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Daily analysis 09.01.2015

, author:

Marcin Lipka

Slight rebound on the EUR/USD extended by some comments from the Federal Reserve meeting. The US data in the spotlight. Interesting conclusions from Hilsenrath. 500 billion government purchase in the euro zone. The EUR/PLN fell below 4.30. Investors are getting ready for the next week MPC meeting.

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

  • 14.30 CET: Condition on the US jobs market. NFP (survey 240k); unemployment rate (5.7%). average hourly earnings (+0.2% m/m and +2.2% y/y); Unemployment rate (survey: 5.7%); Average weekly hours (34.6).

Slight rebound

Yesterday the EUR/USD tested 1.1750 range – the levels unseen since December 2005 and close to one at which euro was introduced in January 1999. Since then we were observing a slight rebound which was extended by some comments from the Federal Reserve members.

On Thursday we wrote about some dovish statements from both Evans and Williams. What's interesting was that opinions were rather ignored. On the contrary, the market got more involved in comments presented by Narayana Kocherlakota suggesting that the Fed should consider more QE if the inflation stays below 2% target. The problem is that Minneapolis Federal Reserve president is well known from his dovishness and his view should not be a surprise to anyone. Additionally, Kocharlakota is not voting member in 2015 and next year he is schedule to leave the Fed. So it is hard to expect that his opinion may weight on the consensus.

Some dovish comments were also presented by Eric Rosengren. Boston Fed president is scheduled to vote in 2016 but most of his conclusions came, as “WSJ” reminded, from statement published on January 3rd. As a result, a slight dollar weakness should be rather regarded rather as profit taking than a reaction to Fed's speak. The FOMC subject should may return at the end of the month when the Committee is scheduled to meet.

Job's market

The Labor Department is scheduled to release US job data. Economists surveyed by Bloomberg expect NFP reading at 240k. Taking the data projections into account, any figure above 250k should be regarded as a positive surprise especially if we see no negative revision for previous two months.

Investors should also consider an unemployment fall to 5.7% and average hourly earnings. The wages are pretty hot topic now. If it turns out that the US paychecks are rising it should mean that the downward pressure on inflation caused by cheaper petrol may be levelled off by the higher consumption prices. It will be a good argument for the Fed not to extend the zero-rate-policy and hike in mid 2015.

Higher payrolls and earnings exceeding 0.2% m/m should be dollar positive and may push the EUR/USD to retest the recent lows. On the other hand, in case of NPF below 200k or lack of wage pressure may give a boost to the most heavily traded pair to around 1.19.

Interesting remarks from Hilsenrath

The chief economists correspondent for “The Wall Street Journal”, often also called an unofficial Fed's spokesperson presented a fairly interesting analysis. He reminded William Dudley (the third most important person at the Fed, close to the Yellen view) speech where the NY Fed's president suggested a different approach toward interest rate hikes.

If during first benchmark raises the market expects fairly benign market conditions (low bond yields, low spreads between, bullish shares) the Fed should increase the pace of tightening. On the other hand ,when if the market reacts fairly nervous the pace of increases should be slower.

The presented approach is a bit counter to the overall view which rather expects Fed to follow the market expectations. This subject is currently really hot especially that the bond yields predict lower rates for longer and the Federal Reserve still does not seem to move their mid year tightening.

What's even more interesting is that the “alternative” approach is in both cases dollar bullish. A nervous market reaction after a first hike pushes more capital to the USD due to risk off sentiment. Moreover, high rate hike pace makes the “greenback” favourable for money managers, especially when other major currencies are facing more accommodation from their central banks.

500 bln from the ECB

Bloomberg, citing its own sources, reported that the ECB staff presented simulations during the recent central bank meeting describing the 500 billion euro QE impact. According to the news agency the ECB will be buying only the investment grade bonds.

Overall, the market expectations assumed that the full-blown QE will be valued at least 500 bln. It also cannot be ruled out that the information was purposely transmitted to the media to check the market reaction. After the publication the EUR/USD hardly moved.

The foreign market in a few sentences

Payrolls will be the most analyzed data today. Significantly better readings and increase in wages should give enough fuel to push the EUR/USD to the recent lows. On the other hand a reading below 200 k and no salary pressure may boos the most heavily traded pair toward 1.19.

Stronger zloty

Theoretically better data from the US market should weaken the zloty. But solid payrolls is a chance for bullish sign for the equities what improves the global sentiment. As a result we may assume that regardless the data the EUR/PLN or CHF/PLN should remain pretty stable and the changed would no exceed more than one zloty-cent.

The most visible reaction may be observed on the USD/PLN. In case of positive surprise from the USD the dollar may return toward 3.65 again. On the other hand weak NFP (less than 200k) and no wages raise can increase the odds that the dollar drops below 3.60.

Investors are also getting ready to the next week MPC meeting. Currently none of 9 economists surveyed by Bloomberg expect interest rate change. It will be, however, important how the Committee sees the recent economic development, zloty weakness impact and possible scenarios when the ECB introduces QE.

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

Range EUR/USD 1.1850-1.1950 1.1750-1.1850 1.1950-1.2050
Range EUR/PLN 4.2800-4.3200 4.2800-4.3200 4.2800-4.3200
Range USD/PLN 3.6000-3.6400 3.6200-3.6600 3.5800-3.6200
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 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Range GBP/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 Cinkciarz.pl Sp. z o.o is prohibited.

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