.6050-1.6150 1.5850-1.5950
Range GBP/PLN 4.9700-5.0100 49900-5.0300 4.9500-4.9900

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 Cinkciarz.pl Sp. z o.o is prohibited.

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