Daily analysis 24.12.2014

, author:

Marcin Lipka

Solid data from the US economy again prompted discussion on sooner-than-later interest rate hike. Standard&Poor's warns Russia on rating cut in the coming 90 days. The zloty is significantly lower to most currencies. Is the central bank intervention on the horizon?

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

  • 14.30 CET: Jobless claims from the US (survey: 290k).

Bullish data at the end of the year is helping both stocks and the dollar

It is hard to ignore the Wednesday's US data. The economy across the pond expanded 5% in the Q3 on the seasonally adjusted annualized basis. It means that the last 3 months were the best for American economy since more than 10 years. Even using the “Polish” methodology which shows y/y data the result is still impressive – plus 2.7%.

According to the Department of Commerce, the contribution of each factor to the result was quite balanced and spread between spending and investments. There was also no deviation from inventors. One of the small surprises was an increase in government spending, especially for defense. Overall the GDP looks solid and healthy with good perspective for the following quarters.

What is not surprising during bullish readings, is a call for earlier interest rate hike. It is worth noting, however, that the data came just after the recent FOMC meeting and even if the Fed had expected a bit lower reading, it would not had changed its mind after Q3 GDP. Additionally, the voting part of the Committee is going to be more dovish in 2015 and the most recent data should not change their view that it is more harmful for the economy to rise the benchmark a bit earlier than later.

Regardless of the details of future Fed's decisions, the GDP was both positive for the dollar and stocks. US indexes rose to new all-time-highs for yet another time this year and the “greenback” has strengthened by more than 10 percent to most world's currencies this year. There are not sings the medium-term trend is going to revers, but some corrections, pretending that they may change the tendency, are inevitable.

Threat of lower Russian rating with no impact on the currency

Standard&Poor's announced in a statement that it is considering a cut to Russian credit credibility. The rating agency claims there is at least 50% probability that Kremlin would be downgraded to junk within 90 days. The evaluation is going to be processed in mid January.

It is definitely a negative message for the economy, but does not really have to mean a significant rouble depreciations. After yesterday's Kommersant reports, plans for taking control of the insolvent banks by the state and providing liquidity by the CBR it is possible that authorities will be able to stabilize the rouble situation for weeks if not for months. So, only another slump of oil prices – to around 40 dollars per barrel – may push the rouble to further significant sell-off.

In the longer term the rouble is, of course, poised to weakness but the yearly depreciation should not exceed the difference between Russian future inflation and the CPI observed in either US or the euro area.

Foreign market in a few sentences

The global currency market situation is still positive for the US dollar and keeping pressure on the euro or yen. Even if some participants decide to generate correction on those assets, it still should be traded at around 1.22 on the EUR/USD and 120 on USD/JPY.

Waiting for the intervention

Current situation is getting more and more similar to that observed in mid-2013. More than a year ago there was also some risk off scenario caused by the Federal Reserve comments which were interpreted as an indication of sooner tapering. It is worth noting, however, that last year the perspectives was worse for the economy and there was no boost from cheaper oil. But on the other hand the regional geopolitics was much more stable so we may assume that the circumstances were pretty even.

When in June of 2013 the EUR/PLN rose to 4.32, the NBP decided to intervene on the markets. It sold a certain amount of foreign currency and Marek Belka told PAP that “Somebody thought they could make money betting on weaker zloty and got their wrists slapped”. The EUR/PLN dropped fairly quickly to 4.20 but after few days it returned to 4.35. The situation stabilized after several weeks when the pair returned to around 4.20

It is hard to say whether we are facing the same scenario currently and if a good level for intervention is 4.32 or 4.35. It is worth to remember, however, that the probability of taking some action by the central bank authorities or BGK is getting higher with each zloty-cent drop of the PLN. When the intervention hits the wires the initial move may be even larger than 0.05 PLN.

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

Range EUR/USD 1.2250-1.2350 1.2150-1.2250 1.2350-1.2450
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000
Range CHF/PLN 3.4600-3.5000 3.4600-3.5000 3.4600-3.5000

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

Range GBP/USD 1.5650-1.5750 1.5550-1.5650 1.5750-1.6850
Range GBP/PLN 5.2500-5.2900 5.2300-5.2700 5.2700-5.3100

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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