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Daily analysis 11.12.2014

, author:

Marcin Lipka

Significant risk aversion on the broader market. SNB does not change the monetary policy. Surprise from Oslo. Russian central bank hikes interest rates but it does not help the rouble. The zloty weakened slightly due to the global stock sell-off. Cheaper gas at the pump on the horizon.

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

  • 14.30 CET: Retail sales from the US (survey: +0.4% m/m; exluding.
  • 14.30 CET: Weekly jobless claims data.

Equity sell-off keeps the correction on currencies

We witnessed a pretty dire session on equities yesterday with a slump on the Dow Jones and S&P 500 more than 200 and 35 points respectively. On the other hand, there was a significant value appreciation on government bonds with yields sliding to 2.16% on the 10-year benchmark. It may be possible that the market starts discounting lower inflation due to record low gasoline prices.

Theoretically in the medium and longer term lower energy cost is a positive sign. However, in the short-term term it may decrease the investments appetite of oil companies and push the commodity stocks lower. Moreover, the lower oil price brings pressure on prices from abroad. If it turns to be true in the inflation data the Federal Reserve may keep the accommodative for longer or increase the benchmark at low pace.

This theme wants to be also picked up by the dollar. It is in line with the appetite to book some most recent profits. But that view will be probably shot lived. The stronger economy, better shape of most companies and wealthier consumers should both keep the stock market in bullish territory, appreciate the “greenback” and push the yields higher. We may, however, wait for the trend to rebuild till the beginning of the next year.

As a result, we confirm our view that the USD/JPY have much slimmer odds to successfully retest the recent highs and the EUR/USD to slide toward 1.20. There may be even difficult to slide toward 1.2250 on the most heavily traded pair. The only event which may change the situation is a relatively hawkish FOMC statement.

No surprise from the SNB. Rate cut in Norway

In line with expectations the Swiss Central Bank (SNB) didn't change the interest rates. The monetary policy authorities from Zurich confirmed their promise to keep the EUR/CHF above 1.20 level and if there is a threat to the floor it may decide to implement additional measures including the negative deposit rates.

From macroeconomic data the SNB reduced its inflation expectations for next year to 0.2% to minus 0.1%. The GDP is expected to grow at a bit faster rate around 2% y/y.

The base case scenario for the EUR/CHF is a range trade between 1.2000-1.2050. We will have to wait for the SNB to introduce the negative interest rates for a significant rebound. But the decision is probably connected with the ECB government bond buying program. Paradoxically enough, we need to wait for Draghi to announce full QE to see franc weaker toward the euro.

Much more volatility was observed on the krone. The Norwegian currency slumped to more than 5-year highs toward the euro and is just 0.3% above the 11-year low to the dollar, after the central bank unexpectedly announced the interest rate by 25 bps to 1.25%.

The MPC wants to keep the inflation closer to the target and decrease the negative effect on of the sliding oil prices. Despite the fact that weaker krone is just a side effect of that policy the lower NOK is comfortable for both the government and the central bank. The first is less concerned about the subdued inflation and the latter, due to weaker local currency, decrease the negative budget impact from slumping oil prices. As a result, further krone slide is highly probable.

Russia hikes interest rates to 10.5% but the rouble weakens furhter

The monetary policy committee from Russia decided to hike interest rates by 100 bps to 10.5%. It is more than Bloomberg consensus estimated but close to the foreign economists projections. Just after the decision the rouble hit all time low bot th the dollar and the euro.

Some investors probably expected for a stronger hike, but actually it would not have changed much. The main issues behind the rouble slump is still oil prices. The CBR action can only work reactively on the rising inflation and wouldn't fight the sliding Brent. Only a stabilization of main export product prices can give some relief to the RUB.

Foreign market in a few senteces

The situation on the US equities and the debt market should determine the dollar value. If the yields on government bonds remain under pressure and the equity indexes continue the slide new highs on USD/JPY and new lows on EUR/USD would be difficult to achieve.

Risk aversion pushed the zloty lower

The beginning of the week was pretty bullish for the zloty. Despite some weakness on global equities the zloty didn't lose value. But the slide around 1.5% is a too strong negative signal for a risk-related assets. As a result both the euro and the franc rose around 1.5 zloty-cent yesterday.

I would not expect any deeper zloty weakness in the current environment. Most factors works in favor of the PLN to stay either near the current levels or strengthen further. Only a significant sell-off on US equities – more yesterday-like sessions – may push the EUR/PLN above 4.20 level.

Despite a price slump in the wholesale gasoline prices 500 PLN on 1k liters (Lotos data) the prices at the pump remain fairly elevated. There is at least 15-20 zloty-cent markup to the fair retail price regardless region in Poland. We also confirm our forecasts that until the end of the year we may see many prices below 4.50 per liter and at cheaper sellers even few percent lower.

Summarizing today's session should be calmer for the zloty. The only threat is a condition of US equities. However, in the base case scenario both the EUR/PLN and CHF/PLN should not deviate more than a quarter of percent form current rate.

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

Range EUR/USD 1.2250-1.2350 1.2150-1.2250 1.2350-1.2450
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000
Range CHF/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000

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

Range GBP/USD 1.5650-1.5750 1.5550-1.5650 1.5750-1.6850
Range GBP/PLN 5.2500-5.2900 5.2300-5.2700 5.2700-5.3100

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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