Daily analysis 29.09.2014

, author:

Marcin Lipka

The PIMCO's chief resignation and the Hong Kong protests should not affect the currency market. Quick and clever response of RBNZ. Further pressure on NZD after the prime minister's comments.An interesting week to come. Euro and franc are traditionally weakening. The dollar above 3.30.

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

  • 14:30 CET: PCE inflation from USA (survey: a minimum of -0.1% excluding the fuel and food prices 0.0% m).

PIMCO and Hong Kong. The intervention. A week

The Friday session was closed below the level of 1.2700. Further losses in EUR/USD were caused by the strengthening American dollar on a wide market. This was an effect of strong GDP reading for Q2 and continuation of current trends. Although the readings in the days to come may depend on the incoming makro data, the strength of the 'greenback' shouldn't be jeopardized in longer term.

Two issues gathering a lot of attention of the financial press ocurred during the weekend. One of them was the resignation of the co-founder of the PIMCO fund, Bill Gross. He was widely considered to be one of the best people to manage the capital on the bond market for many years. The PIMCO results weren't as impressive lately, what may have caused Gross to leave suddenly to the company of a colleague of his.

The Gross departure may have certain effects on the bond market, which gather a lot of the financial press' attention. It was mainly due to the fact that he managed the assets of joint worth of 2 trillion dollars. His strategic ways were rather well-known (i.e. an assumption that the long-term interest rates level in USA will stay low and cause the bonds' value to go up). The PIMCO chief would also bet lower profitability on a peripheral debt. As a consequence strong reactions can be observed on markets in Spain and Italy, which profitability are raising by few base points. It must not be assumed, though, that this capital would withdraw from the euro zone. It is to be put in the countries near the core of the euro zone (e.g. Germany). Therefore, the effect on euro should be marginal.

The second piece of information to make the headlines was student riot in Hong Kong. Firstly, it is worth noticing the very cause of it. The protests began when it was announced that the future leader of the region is to be chosen from the list of recommendations and not locally. The voting itself will take place in 2017 and until then the leader would be nominated anyway, so it is a quite trivial and unlikely to spread to the continental China or end up in the tragedy like the one in 1989. The FX market should remain immune to this news as well.

The stimuli appearing on the currency market are of much greater significance. It is worth noticing the data published by the Reserve Bank of New Zealand (RBNZ). According to the report published on the RBNZ website, the central bank bought 521 New Zealand dollars worth of foreign currency (while selling the local currency, ergo - weakening it). It is quite big an intervention, especially given that similar transactions did not take place in recent months.

This operation is indeed a part of a well-constructed plan. First of all, the pressure is put on the market for some time already by the RBNZ announcements about overpriced NZD. Secondly, the other part of the plan was the central bank's report which was broadly discussed in the Thursday's analysis. An additional proof confirming the monetary authorities in Wellington determination is the fact that the intervention was carried out in August. Usually when banks get to work, dealers / traders know of it quite quickly. This time the whole procedure was kept secret what will only exacerbate its effect. The market will still be speculating on quiet interventions of the central bank and they will affect the NDZ valuation.

Today's comments from the prime minister of the New Zealand can only make this issue more interesting. Bloomberg (quoting quotes John Key on saying that the fair valuation of NZD is the level of 0.65 USD (currently it's 0.77 USD after some strong losses). Interestingly enough, the governments chief is an ex-chief of Merrill Lynch and a member of the Currency Committee in the Fed, NY.

More clever moves from the New Zealand authorities in order to lower the value of the local currency are to be seen. And although it is unlikely that the kiwi reaches the level of 0.65 USD, 0.70 USD should be reached relatively fast.

Today it is worth paying attention to the US inflation data. The PCE, which is an index preferred by the Fed, is expected to fall m/m to -0.1%. Additionally, if the difference between the CPI (1.7% y/y in August) and PCE is maintained, the latter should reach 1.3-1.4%, much below the Fed goal. This fact can be suppressed though by the appreciative aspirations of the dollar. The final decision is to be made on Friday, after the euro zone inflation data, the EBC summit effects and the US payrolls are published.

Stability and continuity

There is not much going on on the main currency pair in Poland. The EUR/PLN is moving within levels of 4.17-4.18 and this should not be changed neither by the data from the global economy nor the Wednesday's PMI reading. The trade on CHF/PLN is equally calm and it shouldn't go far from 3.46-3.47.

There is much more movement on the USD/PLN and the GBP/PLN. However, they are a consequence of global movements on EUR/USD and EUR/GBP. The dollar should reach it's annual record and there are no signals as of yet which could change this tendency. The exceeding of 5.50 on GBP (meaning reaching the 7-years-high) is also not excluded. However, in order for that to happen, two things must occur: a long series of good data from UK and more promises of BoE about raising interest rates.

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

Range EUR/USD 1.2950-1.3050 1.2850-1.2950 1.3050-1.3150
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.2000-3.2400 3.2200-3.2600 3.1800-3.2200
Range CHF/PLN 3.4300-3.4700 3.4300-3.4700 3.4300-3.4700

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

Range GBP/USD 1.6250-1.6350 1.6150-1.6250 1.6350-1.6450
Range GBP/PLN 5.3100-5.3500 5.2900-5.3300 5.3300-5.3700

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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