Daily analysis 19.11.2014

No appetite for yen purchase. Investment bankers do not rule out USD/JPY appreciation towards 130-140. Swiss Franc “floor” until at least 2017. Fed and inflation. The zloty is hardly strengthening. Trade balance improvements and significant savings due to cheaper oil.

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

• 14.30 CET: Housing starts in the US (survey: 1.025 million; seasonally adjusted annualized number).
• 14.30 CET: Building permits in the US.
• 20.00 CET: “Minutes” from the last Federal Reserve meeting.

Yen. Franc. Fed. Data

The EUR/USD was fairly calm in the recent hours. A positive argument for the euro came from economists sentiment in Germany, but slightly higher than expected PPI reading in the US pushed back the EUR/USD rising expectations. It is also worth noting that there are some opinions on the market that the producer's inflation was deviated by a new methodology so it is currently a weak indicator regarding, for example, future CPI publications.

There is no rest from the yen even for one day. The Japanese currency continues its depreciation trend and even solid profits do not discourage the bulls to open new positions on USD/JPY (the pair soared 10% in a month). A negative approach towards the yen was also strengthened by the Bank of Japan statement. Despite the fact that we didn't get additional purchase this time, the overall communicate was pretty dovish.

This time the asset purchase operation was approved by 8 out of 9 members while in October only 5 of 9 MPC participants voted “yes” on the expanded QE program. Additionally, BoJ chief Kuroda said that the core inflation may fall below 1% on annual basis. As a result we may conclude that lower inflation can justify more easing on the horizon. Finally the USD/JPY is currently testing 107.50 level.

A further yen depreciation is also expected by global financial institutions. Cited by Bloomberg Marcel Thieliant from Capital Economics claims that the Japanese inflation will not be approaching the 2 percent goal. It should push further the central bank stimulation and fuel a move on USD/JPY toward 140 till the end of next year. A similar target was set by Albert Edwards from Societe Generale (till the end of 2016).

The mentioned estimates may be actually seen in the future under one condition. Currently the Japanese currency remains a barometer for the global risk aversion and a “safe haven” (sounds pretty strange). The JPY losing value when equities soaring and opposite. On the contrary, if the long paradigm is scrapped and the yen would be moving only on behalf of fiscal-monetary policy (should not be ruled out especially that many strong correlations disappear on markets on regular basis).

Also the Swiss franc subject is still on the headlines. According to the survey, conducted by Bloomberg, majority of economists assume that 1.20 floor on EUR/CHF will remain in place at least until 2017. However, as we wrote yesterday, it does not have to mean a swift appreciation of the euro-Swiss pair, even though it may look as the only good trade.

Today besides macro data from the US we are also having “minutes” from the recent Federal Reserve meeting. No conference after the October decision and contradictory messages from discussion and the statement building the expectations that after fairly hawkish statement we should get the “dovish” discussion.

This concept is contradictory, however, to the behavior of FOMC members. After October decisions hawks agreed with the communicate while Narayana Kocherlakota (uber dove) expressed his concerns. As a result, even if there were some remarks on the strong dollar or weak global economy they me be more benign than in September. Finally, despite the fact that the dollar is pretty eager to weaken it may choose the other moment – for example the CPI data.

The Thursday's session should be also interesting due to the preliminary PMI readings from the main European economies and the whole euro zone.The Markit's Purchase Managers' Index according to the market consensus should be at 48.8 in France and 51.5 in Germany. Regarding Paris it is hard to expect any positive surprise but Berlin may give some upbeat data (especially taking into account the rebound on the ZEW). Depending on the scale of rise it may even push the EUR/USD toward 1.26.

No appetite for appreciation. Gasoline

A brief downside move on the EUR/PLN pushed the pair towards 4.2100 in the morning. But the zloty's appreciations was short-lived and the local currency leveled off all the gains shortly after the European session began. As we wrote earlier clearly some participants do not want the stronger zloty despite a pretty good sentiment on global equities, strong forint, solid GDP and no interest rate cut.

Moving a bit from the market “game” it is worth taking look at the gasoline market. The slide on brent crude, as we expected more than a month ago, pushed the gas below 5 PLN per liter. If the crude stays below 80 dollars and the USD/PLN does not appreciate over 3.40 we should see the range on many stations between 4.70-90 with high probability of testing the lower bound on cheaper pumps.

Additionally, it is worth noting that almost 30% crude slump is a significant boost to the economy and improvement for the trade balance. According to the IMF data Poland imports oil worth 25 billion USD annually. As a result the nominal savings may top 7 billion yearly. Taking even into account 10% PLN depreciation toward the dollar the real gain is several billion PLN. In the long run it should also boost the local currency (less demand for dollars). Lastly it it worth remembering about the stimulative effect. Savings may top even 1% of GDP which turned into consumption should boost both the government and the consumer budget.

Summarizing the zloty can still be heading toward appreciation. The base case scenario is a slide toward 4.20 per the euro and slightly below 3.50 on the CHF/PLN.

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

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