Daily analysis 15.12.2014

, author:

Marcin Lipka

Risk-off sentiment prevents currencies to resume medium-term trends. The oil is still in focus. Wednesday's Federal Reserve meeting will “shake” the investors? Abe coalition keeps 2/3 parliamentary seats. The zloty returns below 4.18 per the euro before inflation data. Increasing odds for petrol below 4 PLN/litre.

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

  • 14.00 CET: Balance of payments from Poland (current account: minus 350 million euro; trade account +249 million euro).
  • 14.00 CET: CPI from Poland (minus 0.5% y/y).
  • 14.30 CET: Empire State manufacturing index (survey: 12 points).
  • 15.15 CET: Industrial production from the US (survey: +0.7 m/m; capacity utilization: 79.4%.

Slight panic and the Fed

Stock markets ended the previous week deep into the red territory and the S&P 500 tested 2k mark. Investors instead of praising the cheaper oil investors started to focus on negative aspects of lower priced energy. Some claim that halting crude investments and falling inflation may threaten the whole economy. There are also some calls that some commodity companies can have problems with paying their debt. As a result the whole lower-rated corporate bond market can be threatened with more defaults.

Currently, however, such opinions seem to be overstated. Both Fed members and economists from well established economic institutions assume that the GDP should be boosted from cheaper oil. Higher consumption level due to lower petrol prices is supposed to increase the sales and boost the production. Positive impact on developed economies which import oil was also mentioned by IMF officials.

In today's “The Wall Street Journal” IHS Global Insight publish their research on US economy oil impact. According to the think-tank 20 USD crude price drops should result in GDP increase around 0.4 percentage point in the following year. Moreover, the unemployment should shrink by 0.2 percentage points and “payrolls” increase by 40k on the monthly basis. The IHS also predicts that the CPI will drop to 0.2% y/y if oil stays around 60 USD per barrel. However, the core inflation will remain fairly unchanged.

It is possible that Wednesday's Federal Reserve meeting will give investors some more clear sings regarding the future economy. Positive remarks should give equity bulls some fuel and push the dollar higher.

The oil in focus

We have written for weeks how the oil shaped the rouble conditions. Most recently the falling crude prices also affected the Norwegian krone and Mexican peso. Furthermore, both equities and bonds are also feeling the commodity impact. Shares are scared with investments in oil industry and debt related securities assume subdued inflation which can translate even to higher odds for QE in Europe.

The more attention is focused on WTI or Brent there are more odds that volatility on that market will be elevated for longer and moves would get more and more unpredictable. Investors are aware of that fact and it will take a long time until the oil returns to some more fundamental stabilization.

Additionally, the oil is heavily depended on comments from exporting oil countries. Investors speculate of levels where OPEC decides to decrease the supply or what game is played by the cartel. Is it only the economic issue or some geopolitics is also involved?

Abe policy is scheduled to be on track

Abe's government secured the 2/3 super majority in the lower house of the Japanese parliament. It was not however translated to the currency weakness. We suggested such scenario in a few previous analysis. Combination of cheaper dollar and increased risk aversion pushed investors to book some profits on the USD/JPY.

In the longer run, however, the yen should remain under pressure. Both Abe and the central bank have a sufficient power which probably be used to further stimulate the economy. It should bring more weakness to the Japanese currency in the following months.

Foreign market in a few senteces

Today we have a few readings from the US. There are no reasons to expect that the data may fell short of expectations. The indicators should show that the American economy is in good shape what can give a slight boost to the “greenback”. But regardless the data currency investors will probably wait for the Fed's statement, Yellen conference and new economic projections on Wednesday.

Regaining the strength. Petrol

The Polish currency has strengthened both to the euro and franc since the early morning. The main reason behind the zloty appreciation is better global sentiment. It should not be changed by the inflation data unless the CPI drops more than 0.6% y/y.

In some regions of the country the retail gas prices dropped significantly. At the pumps located near larger malls the regular petrol is even priced at 4.25 per litre (Gliwice). Despite the fact that it is probably sold below the break even point (wholesale price including the VAT is priced at 4.12) most of the fall has not been discounted at many stations.

Additionally, if the Bent drops to around 55 USD (currently 63) we should see at some retailers the 3.99 price which has not been seen for years. There is still a rule that if we wait longer the price will be for sure lower

The zloty should be able to hold to its gains till the end of the day and the base case scenario for incoming hours for EUR/PLN and CHF/PLN is 4.17 and 3.47 level respectively.

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 Sp. z o.o is prohibited.

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