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Daily analysis 17.11.2014

, author:

Marcin Lipka

Weak data from Japan. Odds for further stimulation are rising despite the fact that the negative GDP reading was used by the yen bulls to generate a correction. No major results from the G20 meeting. Europe plans a 300 billion euro stimulus plan. The zloty is marginally higher at the opening. Commerzbank on election impact.

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

  • 15.15 CET: Industrial production from the US (survey: +0.2% m/m).

Japan. G20. Fed

Japanese GDP slump was a significant surprise for investors. The country was pushed into territory of recession for the fourth time since the Lehman Brother collapse. The economy shrank by 0.4% q/q (minus 1.6% on annualized basis). One of the main drag on the numbers was inventories slump which took 0.6 percentage point from the quarterly result.

The other GDP components were not much better. According to the Government of Japan Cabinet Office the private consumption rose only by 0.4% and a fall of private investments took 0.2 percentage points from the whole reading. Only public spending remained in positive trend but it is hardly a surprise taking into the account fiscal stimulation.

Few minutes after the Japanese data was released the USD/JPY soared over the level of 117. Shortly later, however, many investors took advantage of the 7-year highs on dollar to the yen and booked some profit pushing the pair below 116 mark. The performance of Tokio stock exchange also had the negative impact on the USD/JPY, which usually is negatively correlated with the currency.

Taking into account economic data, Shinzo Abe will probably pause the tax sales hike. Additionally, there is a high probability that he announces new election to the lower house of parliament (mid December) and maybe his party even receives better result that in previous voting.

Weak GDP was quickly commented by the main architect of Abenomics – professor Etsuro Honda. He told “The Wall Street Journal” that the data was “shocking' and raising sales tax is “out of the question”. Honda also is leaning towards pushing for more fiscal stimulus but such aggressive measures may face some opposition in the Liberal Democratic party. The professor also does not rule out further easing from the central bank.

The situation on the yen may be pretty dynamic, but we should not expect significant JPY slump if the base case scenario (tax hike delay to 2017 and new election) is introduced. But if Abe pushes for more fiscal stimulus, the Japanese currency should be hit further and approach closer to 120 mark for the dollar.

On the G20 summit there were no groundbreaking decisions. Despite diplomatic issues between the Western leaders and Russian Delegation, which was heavily circulated over the media, the meeting was a non-event case.

We may derive a bit more hope from the European plan to boost the economy (mainly the private-public partnership regarding broadly measured infrastructure projects). The “Financial Times” reports that European Commission chief is scheduled to present the program, probably managed by the European Investment Bank, worth around 300 billion euro. Currently, however, this news should not have a major impact on the common currency.

Summarizing the USD/JPY pair will be in focus. Additionally, other currencies will be under its impact – it was clearly seen during the night when the dollar depreciation to yen poshed the EUR/USD higher). The market will also start speculation on Wednesday's “minutes”. This time, however, I wouldn't count on more dovishness. Taking into account that all hawks signed a statement, there will be few elements in the discussion which may push the dollar lower.

The GDP effect

The slight zloty's appreciation is still a consequence of pretty solid GDP reading for the third quarter. If no new negative info hits the region, we should slowly approach levels below 4.22 on EUR/PLN and 3.51 per franc.

On Friday the Polish Press Agency (PAP) published few comments from Alicja Zielińska-Głębocka. The MPC member claims that chances for the interest rate cuts in December is 50:50. Additionally, Zielińska-Głębocka is another monetary policy maker (after Chojna-Duch) who puts a significant attention on the November PMI reading. As a result of the HSBC survey, the PMI will be heavily scrutinized in two weeks and if it turns to be higher than in October (51.2), it would be a good argument for zloty appreciation.

The Commerzbank fairly quickly reacted to the Polish elections. The German bank claims that the political risk “should now be viewed as significantly higher in Poland” if PiS wins the election next year. It would be due to the “largescale policy overhaul, in particular on the pension, retirement age and banking sector regulation fronts”. Currently, however, I would not put too much attention to the political issues. Usually the reaction on the market is shortly after the results and not several months before. Moreover, there are many other market events that should shape the zloty in the following months.

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

Range EUR/USD 1.2450-1.2550 1.2350-1.2450 1.2550-1.2650
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3600-3.4000 3.3800-3.4200 3.3400-3.3800
Range CHF/PLN 3.4800-3.5200 3.4800-3.5200 3.4800-3.5200

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 5.3700-5.4100 5.3500-5.3900 5.3900-5.4300

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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