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Daily analysis 10.04.2014

, author:

Marcin Lipka

EUR/USD takes off above 1.3850 as a result of “minutes” being more dovish than the market's expectations. Realisation of Chinese data about foreign trade does not cause negative reactions on the markets. Conference of Marek Belka after MPC summit occurred without surprises. Zloty remains stable in relation to Euro but on the wave of EUR/USD increase dollar-zloty pair is testing the level of 3.00.

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

  • No major economic data which can significantly affect the analyzed pairs.

Doves from Fed. Chinese data

Three weeks after Janet Yellen's widely commented statement about possible start of the money rates increase in “about 6 months” after finishing the operation of quantitative easing exiting, we finally received a record of the discussion from previous Federal Reserve summit. Its message is more dovish, which does not mean that the interpretation of Fed signals is simple or even logical.

However, let us start from the beginning, that is the information which were quickly “caught up” by the market, and on basis of which the dollar's clear weakening occurred. First of all, there were no verbal suggestions in the records that the monetary policy of USA will become tightened half a year after exiting from QE. Another telegram which was unpleasant for the investors with hazardous assets is the fragment of “minutes”. It states, that “few members have noticed, and some were even upset by it, that the general raising of expectations towards money rates increase (among others indicating the increase of median of money's value to the level of 1% at the end of 2015 vs. estimated 0.75% in December and 2.25% at the end of 2016 vs. 1.75 in December's communicate – author's note) in comparison with previous projection can be misunderstood and might indicate that the Committee tends to less accommodative policy”. Few members also claimed that “the median of expectations overestimates projection's alteration”. Translating these difficult terms to an everyday language, it simply means that the part of FOMC noticed that the Committee members' (which means themselves) projections concerning future money rates, are on higher level than they have expected or wanted.

Going further into the American bank's message, we receive even more unclear signals. According to “minutes”, on March 4th (two weeks before the official summit was planned) FOMC organized a special video-conference on which they discussed a need for resignation from current “forward guidance”, saying that “money rates will not be increased until the unemployment is above 6.5% and the expectations of future inflation are below 2.5%”. It was established that the upcoming summit (March 18, 19) will be a good occasion for altering forward guidance (approaching the level of 6.5% on unemployment could cause some market participants to take it as an announcement of forthcoming raising of money rates, and Federal Reserve does not want that because the revival is still fragile – author's note). Few members also indicated that “the chairman conference (Janet Yellen – author's note) after Fed summit will be a good moment for explanation of intentions of future monetary actions”.

As we recall, this explanation (Janet Yellen's words about “6 months”) was in result directed in completely different direction than originally intended. They caused that instead of “softening” the force of economic projections assuming faster increase of money rates and explain the fact of resignation from forward guidance the market became seriously “anxious” of faster tightening of monetary policy. Of course the investors' “anxiety” should not interest FOMC representatives, but the uneasy and accidental message of Fed (once again in reference to the chairman) should cause a certain reflection amongst the members of this staff.

Jumping over the Pacific Ocean, it is worth noticing that some disturbance (although more in the comments than on the market) was caused by today's data from China. According to official reports Chinese import as well as export, decreased in relation to March in previous year. However, as the representatives of RBS and Goldman Sachs quoted by “The Wall Street Journal” emphasized, it is mainly related to the liquidation of fictional trade by the government. Its peak period took place in the beginning of last year (thus compared similar months are worse – author's note). Additionally, as Capital Economics underlines, the biggest decreases have been recorded in goods trade with Hong-Kong and Taiwan and these are the territories, where the “fictional invoices” were mostly exploited in the past.

In conclusion, the market received Federal Reserve message with clear satisfaction. Information included in “minutes” also deny Janet Yellen's suggestions that money rates could increase within a year. Thus this information is negative for dollar. Until we will not receive clear and coherent suggestions (rather not today, despite that there are some appearances planned for the afternoon) from ECB (the other side influencing EUR/USD rates) about the possible further easing of monetary policy, the bulls have open door to the new heights on main currency pair.

Without a breakthrough

We did not receive any breaking information from MPC. Marek Belka and his partners maintained a will of leaving money rates on a stable level until the end of Q3. Council's chairman also said during the conference that the Polish forward guidance can be increased (if the conditions will remain unaltered) on July's summit (which is logical as the new projection of inflation and GDK will be known by then). In reference to the hypothetical start of quantitative easing by ECB, the president declared that it could enforce zloty (the market was aware of this – author's note), and further on he also concluded that Fed's exiting from QE will be simply replaced by the increase of liquidity by Draghi and by the Bank of Japan. In result it may cause the situation on the market to alter very quickly.

EUR/PLN pair received with calmness the Council's information, as well as FOMC dove message. USD/PLN reacted decisively expressly and today it tests the levels of 3.00. For now, the market tries to show that it is not willing to descend below this round limit. However, it only takes a further appreciation of EUR/USD and this “will” can quickly be found. It is also not excluded that we will further observe a similar movement, that we can see on Korean won (today another enforcement and record low evaluations of USD/KRW pair).

In conclusion, the base case scenario will still be the maintenance of EUR/PLN and CHF/PLN close to the current levels. The chances on decreases of USD/PLN below 3.00 are growing. However, the probability of finishing today's session below this limit is less than 50%.

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 3.4000-3.4400 3.4000-3.4400 3.4000-3.4400

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

Range GBP/USD 1.6550-1.6650 1.6650-1.6750 1.6450-1.6550
Range GBP/PLN 5.0100-5.0500 5.0300-5.0700 4.9900-5.0300

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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