Daily analysis 30.07.2014

, author:

Marcin Lipka

The EUR/USD is falling below 1.3400. European sanctions, better-than-estimated US data and increasing odds for more hawkish messages from the Federal Reserve are keeping pressure on the Euro-dollar. Swedish GDP falls short of expectations. The zloty is traded above 4.15 per Euro and close to 3.10 for the USD. Probability of further weakness is higher than a rebound.

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

  • 14.15 CET: Changes in private payrolls according to the ADP (survey 235k).
  • 14.30 CET: US GDP reading (survey +3.1% seasonally adjusted, annualized numbers).
  • 20.00 CET: FOMC statement after the two-day meeting.

Sanctions. The data. Sweden

Sectoral sanctions announced by the EU and the strongest consumer confidence readings from the US since 2007 pushed the dollar higher and extended the Euro sell-off. In result, we are slowly falling below 1.3400 on the EUR/USD today. In the following hours the market will focus on US GDP reading, private payrolls from the ADP and statement issued by the Federal Reserve after its two-day meeting.

On Tuesday the European Union imposed sectoral sanctions on Russia. Restrictions in goods/services exchanges will cover military equipment (the current contracts will be fulfilled – French warships are supposed to be delivered), drilling technology and financial services. The EU decision clearly matches the draft obtained earlier by the “Financial Times” and presented in our commentary on Thursday.

The banks where the government ownership exceeds 50% may be affected by the Russian sanctions the most. They will be cut from European financial market and the cost of obtaining capital for them is supposed to increase. It is worth noting, however, that the institutions controlled by Moscow will need (according to Morgan Stanley) around 33 billion USD of new and refinancing funds. The amount is not that significant and if they fail to get the capital from the Asian market, they always may use the central bank funding where the currency reserves are almost 500 billion USD. Undoubtedly, Russia is losing on the image side, what may be visible in hard numbers unless the Kremlin changes its strategy. On the other hand, we should dismiss statements about Russia losing 100 billion USD next year or its GDP shrinking by 5% due to sanctions. These numbers seem to be overestimated by one order of magnitude.

In the following hours we have three major publications. Overall better readings from the US should give additional boost to the dollar and keep the downward pressure on the EUR/USD. The dollar should be fueled by ADP reading above 250k or GDP exceeding 3.5% (seasonally adjusted, q/q annualized). Later we are also getting FOMC statement after the two-day meeting. Some more hawkish remarks (especially regarding stronger employment or higher inflation) should result in further dollar strength.

The Swedish currency rebounded a bit after the sell-off caused by the most recent Riksbank decision. However, after today's weaker-than-expected GDP reading, the krone is losing value again and we are topping 9.23 on the EUR/SEK. Stockholm readings show that the growth in Q2 rose only 0.2% q/q and 1.9.% y/y, while the Bloomberg consensus was showing a gain around +2.4%. Such weak growth should keep the selling pressure on the local currency and justify the Riksbank move.

Summarizing, the sanctions theme should be getting less and less attention, whereas the macro data is expected to rule the market. There is a higher probability that both ADP and GDP readings may surprise on the “plus” side, what in result should give additional boost to the dollar and push the EUR/USD toward 1.3350. Additionaly, if the Fed's statement is more hawkish, we may see the Euro-dollar trade in mid 1.33 until the end of the week.

The zloty is lower

As we have suggested for several days the sanctions on Russia would not result in positive developments on the zloty. The EUR/PLN is approaching 4.1550 in late morning while USD/PLN is traded around 3.10. The sentiment toward the local currency is under pressure also due to Polish Radio News Agency reports that Russia is scheduled to ban some Polish fruits and vegetables from August 1st. Besides the worsening parameters of Polish export (and lower demand on the zloty), it may cause a further downside pressure on prices.

It is possible that restrictions in trade with Russia may cause the extension of low inflation readings in Poland. Further with falling GDP growth it can be a good argument to cut interest rates as early as during October meeting.

Summarizing, the selling pressure on the zloty should remain. It will not be a rapid slide but we should end the current week above 4.16 on the EUR/PLN. 3.10 per the dollar and 3.42 for the Swiss franc. Moreover, the pound would probably exceed the year's high and move above 5.25 mark.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1200-4.1600 4.1200-4.1600 4.1200-4.1600
Range USD/PLN 3.0400-3.0800 3.0600-3.1000 3.0200-3.0600
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Range GBP/USD 1.7050-1.7150 1.7150-1.7250 1.6950-1.7050
Range GBP/PLN 5.2100-5.2500 5.1900-5.2300 5.1500-5.1900

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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