Daily analysis 24.03.2014

Bullard “explains” Yellen's “six months”. Goldman Sachs does not believe in earlier interest rate hikes in the US. Weaker PMIs from Germany and China, but much better in France. Polish new MPC member does not see interest rate hikes even in 2015?

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

• No key macro data.

More on Yellen. Goldman Sachs. PMI

On Friday James Bullard (St. Louis Fed's chief, not voting this year, his views are pretty close to the market consensus) took the opportunity to clarify Yellen's “6 months promise”. According to Reuters he said that “on the 'considerable period' being six months, the surveys that I had seen from the private sector had that kind of number penciled in”. He also added that “That wasn't very different to what we had heard from financial markets. So, I think she's just repeating that”. If we look closer to the explanation, it is far from being dovish. Firstly, because the market expectations was much different (the rate hikes in 3rd quarter 2015) what was also confirmed by sharp rise of 2-year treasury yields. In result, we can conclude that he kind of confirmed the Fed's stance that the rates can rise much earlier than expected (also the same picture is painted in the FOMC economic projections).

The mentioned opinion is probably far from Goldman Sachs view. The most recognized investment bank claims that its view on US monetary policy hasn't changed much. “The Wall Street Journal” cites “GS” chief economist, Jan Hatzius, who wrote to his clients that “our central forecast for the first hike remains early 2016, although the risks now tilt in the direction of a slightly earlier move”. He also claims that there are several reasons why in 2015 the US monetary policy will not change. “Firstly, we do not think that Yellen meant to send a strong signal of a shift in the reaction function”. Further Hatzius sees that there is a downside risk to the American GDP growth, and the inflation will return slower to the FOMC target. Others, however, started to revise their expectations. Bank of America's Merrill Lynch expects the tightening in 4th quarter of 2015 (previously in 1st of 2016) and a head of G10 FX strategy at Citi (according to Moneybeat) says that when the interest rates start rising, the yen, euro, and the Canadian dollar “will be among the biggest losers” to the greenback. Regardless whether the last Federal Reserve meeting will be a truly groundbreaking moment (a beginning of a stronger dollar), most market participants will be closely scrutinize the incoming data. If economic report confirm that the US economy is strong and only a harsh winter put a pressure on the readings, then we can see that market expectations will be getting closer to the Fed's projections. Eventually, it will be a strong “buy signal” for the greenback.

Today Markit and HSBC published PMI indexes. The manufacturing data from China was again below the 50 mark (48.1; the worst reading in 8 months). Commenting the data Hongbin Qu, chief economist, China & Co-Head of Asian Economic Research at HSBC wrote that the “Weakness Is broadly-based with domestic demand softening further”. Qu is, however, more optimistic on the future and claims that Beijing launches “a series of policy measures to stabilize growth” which will include “targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower”. There are also some interesting finding in the France PMIs. Both services and manufacturing index jumped over the 50 mark (51.4 and 51.9 respectively). On the other hand, we had a fall in German managers index which dropped to 53.8 for manufacturing and 54.0 for services. Commenting the German data Oliver Kolodseike, economist at Markit does not see any significant threat to the Europe's largest economy and predicts that it will grow 0.7% in the Q1 of 2014.

Summarizing, investors will be very sensitive to US market data. Stronger economic reports from the other side of the Atlantic ocean will be positive for the dollar (especially regarding tightening expectations). It is also worth to point out that the recent fall was followed by a small correction what can be an indication that some “longs” try to use any blip to reduce their positions. Currently the EUR/USD perspective is fairly negative and we can slide under 1.37 till the end of the week.

Stable on the zloty

The EUR/PLN pair didn't react to Chinese or European PMIs. It is possible that we can trade near 4.20 level for the rest of the week. More volatility will be expected when some dramatic news comes from Ukraine. However, taking in the account recent developments it is highly unlikely that the conflict intensifies in the following days.

There were some interesting remarks in Polish Press Agency interview with professor Osiatynski. The MPC member said that “it is possible that the Committee will be able to hold rates at least till the end of the year. I think, that also in the next year”. It is really vital conclusion especially that market participants and other policy makers see a first rate hike in early 2015.

Summarizing, we should have a fairly calm trading on the zloty. The EUR/PLN pair will be traded around 4.20 and the CHF/PLN should not rise over 3.45.

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

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