Daily analysis 19.03.2014

, author:

Marcin Lipka

The EUR/USD is around 1.3900 before the Fed's decision. Putin's remarks on “no interest into East Ukraine” lowered the nervousness in the CEE region. The zloty, in line with other EM currencies, gained some value. Production data from Poland shouldn't push the PLN volatility higher.

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

  • 14.00 CET: Industrial production from Poland (ISBnews survey +6.3%).
  • 19.00 CET: The Fed's statement after FOMC meeting.
  • 13.30 CET: Janet Yellen press conference after the Federal Reserve decision.

“Waiting mode”. Federal Reserve

The EUR/USD was moving sideways during the recent hours. We had some more volatility after lower-than-estimated ZEW reading, but some remarks from the Institute chief that the rebound in Germany should proceed and a lower reading came mainly from Ukrainian fears. On the other hand we had a moment (during Putin's speech) when the most heavily traded currency pair tried to break 1.3950, but the momentum wasn't strong enough. Investors are clearly have been waiting for the FOMC meeting and a few of them would like to take a risk before Fed's decision.

On Monday I wrote that Russia (at least in the near future) would not like to annex another territories of the former Soviet Union. Such suggestions were made by Russian Federation ministry of Foreign Affairs, stated controlled TV Russia Today or Polish Institute of International Affairs. The market, however, wanted a clear confirmation from the main player in the conflict. Putin during his statement said: “Don't believe those who scare you with Russia, who yell that Crimea will be followed by other regions”. Regardless how much truth is in that sentence, investors were waiting for any comments that can, at least in the short-term. Putin's comments give also hope that there will be no third stage of sanctions (goods and services). It seems that the West does not want to introduce the hard sanctions unless Russia takes eastern part of Ukraine (this was kind of confirmed by Polish foreign minister Radek Sikorski on Monday). Despite the fact that in today's financial newspapers the Crimea topic is heavily discussed (Both the “FT” and the “WSJ” urges the US-EU tandem to put pressure on Russia), it is possible that in the following days the issue can bring less and less attention (unless something dramatic happens).

In the recent days I did put a lot of emphasis on the hypothetical changes in the FOMC policy and its projections. The Fed will probably change its forward guidance scrapping 6.5% employment threshold and substitute it with more broad unemployment measures and other indicators describing a state of economy. Currency investors will also focus on Federal Reserve projections with special focus on GDP (whether it is downwarded due to cold winter) and inflation (should rather remain unchanged from the December projection or upgraded. Moreover, market participants will scrutinize two important charts describing when the first interest rate can occur and what interest rate is going to be at the end following years. Any changes showing that the monetary policy will be accommodative for longer than previously thought should bring the dollar lower. On the other hand, more hawkish remarks could strengthen the greenback and push the EUR/USD under 1.3900 level.

Summarizing, Putin's remarks calmed markets in the CEE region and gave some breath to the local currencies. Today investors will focus on Janet Yellen conference, FOMC statement and revised economic projections. Any more dovish than expected remarks or downgraded economic estimates should push the dollar lower. On the other hand, if we see that the growth was not significantly affected by the weather and the economic pace is in line with the December estimates, we should expect that the dollar will end the day firmer.

Around 4.20

The zloty took advantage of improving market sentiment after Putin's comments. We fell on the EUR/PLN toward 4.20. It will be a good starting point for the zloty before the FOMC meeting. The local currency should react in line with the EUR/USD moves. If the main currency pair rises, we should pay less than 4.20 per the euro and test the 3.00 PLN on the dollar. On the other hand, in case of EUR/USD falling the EUR/PLN can rise toward 4.22 and the greenback can be worth more than 3.05

The local industrial production data should have a limited effect on the Polish currency. Only a reading below 5% or above 8% can have any impact, but still the change should not exceed PLN 0.01. The base case scenario for the EUR/PLN is a trading around 4.20 till the FOMC meeting.

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

Range EUR/USD 1.3750-1.3850 1.3850-1.3950 1.3650-1.3750
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.0500-3.0900 3.0300-3.0700 3.0800-3.1200
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 1.6750-1.6850 1.6850-1.6950 1.6650-1.6750
Range GBP/PLN 5.0500-5.0900 5.0700-5.1100 5.0300-5.0700

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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