Daily analysis 31.03.2014:
The market begins to position before the ECB meeting and Friday's job's report. Another meeting on the neutral grounds – Paris talks between Kerry and Lavrov on Ukraine. The zloty remains stable around 4.17 per the euro.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- Already published euro are inflation (survey: +0.6% y/y; actual data +0.5%).
- 15.45 CET: Chicago PMI from the US (survey 59 points).
- 15.55 CET: Janet Yellen speech in Chicago.
Inflation. Politics. ECB and NFP
The Friday's data were not groundbreaking. Both the inflation reading from Germany and the US were in line with expectations. Surprisingly, the EUR/USD bounced quite significantly from the 1.3700 level. A simple explanation, which is sometimes exploited on markets, is that some participants expected even lower reading after earlier reports from Saxony and Spain. The other explanation can also be a low PCE reading from the US, but not on the m/m basis but y/y. If we look at the US Department of Commerce data we can see that the prices grew just 0.9% y/y (which was the second the lowest reading in more than four years).
It is hard to find a good “explanation” for the morning EUR/USD move. Initially, after the euro area inflation hit the wires (only +0.5% y/y vs expected +0.6% y/y), the most heavily traded currency pair dropped to 1.3720, but after few minutes it exceeded the opening level and rose to 1.3770. The fact that most economists do not expect any change in the monetary policy should not serve as a reason for the EUR/USD appreciation. The bulls who trade on the euro-dollar have chosen a risky strategy – ignoring bad news and exploiting the positive ones. It is also sometimes an indication of a trend changes.
On Sunday we had another set of negotiations between US Secretary of State and the Russian foreign affairs minister. As usually, the meeting was not groundbreaking, but at this moment it is even hard to evaluate what kind of agreement can be established. The West seemed to accept the Russian annex of Crimea. It can also be confirmed by today's “The Wall Street Journal” analysis. The “WSJ” points out that during the summary of the discussion, Kerry didn't even mention the Crimea. The US requests to withdraw Russian soldiers from the Ukrainian border and start talking to Kiev officials. On the other hand, Moscow would like to establish Russian as a second official language in Ukraine and get a promise that Poland's eastern neighbor will not join NATO. All the mentioned requests seem to be pretty soft, what can confirm the hypothesis that the West agreed to the Crimea news status while Russia accepted that Kiev will establish closer ties with Brussels.
In the coming days the market should position itself before the Thursday's ECB meeting and Friday's US data. After the inflation reading published today there can be some more expectations for more decisive move from the ECB, but Mario Draghi will probably not change his mind and leave the monetary policy unchanged. Traditionally, as the first Friday approaches investors will be waiting for the payrolls reading. Economists expect that around 200k jobs were created in March and if we get much higher number it will be really difficult for the EUR/USD to hold its recent gains.
Summarizing, the EUR/USD desperately tries to hold near the recent highs. If we get more dovish comments from Draghi (during the conference after the ECB meeting; even without a cut) and significantly higher payrolls reading, we can expect the EUR/USD can end the week more than 100 pips below the current value. At the end it is worth to remember about Janet Yellen speech today. It is not clear whether she will make any comments on the monetary policy, but it can be one of a few reasons for the EUR/USD to rise.
The zloty seem to be quite resilient for the external impulses. It was clearly seen both during the Friday's and Monday's data. Tomorrow, however, it is worth to watch the Polish PMI reading. There is a slim chance that we will beat the recent 4-high reading. It is also worth to see whether there will be any comments from purchasing manger and some remarks on Ukrainian and Russian markets.
Summarizing, the zloty should remain pretty close to 4.17 level on the EUR/PLN. A similar situation should be observed on the CHF/PLN. We can even make a pretty safe bet that the Polish currency should be stable at least till the ECB meeting and Friday's jobs data.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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