Daily analysis 10.10.2014

, author:

Marcin Lipka

A series of comments from central bankers didn't change significantly the sentiment on the currency market. Primary Dealers survey shows a slightly earlier rate hike than previously. The rouble under constant selling pressure. Polish currency remains stable to both the euro and the franc. The USD/PLN returns above 3.30 level. Gasoline on its way to 4.99 PLN per liter.

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

  • No major macro economic data which may significantly affect the analyzed pairs

Draghi and Fischer. Primary Dealers. Russia

The currency market is still fairly nervous having in mind the last week payrolls and Wednesday's “minutes”. It translates into significant changes on the majors even in a scenario when reported information are neutral. Today, however, the pairs should stabilize around half way between the recent highs and lows. It means that the base case scenario for the EUR/USD should be trading around 1.2650.

The main message from the the Draghi's statement and discussion with Stanley Fischer was a clear signal that the ECB is committed to increase its balance sheet from around 2 to 3 trillion euro which, as a consequence, should lift the inflation and growth. The main tools used to achieve this goal will be accommodative monetary policy combined with recently announced non-standard tools such as TLTRO operation and ABS/covered bonds purchases.

However, one might get an impression that if the current tools fail to meet the central bank inflation goal, the path is pretty clear. Of course, the ECB chief didn't use the phrase sovereign debt purchases but further monetary stimulus should go into that direction.

Mario Draghi again tried to push governments to push the reforms forwards. The ECB chief mainly talked about the job market (in some euro zone countries the process of laying off an employee is almost impossible which damps the competitions and competitiveness) and administration where procedures to start business may takes months. Draghi also called on European leaders to improve the usage of the available funds to stimulate investments (not only in infrastructure but also in education or new technologies).

Overall the debate at Brookings Institution showed how many issues euro zone is facing and how socially unpopular decisions should be proceeded rather earlier than later. Regarding the monetary policy it will remain at current level or it will be even loosened further (interest rates will not be raised until 2017). The message was negative for the euro, but largely (besides full-blown QE theme) it is already priced in.

The other central bankers who were speaking also didn't generate a significant move. As “The Wall Street Journal” reported today, only John Williams (dovish/neutral Fed's member, non-voting this year) commented on the dollar appreciation. He wasn't, however, really concerned with the “greenback” appreciation and its effect on the economy. He also added that he didn't expect that the US currency continues its appreciation pace in the following years as it did in the last 12 months. Stanley Fischer who took part in the conference with ECB chief Draghi and Jeffrey Lacker didn't say anything interesting which might have changed the hypothetical approach toward monetary policy.

Concerning the interest rate policy it is worth paying attention to the most recent Primary Dealers survey. According to banks which process transaction directly with the Fed the first rate increase should occur between 2nd and 3rd quarter of 2015. The survey was, however, conducted before the September's FOMC meeting, so its value, taking into account the recent minutes or jobs data, is limited. Comparing it to the previous research the moment was brought a bit forward from 3rd quarter in July.

There is still fairly tight situation on the Russian rouble. The central bank intervened at least 10 times to move up the range where dollar/euro basket is traded. Only today the rouble index rose from 45.00 to 45.20. As the 45.00 level was a ceiling for the bound, the intervention was valued at lest 1.4 billion USD (350 million at every 5 rouble cents to move the range). It also means that the CRB had to exchange at least 3.5 billion USD this week to calm the currency moves.

Investors also still rumor how much from 50 billion corporate debt due this year is secured on the market. Additionally, the Russian currency is also under pressure from crude falls (directly from the current account and the budget balance). Around 10 dollar drop of the Brent price generate around 1% of GDP budget deficit.

All the numbers look pretty scary but we still have to remember that Moscow continue its balanced budget so even in a scenario of significant fall of the revenue from commodities the deficit should not exceed the world's average. It is also worth noting that CRB posses more than 450 billion currency reserves (third in the world) and only 10% debt to GDP.

Pressure on the rouble may continue until we see a rebound on the crude oil and when the commercial debt payment is due. The slides still will not be dramatic (as in case of hryvnia or rouble in late 90s). It will be rather a stable depreciation and when the negative sentiment calms, we should see a significant correction, especially when the monetary policy is fairly tight and Russia enjoys a significant current account surplus. Fundamentally, when the capital outflow stops, the currency should not lose the value.

Summarizing, today's session on majors will be probably fairly calm. The EUR/USD should finish the session close to 1.2650. The beginning of the following week should also be quite stable due to lack of macroeconomic impulses

Still fairly calm

Both the EUR/PLN and CHF/PLN still remain fairly stable and only a significant global event may move the pairs markedly. It is also worth noting that the zloty changed a correlation trajectory a bit. Currently it does not necessarily loses the value when the US stocks (overall equity risk appetite) fall, because lower equities valuations may mean slower economy and therefore it can keep the monetary policy in the US accommodative for longer.

From the point of Polish economy the country should benefit from lower oil prices. If the recent Brent slides continues and the USD/PLN will not be pushed toward new highs the wholesales prices for the gasoline may fall 3-4 percent and drop below 4k PLN per tone (the Diesel even below 3.9k). It should translate to falls of around 0.15-0.20 PLN per liter on regular gasoline what may push the retail prices below 5.00 mark (same importance as drop below $3.00 per gallon in the US). In the longer term it should also improve our current account.

Summarizing, the probability of events that can the EUR/PLN and CHF/PLN from the recent range trade is fairly low. As a result, both today and at the beginning of the next week most trades should be around 4.18 per the euro and 3.46 on franc.

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

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.2800-3.3200 3.3000-3.3400 3.2600-3.3000
Range CHF/PLN 3.4300-3.4700 3.4300-3.4700 3.4300-3.4700

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

Range GBP/USD 1.6050-1.6150 1.5950-1.6050 1.6150-1.6250
Range GBP/PLN 5.2900-5.3100 5.2700-5.3100 5.3100-5.3500

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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