Daily analysis 01.10.2014

, автор:

Marcin Lipka

German PMI drops below 50 mark. Rumors before the ECB meeting. Speculations on capital controls in Russia. The USD/JPY above 110 level. Polish headline PMI slightly better but the details are not that encouraging. Polish pairs continue the recent trends.

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

  • 14.15 CET: Private payrolls according to the ADP (survey: 205k).
  • 16.00 CET: Manufacturing ISM index from the US (survey: 58.5).

Germany. Rumors. Speculations. Yen

Tuesday's inflation data from the euro zone pushed the EUR/USD markedly below 1.2600 level. The main reason behind the sell off was caused by the core HICP reading which dropped to 0.7% level (expectations around 0.9% y/y). The “clean” inflation was mainly lowered by subdued price rises in the services sector (drop from 1.3% y/y to 1.1% y/y in September). It may mean that not only the transitory factors are pushing the HICP lower but also that the overall trend on prices can be under pressure. As a result, the ECB meeting could not only meet but even exceed the dovish expectations.

The final PMI data from Germany also weighted on the common currency. Usually the second reading does not bring much attention due to the fact it rarely deviates from the “flash estimate”. This time was a bit different. Markit announced that Purchasing Manager's Index was revised downwards to 49.9 (firstly 50.3 was announced). Additionally, it dropped below 50 mark which separates expansion form contractions and manufacturing benchmark is at 15-month lows. Commenting the data Oliver Kolodseike, Markit economists and the author of the report said that “the September's manufacturing PMI results paint a worrying picture of the health of German's goods-producing sector”. Moreover, he also claims that new orders dropped at the fastest pace since the end of 2012.

Also rumors before the Thursday's ECB meeting are negative for the euro. The market is getting ready for a dovish conference, and the event is also highlighted by the press. Today the “Financial Times” wrote on the cover page article titled “Mario Draghi pushes for ECB to accept Greek and Cypriot “junk” loan bundles”

The “FT” writes primarily about Asset Backed Securities (ABS) which ratings cannot exceed its country credit standing. British newspaper, citing “people familiar with the matter”, claims that the subject creates some internal tensions inside the Bank. The market, however, is probably not that concerned with the scale of purchase (around few billion euro) especially when we compare it with 300+ billion operation but rather with the precedence and diminishing role of the Bundesbank. Additionally, the fact would also bring closer the ECB to the sovereign debt purchase (full QE).

Yesterday Bloomberg published, citing its sources, that Russia is planning to introduce the capital controls. The information was negative for the rouble which is currently at lowest levels in history to the euro/dollar basket. However, the odds for using such measures are really slim. Firstly, we can see that the conflict in Ukraine is gradually deescalating rather than getting more severe. The Minsk ceasefire/truce has been implementing and we can even expect that some of the sanctions can be scrapped by the year's end. Secondly the Russian Central bank is rather committed to allow rouble to trade freely and not to introduce heavy measures. Thirdly the CBR still has around 460 billion reserves which are melting pretty slow taking into the account the turmoil in the region.

Further gradual rouble depreciation is possible (especially to the dollar and our target set at 40 level may be reached), but the slide should not end with a panic (like in the late 90s) and no capital controls will be established even if some people at the Kremlin might discussed it.

During the Asian session one of the most important Japanese data was published – Tankan index. Business people surveys showed mixed picture of the economy what will be pretty challenging task for the BoJ. The manufacturing Tankan was better than expected (13 points vs 10) while services index turned to be lower than estimated (13 vs 17 points). Uncertain were also the expectations for further readings. This time the yen was losing value due to the global dollar appreciation rather than JPY weakness. Another main event regarding the Japanese currency is BoJ meeting (ends on October 7th).

In the hours to come it is worth focusing on the US data. If the ADP or ISM is strong we should expect the EUR/USD to remain below 1.2600 until the ECB conference. On the other hand, when the readings disappoint we may see a slight correction until Mario Draghi starts talking on Thursday's afternoon.

Better but still weak

The headline PMI reading was above market expectations (49.5 vs 48.6). However, looking into the details of the HSBC/Markit report the optimism quickly fades.

In the summary we can read that “four out of five of the PMI's components registered negative contributions to the headline figure in the latest period, the exception being employment (which is rather the lagging indicator – author's note)”. Additionally, the production declined at the fastest rate since 2013. As a result, slightly higher PMI does not rule out that we can see a 75 bps rate cut till the end of the year especially that HSBC notes some deflationary pressure. Summarizing the overall readings (headline + commentary) should be regarded as neutral either in short-term or concerning future MPC decisions.

Today both the EUR/PLN and CHF/PLN should remain in a very narrow range. Regarding the other PLN pairs the situation will be fully depended on the condition of global currency market. If the scenario of further downside pressure on the EUR/USD fulfills, the USD /PLN may even top 3.33.

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

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.2800-3.3200 3.3000-3.3400 3.2600-3.3000
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

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