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Daily analysis 23.04.2014

, author:

Marcin Lipka

Mixed PMI readings – close to consensus from China, worse from France and better from Germany. Lower inflation put pressure on the Aussie. Williams on the US monetary policy. Renminbi is weaker again. Polish MPC members on current growth and Ukraine. The EUR/PLN is getting close to 4.20 on some weakness in the region.

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

  • Already published PMIs from France, Germany and the Euro Zone.
  • 15.45 CET: Preliminary PMI manufacturing readings from the US (survey: 56.4).
  • 16.00 CET: New home sales from the US (March data, seasonally adjusted annualized data; survey 455k).

PMIs. Williams. Yuan. Aussie

The US equities rose again yesterday and gave some hope that the risky asset will follow that trend on Wednesday. However, the optimistic scenario has had some hurdles on the way. The first one was Chinese data. Published during the night PMI (complied by Markit and HSBC), the reading from the largest Asian economy remained deep below the expansion/contraction line at 48.3 points. Despite the index being in line with expectations, some might have expected the reading to be better, taking into account the GDP and retail sales published last week.

Another element which put some pressure on the European sentiment was Purchasing Managers' Index from France. In the previous month Paris surprised with solid readings, significantly rising above 50 level, both in manufacturing (51.8) and services (51.5), but in April the PMI dropped to 50.9 and 50.3 respectively. Commenting the data Jack Kennedy, senior economist at Markit wrote that “a weaker rise in activity reflected stalling new business, while staffing levels were cut at a sharper rate”. Moreover, in the services sector business expectations dropped to 11-month low.

When many market participants expected that German data will follow French readings, it turned out that the largest European economy exceeded the targets. Both manufacturing and services indexes were above economists' consensus (55.0 and 54.2 respectively). In result the composite data for the euro area were above expectations and the services sector expended at a fastest pace in almost three years. Commenting the data, chief economist at Markit, wrote that “The PMI is signalling that the GDP is on course to rise by 0.5% in the second quarter, building on a 0.4% rise in the first quarter. Williamson also points out that the growth is not only crated by Germany. He claims that “perhaps the best news came from the rest of the region, where the fastest rate of growth seen since early-2011 suggests that the recovery in the “periphery” is gaining traction”. Markit also stressed out that job creation is improving in the Euro area. Ending the commentary Williamson emphasized that there is still downward pressure on prices and “there will be growing fears that deflationary pressures are intensifying and that the ECB needs to respond with more than just words to the recent appreciation of the exchange rate”.

Ignoring the last sentence we may conclude that overall the European data was good and positive for the Euro. It was also quickly evaluated by the EUR/USD which rose to around 1.3850.

Besides the PMIs during the Asian trading, we had inflation report from Australia. The data was below expectations what quickly turned into 100 pips slide on the Aussie. However, taking in the account the RBA stance and the fact that prices sill rising fairly quickly (2.9% y/y) we can conclude that the AUD/USD slide should be limited. Moving slightly to the north it is worth noting that yuan dropped to the lowest levels in more than a year and the USD/CNY pair touched 6.25 level. Further depreciation is quite possible but a move above 6.30 (more than one percentage point) is rather unlikely taking into the account PBOC active exchange rate policy.

From Tuesday's news it is worth to cite John Williams remarks. The president of San Francisco Federal Reserve (dovish, non-voting, close to the views of chairwoman) claimed that “we're exactly on the right track” regarding the current policy. Williams also claims (according to Bloomberg) that “adding more and more stimulus either through asset purchases or even trying to put even stronger forward guidance does create more risks about getting policy right on the exit”. From the whole interview we conclude that the inflation has already “bottomed out” employment will drop to 5.5% at the end of next year and the first tightening should be expected in the second half of 2015. It seems that his views are very close to the FOMC and to the market projections. Therefore any deviation from the current base scenario should have impact on the greenback.

Summarizing, we should note that the PMIs were overall positive what should be bullish message for the EUR/USD (ECB's QE is a bit more distant). However, to continue the move and rise significantly above 1.3850, we need some weaker data from the US and no dovish comments from the ECB.

Hesitation

Some additional tension in the East and weak data from China and France put pressure on the zloty in the early trading. However, more upbeat PMIs from the Euro area gave a relief to the PLN and we returned to 4.19 per the Euro.

Yesterday we had three interviews with MPC members (Zielińska Głebocka, Bratkowski and Chojna-Duch) on TVN24 Binzes i Swiat. The most important message from the Committee members is that Ukrainian issues should not cut the GDP growth by more than 0.2-0.4 percentage points and Polish Euro adoption date is still uncertain. Regarding the question how fast the economy will expand in 2014, the most optimistic was Zielińska-Głębocka who claimed that Poland may grow even 3.6-3.8% in the current year while Bratkowski predict the figure between 3% and 4% but closer to the lower mark.

Summarizing, the EUR/PLN was able to hold below 4.20, but the external pressure may put the Polish currency and more risk in the coming days. In the next 24hrs, however, I expect that w should remain in the narrow range around 4.19 level.

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 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0100-3.0500 2.9900-3.0300 3.0400-3.0800
Range CHF/PLN 3.4200-3.4600 3.4200-3.4600 3.4200-3.4600

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

Range GBP/USD 1.6550-1.6650 1.6650-1.6750 1.6450-1.6550
Range GBP/PLN 5.0300-5.0700 5.0500-5.0900 5.0100-5.0500

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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