Daily analysis 19.09.2013

, author:

Marcin Lipka

The Federal Reserve decided to do... nothing. Why almost everybody expected the tapering? Another rumors on the new Fed's chief. The Polish zloty is much stronger in line with other EM currencies.

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

  • 14.30 CET: weekly jobless claims from the US (survey 330k)
  • 16.00 CET: Existing home sales from the US (survey 5.25 million)

Surprises. Yellen closer to the nomination

Investors who were not watching the Federal Reserve decision live should really regret. Exactly at 20.00 CET “no tapering message” hit the wires. The reaction on all asset classes was euphoric. The EUR/USD jumped by 150 pips, stocks climbed to their all time highs and the gold soared 3%. Moreover the UST yields slumped (prices soared), and all EM currencies rose around 2-3% to the dollar. The only loser was the “greenback” which received the most dire message – full QE remains.

After a short while everybody was asking the same question. Why the Fed didn't start the winding-down operation? Almost all major banks and financial institutions were predicting the tapering in September. How all can be wrong? Why nobody got the Fed's message earlier? The only explanation is that everyone was so focused to analyze recent statements, minutes, Bernanke's speeches and other FOMC suggestions that everything was matching to a single outcome. Tapering should begin in September. We can start from the May 22nd remarks when Ben Bernanke first time mentioned a possible QE reduction. Than we had the June FOMC meeting where he confirmed that “later in the year” the tapering should start. He was also suggesting that when unemployment dropped to 7% the asset purchase would be finished. We can also remember that during the June conference he was not concerned with the EM problems or rising yields on UST. In results all the ways were directing us to a small/lite tapering which would both begin the monetary policy normalization and not scare the investors (especially on the UST).

However, if the market fails to understand the FOMC message, the Federal Reserve has an emergency exit. In the following days we have a wave of speeches from the Committee members. As Michael S. Derby from the “WSJ” points out (“After Fed Meeting Officials Have Heavy Speaking Schedule”) it can be used to calm the markets in case of volatile reaction. Only on Friday four FOMC members are scheduled to talk – Esther George (voting, most hawkish), James Bullard (voting, dovish, concerned about to low inflation), Naryana Kocherlakota (currently dovish, with voting rights in 2014) and Daniel Tarullo (member of the Board of Governors, dovish). On Monday William Dudley is suppose to speak (third the most important person in the Fed, dovish, close ally of Bernanke's policy). Are all the speeches suggest that the FOMC is suppose to announce something unexpected? Rather no, I would see it as a backup in case the market creates to much volatility.

Yesterday the Fed's chief dismissed all the arguments on tapering saying that “asset purchases are not on a preset course”, all the decisions will depend on the economic outlook, the June remarks were appropriate at that time ,and “We can't let market expectations dictate our policy actions” which was clear message to all disappointed.

Moving to the Fed's statement we can see that the main reason why the FOMC decided not to reduce the asset purchase were the rising Treasuries “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. “, and economic conditions where Fed wants to “await more evidence that progress will be sustained before adjusting the pace of its purchases “. It is also worth to look at the economic projections where the growth was significantly downgraded (expected), inflation is expected to stay in the previous ranges and the interest rates will remain under 1% in 2015 and below 2% in 2016 (quite dovish, also bearish for the dollar).

In the evening we had also additional rumors on the new Fed's chairperson. Sources in the White House were reporting (according to Reuters) that “Janet Yellen was fornt-runner fo the top job at the US central bank when Ben Bernanke steps down”. It also added some steam to the broad enthusiasm and pushed the dollar lower.

Summarizing it is really difficult to explain the Fed's decision. The Federal Reserve was preparing the markets for several weeks to announce the tapering in September and in the last second it made a step back. Bernanke clearly wants to put a strong pressure on UST yields, but a strategy can be really risky especially when the tapering begins. From the market point of view the EUR/USD bullish mood should remain for longer and we can even reach 1.3700 if the economic data doesn't show a real strength. Currently the tapering expectations are moved to December, but having in mind the recent projection's failures, a few would be really certain about that date.

The zloty soared on “no tapering”

Instead of any words it is worth to look at the USD/PLN chart. In a few hours the zloty appreciated to the dollar by more than 3%. It was the result that EUR/PLN dropped and additionally EUR/USD rose. The similar situation was witnessed on all EM currencies from Mexican peso, followed by Brazilian real, South African rand and ending, with the recently most battered, Indian rupee. However, it was not caused by a real capital flow to this economies, but rather “frightened shorts” which had to be unwind immediately in case of “search for yields” in the coming future.

Both in the medium and short term the zloty should benefit from the QE. The EUR/PLN can fall even toward 4.10 (a similar, but opposite move, which was observed on the zloty in June). Today the zloty will probably try to stabilize, but in the next weeks more bullish moves are expected.

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

Range EUR/USD 1.3450-1.3550 1.3550-1.3650 1.3350-1.3450
Range EUR/PLN 4.1500-4.1900 4.1400-4.1800 4.1600-4.2000
Range USD/PLN 3.0700-3.1100 3.0400-3.0800 3.1300-3.1700
Range CHF/PLN 3.3600-3.4000 3.3500-3.3900 3.3700-3.4100

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

Range GBP/USD 1.5950-1.6050 1.6050-1.6150 1.5850-1.5950
Range GBP/PLN 4.9300-4.9700 4.9500-4.9900 4.9100-4.9500

A breakout above 1.3400 was another bullish signal for the EUR/USD and a confirmation for the move toward the next major target at 1.3650. All PLN pairs are in bearish trends.

Technical analysis EUR/USD: the next target for the EUR/USD is 1.3650 and in the extension even 1.4000. Sliding below 1.3400 generates a sell signal with the first target around 1.3200.


Technical analysis EUR/PLN: the 4.1800 target was reached. The next is fall toward 4.10-4.13 range with a possible test of the lower band. A bullish signal is generated after moving above 4.22 level.


Technical analysis USD/PLN: the target is still 3.05 on the pair (which was almost reached). We are down more than 0.15 PLN since the sell signal was generated. Shorts are preferred until we rise above 3.15.


Technical analysis CHF/PLN: the comeback under 3.43 negates the buy signal. Now the base case scenario is a range trade between 3.40-3.45. Sliding under 3.40 generates a sell signal with target at 3.33.


Technical analysis GBP/PLN: the sell signal was generated with the first target at 4.93 and another at 4.85. The comeback to the bullish trend is generated above 5.03.


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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