Daily analysis 23.10.2014

, author:

Marcin Lipka

The German data has stopped the EUR/USD sell-off which had been observed after strong inflation numbers form the US and weak French PMI readings. Dark clouds above the Kremlin. Retails sales from Poland below expectations but the zloty was “rescued” by solid data from Germany. The PLN outlook has shifted to slightly negative.

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

  • 14.30 CET: US jobless claims (survey 281k).
  • 15.45 CET: Preliminary manufacturing PMI reading form the US (survey 57 points).

Inflation. PMI. Russia

The recent 24 hours were pretty hard for the EUR/USD. After Tuesday's Reuters report on possible corporate bond purchase by the ECB we also received quite strong inflation data form the US which pushed the dollar higher. Additionally, during the morning session in Europe weak French PMI hit the wires and pushed the euro down. As a result, we almost touched the 1.2600 level. The situation slightly improved by the Purchasing Managers' Index from Germany but if we do not get any groundbreaking data regarding monetary policy in the US or in Europe the 1.2500 test seems to be inevitable.

In Wednesday's CPI publication from the US there are no signs confirming the threat of incoming disinflation. Consumer prices rose by 1.7% y/y and were rather in higher range of market expectations. The core inflation also stayed at previous 1.7% y/y level. Looking at different parts of the Bureau of Labor Statistics report the prices fell only in energy related products while the cots of food or services rose at 3.0% y/y and 2.4% y/y respectively. The data didn't confirm any threat of weaker CPI expectations and therefore should keep the first hike expectations at previous date (mid 2015). The data should also support the “greenback”.

The French reading published before European stocks opening bell was again disappointing. The manufacturing PMI dropped to 47.3 while economists expectations were around 48.5 level (previously 48.8). In the report prepared by Markit it is hard to find any encouraging statements. The researches basically only noted that new orders fell at fastest pace since 16 months which was followed by employment and export drop.

On the paper the German reading looked much better. The manufacturing PMI rose to 51.8 (expectations 49.5; previously 49.9). However, Markit economist Oliver Kolodseike wasn't that bullish. He noted that despite business improvement and further employment growth “new orders increased ant the slowest pace in over a year and service providers reported a sharp drop in sentiment, suggesting that output growth my come under pressure in coming months”.

Summarizing PMIs from eight euro area countries the Markit economist chief Chris Williamson writes that “the survey data are broadly consistent with GDP rising 0.25% in the third quarter, but unless demand picks up soon, growth could weaken again in the fourth quarter and deflationary forces could intensify”. Reading the Markit report it seems that despite a slight improvement in the numbers we should see a slowdown in the single currency economies rather than more bullish perspective.

A culmination of bad news hit the Russian economy in recent hours. The ruble again dropped to the dolar- euro basket. Currently it is traded around 46.6 level which is at least 30 ruble cents higher than the central bank band. It means that the CBR will have to spend at lest 2 billion USD to slow the currency downside pressure.

The intervention may not be enough especially that Standard&Poors plans to review Russian credit standing. The Kremlin rating is at the lowest investment grade. Taking into the account that the perspective is already negative even one-notch-cut will mean that the Kremlin solvency slides to the speculative territory. “Junk” rating actually would not hurt so much the government budget but it will be a major issue for the state-owned energy related companies which are scheduled to repay some its foreign denominated debt till the end of the year.

Evenn now the pressure is quite severe. As TASS and Ria Rovosit news agencies report, Rosneft has asked for 49 billion USD “from Russia's National Wealth Fund to help the company withstand Western sanctions against Russia. The ministry of finance claims that Rosneft and Novatek will be able to receive $1.9-3.6 billion help as early as this year.

Falling revenue from exporting crude oil, lack of improvement regarding Ukraine and further Moscow isolation may also push the CBR to increase the interest rates. Money market instruments show that 3-months lending rate may rise in 3 months from 10.68% to 12.37%. It may mean that the central bank may hike the benchmark by at least 100 basis points. It should further cut the Moscow's growth perspective and the boost for the currency will rather shorted lived.

Summarizing, the EUR/USD should remain under pressure even taking into the account better than expected PMI readings form Germany. The most traded currency pair will be pushed to the south by lower expectations regarding longer zero-interest-rate-policy (US inflation) and rumors on furhter easing in the euro zone (Reuters report). This week we will not probably see the 1.25 test on the EUR/USD but if there is no further groundbreaking data (monetary policy) the base case scenario is further downside pressure on the common currency.

Has the zloty been rescured?

The zloty has lost some value since yesterday afternoon . Today we tested 4.23 level per the euro and we topped 3.35 on USD/PLN. The significant pressure the Polish currency was eased by solid manfucturing data from Germany, but the imrovemnt may be short lived. In negative coincidence (risk-off sentiment, dollar appreciation and dovish MPC member's statements) the euro may rise to 4.25 and the dollar soar toward 3.40 level.

The scenario may also be confirmed by the local data. Retail sales rose below expectaions (+1.6% y/y vs 2.4% y/y). A siginicant slump was observed in appareal/shoes category and consumer durable goods (from 6.2% y/y to 1% y/y).

Currently the base case scenario for the zloty moves to a higher rante (4.22-4.24 per the euro). The upside sceario is also expected on the dollar (3.34-3.36) and Swiss franc (3.50-3.52). Additionally, there is more risk that we see a futher depreciation of the PLN than its appreciation.

Expected levels of PLN according to the EUR/USD rateŁ

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3200-3.3600 3.3400-3.3800 3.3000-3.3400
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 5.2900-5.3300 5.2700-5.3100 5.3100-5.3500

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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