Daily analysis 15.10.2014

, author:

Marcin Lipka

Rediscussion – more expenses orcareful spending. QE is not excluded – Williams speculates about the conditions of return tu assets' purchase. The fall of oil prices is advantageous for the world, but not for Kremlin. The Russian minister quotes the speculations about lowering the rating. Expectations for an interest rates cut do not allow EUR/PLN to come back below the level of 4.20. Inflation data.

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

  • 14.00 CET: Consumers inflation from Poland (minus 0.4% y/y).
  • 14.30 CET: Retail sale from USA (minus 0.1% m/m; with exclusion of cars and petrol +0.4%).

Discussion. QE4? Oil. Russia

Recent poor data from Germany and risk of not fulfilling the limits of budget deficit in France, provoked a discussion concerning the methods of increasing the region's economic activity. Paris and Rome would like Berlin to begin fiscal stimulation of its economy. On the other hand, Angela Merkel, who promised their voters that she will maintain a balanced budget, points out to their colleagues from France and Italy that instead of going into further debts, some painful reforms are required. Both sides remain by their opinions, as it usually is in case of the beginnings of such fundamental discussions. But it seems, that this time the understanding will be achieved relatively quickly.

The Chancellor will probably agree on some compromises, when France and Italy will begin to reform their own economies (first actions will be probably directed to the numb labour market). Thus we can expect that this discussion will bring positive solutions, rather than the negative.

However, the market is currently more focused on the issues which could disturb the expectations concerning changes in monetary policy. Throughout recent days, we have informed about the signals from Federal Reserve which may disturb fast appreciation of the American dollar. Yesterday's statement of John Williams seems very interesting in this context.

In the interview for Reuters the chief of Federal Reserve from San Francisco (his views are very close to Yellen's; in 2015 he will have a right to vote) did not excluded, that “if we receive disinflationary forecasts I think that the return to additional purchase of assets is a situation, that will be something which should be seriously considered”.

Of course there are many conditions in this statement and the drawn scenario is an extreme development of the case. However, just a few months ago (before the clear slowdown of Europe and significant descends of oil prices), such statement would have never appeared.

Other signals coming from the interview for Reuters, are also relatively dovish. Williams said that if the inflation does not return above 1.5% y/y (PCE is currently on the level of 1.45%), it will be an argument for increase of the interest rates later. Chief of Fed from San Francisco would also not like that the term “longer time”, which is supposed to pass since the moment of ending current QE until increase of interest rates (dovish signal), would be deleted.

The falls of oil prices cause more and more discussions. They are of course negative for the countries exporting oil, but in the long run cheaper energy resources are something positive for the world. According to Capital Economics survey cited by Bloomberg, “the 10 USD fall of oil price, should translate into the increase of global demand for goods and services by 0.2 to 0.30 per cent”. Because the price of oil decreased by approximately 20-25 USD, we can assume that it would have had a positive effect for the global GDP, even on the level of +0.5 per cent.

Dramatic decrease of oil prices (since the beginning Brent dived 25%; during 3 months by 20%, and only during recent 4 weeks by 15%) may cause a clear decrease of one of our comments often guest's income – Russia. The analyses recently discussed the fact that the 10 USD fall of “black gold” prices means the increase of Kremlin's budget deficit by 1 per cent. If the current levels would maintain, only due to a decrease of incomes from this resource's export, we have 2% of deficit.

Apart from this factor's negative influence on the rouble (which is currently discounted anyway), there is still one more matter, that may concern Moscow – rating. According to S&P agency, Russia's credibility is on the level BBB minus, with a negative perspective. It is the last rank of “solvency of the investment”. The market speculates, that due to Kremlin's isolation and recent descends of oil prices, this credibility may be decreased to “default”.

Interestingly enough, ccording to TASS agency, these speculations were quoted yesterday by the Russian minister of economic development, Alexey Ulyukayev. Of course these were not some random words of government representative but rather a one-step-forward movement, so that the investors involved in the region, would not be too surprised (by the current tense situation on the rouble, the reaction could have been disproportional). One should also agree with Ulykayev, that this change would mainly increase the cost of financing the enterprises (also national ones – author's footnote), because they have significantly greater exposition on debt denominated in foreign currencies, than the country itself. The effect on rouble (if we will not see any extra planned intervention of CBR) will also be negative.

In conclusion, one should focus especially on the discussion inside Federal Reserve (statements of crucial members, upcoming summit). If Williams' views will be repeated, we are probably in for a short term, clear work off of dollar's appreciation, combined with a significant slowdown of its mid-period enforcement.

Above 4.20

Significantly worse data from the German economy and pressure on prices lowering cause the increase of expectations for the interest rates cut. Currently the base case scenario is the decrease by 25 base points in November. However, if the incoming data confirms the further slowdown of growth and increase of very low/negative inflation period (e.g. today's CPI reading), then the market will even start speculating about repeating the half per cent cutting in the upcoming month.

This fact has a negative influence on the national currency and the maintenance of EUR/PLN above the limit of 4.20. The situation on franc looks similar. It oscillates 0.02-0.03 PLN above recent averages. Until the speculations about the cutting bigger than 25 base points will appear (as e.g. yesterday's statement of professor Osiatyński for Bloomberg, who can even consider the decrease on the level of 0.75 per cent), the pressure on zloty will maintain and maintenance in division 4.20-4.22 on EUR/PLN and 3.47-3.49 CHF/PLN, will be the basis scenario.

Finally, one should also notice that our scenario of petrol prices clear descend is fulfilling (today Lotos sales PB 95 in wholesale for less than 4 thousand PLN per ton – for the first time since over 3 years). Now it is actually certain, that we will be able to buy the popular led-free petrol for 4.99 PLN on many cheaper petrol stations. Additionally if the current levels of Brent oil will maintain, the average price of petrol should come near to the limit of 5.00.

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 4.1800-4.2200 4.1800-4.2200 4.1800-4.2200
Range USD/PLN 3.3200-3.3600 3.3400-3.3800 3.3000-3.3400
Range CHF/PLN 3.4500-3.4900 3.4500-3.4900 3.4500-3.4900

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

Range GBP/USD 1.5950-1.6050 1.5850-1.5950 1.6050-1.6150
Range GBP/PLN 5.2900-5.3300 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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