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Daily analysis 28.03.2014

, author:

Marcin Lipka

The EUR/USD is close to 1.3700 level before the inflation data and next week ECB meeting. Ukrainian hryvnia is the weakest in history despite the IMF help. Record low yields on peripheral debt. Osiatyński in another interview does not see monetary tightening till the end of 2015.

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

  • 13.30 CET: PCE inflation reading from the US (+0.1% m/m, February data, core PCE +0.1% m/m).
  • 14.00 CET: Inflation reading from Germany (survey +0.9%).
  • 15.55 CET: University of Michigan and Reuters consumer sentiment index (survey: 80.5 punktu).

Inflation. Bonds. Hryvnia

In the morning we almost touched 1.3700 level on the EUR/USD. The morning slide was pushed by worse-than-estimated data from Spain, however, it was rather an “excuse” than a real impact. The slump of the most traded currency pair would have been even deeper without another attempt to “explain” Yellen message. In an interview by Bloomberg TV we could hear one of the most well recognized dove. Charles Evans, Chicago's Fed president said that “My own take is it's most likely to be in the second half of 2015 (rate hike – author's note). If I had my druthers, I'd wait a little bit longer than that”. Evans also recalled the most recent Fed's dealer's survey (latest data available from January; the March one will also not cover the recent Yellen remarks because the data is collected before a meeting) where major financial institutions predict a first rage hike in Q4 of 2015.

Today we are having important data on inflation. The first reading will come from the US (PCE inflation, the most respected price index by the Federal Reserve). The market consensus shows that the prices should rise 0.1% m/m (at the same level as previously). A higher/lower reading even by 0.1 percentage point can give a bullish/bearish signal for the USD. A similar reaction (on the euro) can be expected from the German data which can be a good indicator before the Monday's euro are HICP publication.

The peripheral debt brings much less attention recently, but it seems that bond trades are pretty busy. According to Reuters, the 10-year Italian yields dropped to 3.28% (8-year lows), while Spanish yields slided to 3.25% (8.5-year lows). A capital flow to the government securities (and also to equities) has been regarded one of the main reasons (with rising current account surplus) of the euro strength.

Ukraine finalized a financial assistance with the IMF yesterday. It didn't, however, push the local currency higher. The USD/UAH pair rose to record high levels on Thursday and during the Friday session are only slightly lower (dropped from 11.3 to 11.2; still 25% devaluation/depreciation since the beginning of the year). Currency investors are pretty resilient to buy Ukrainian currency due to a fact that one of the precondition of the help is to allow the hryvinia to trade freely. The IMF also requests to increase the gas prices (reduce the subsidies) and lower the fiscal imbalances (pension reform; public employment reduction). Investors do also remember that the recent major IMF in Greece wasn't that successful and the country's debt was restructured.

Summarizing today's inflation data can be key for the EUR/USD at the end of the session. If German prices fall short of expectations and the US turns out to be higher, then we should finish the day under 1.3700. On the other hand, in an opposite scenario we may remain above the 1.3700 and try to position before the euro area inflation and the ECB meeting.

EM pushed the zloty higher

The zloty enjoyed a nice rally on Thursday afternoon. A significant lira appreciation and the financial assistance from the IMF (more on the political stability than economy) caused that we fell to 4.16 on the EUR/PLN. The zloty wasn't even affected by another dovish comments from professor Osiatynski. The MPC member told Reuters that “I see no good justification for a change in (monetary policy) stance and for raising rates before the end of 2015”. He also claims that “As long as labor productivity increases at a pace not lower than wages, there is no inflation pressure”. Regarding the recent MPC statements and other MPC comments, he wants to keep the current policy a year longer than other participants.

Today the data from the global economy should not bring more volatility on the zloty. The EUR/PLN should finish the week around 4.17 plus/minus 0.01PLN. The same situation should be observed on the CHF/PLN which is supposed to remain slightly above 3.40 mark.

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 3.4000-3.4400 3.4000-3.4400 3.4000-3.4400

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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