Daily analysis 03.07.2014

Solid ADP strengthened the dollar only for a while. Yellen not eager to tighten the monetary policy to prevent bubbles. Riksbank cuts interest rates by 50 bps. ECB and NFP in focus today. Smart move by the Polish MPC. Standard & Poor's on tapes and early election. Another solid export growth according to KUKE.

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

• 13.45 CET: ECB interest rate decision (survey: unchanged, benchmark at 0.15% and the deposit at minus 0.1%).
• 14.30 CET: Mario Draghi conference after the ECB meeting.
• 14.30 CET: US BLS job report (survey: NFP at 211k; unemployment rate: 6.3%; earnings +0.2%.

Yellen and ADP. Deep cut. Payrolls and ECB

The dollar strengthened slightly after solid ADP data, but due to some discrepancies between the private reading and official publication, the EUR/USD slide was quickly levelled off. Today in focus we have the payrolls and ECB conference.

Similarly to previous morning, we are starting the session around 1.3660 today. The US currency only briefly gained some value after 280k ADP reading (consensus was at 213k). In the longer term ADP and Moody's Analytics publication is in line with the BLS report but recently the difference is pretty significant (in April it was almost 100k and in May up to 50k) so the “prognostic” value of the Wednesday reading is not that high. However, if the June's “payrolls” come close to the yesterday data (over 250k), we should see a major downward move on the EUR/USD.

Both Yellen speech and her discussion with Christine Lagarde wasn't that interesting taking into the account the future monetary policy. The two most powerful women in the financial world were talking about macroprudential tools which may and should prevent the economy from systemic crisis (when a bubble asset bursts it should not drag into the recession/depression the whole country). Regarding the dollar and equities Yellen clearly stated that she would not hike interest rate to prevent asset bubble. She would rather see higher capital and liquidity requirements more action from Financial Stability Boards and clearing institutions for broad range of derivatives. It can be see as a slightly USD negative and equities positive signal.

Today the Swedish krone slumped to 4-year low after the Riksbank cut its benchmark rate by 50 bps, whereas market expectations were set at 25bsp. In the central bank statement we do see a significant inflation reduction for 2015 CPI (in February it was 2.5%, in April 2.2 and today only 1.3%). The Bank also clearly stated that it does not to plan rise the benchmark till the end of 2015. It means that the average reference rate will stay at 0.25% for the whole next year (while in April it projected the benchmark at 1.1%). Such dovish MPC stance should still keep the SEK under pressure and new lows are expected.

Thursday's trading will be shaped by two events – Mario Draghi conference and payrolls reading (both at 14.30 CET). Besides the BLS headline reading (NFP and unemployment), the market will also focus on salary rises and labor force participation rate. If we see a strong “payroll” data (above 250k) combined with higher wager growth, the dollar should markedly benefit from such reading. A contrary publication below 200k and subdued participation rate should put additional pressure on the greenback. Regarding Draghi, it is hard to expect that he may bring us closer to QE or ABS purchases. But he still may be quite dovish suggesting that mid-term inflation can get further from the target and that exchange rate may still push prices lower. Regarding the both publications it is higher probability that we may finish the week below 1.3600 than above 1.3700.

MPC decision

Polish MPC did make a smart move yesterday. Using the new economic projections, and especially lower path of inflation for 2014 (there is 50% probability that it will stay between minus 0.1% to +0.4% vs March expectations set between +0.8% to +1.4%) it decided to dismiss the forward guidance. At the first time it could be interpreted as a rate cut as early as in Septemer.

However, Belka's first answer for a rate question markedly reduces the possibility for such a move. He claims that the probability for a cut is still “very low”. Additionally, the MPC chief says that there is a “broad consensus” inside the Committee regarding “the path of monetary policy”. The whole conference we should regard as hawkish.

In result, the MPC left some room open to cut the interest rate if economic number fall short of expectations (by scrapping forward guidance) but at the same time continues to support the base case scenario to leave the interest rates unchanged.

Besides the MPC meeting we had two positive data. According to KUKE organization in May export rose by 8.5% y/y. If we assume that import rose at the 2014 average pace (around 5-6%) my should expect another solid trade surplus in May (around 500 million Euro) and the Jan-May data may top around 1.3 billion USD on the “plus” side.

Another good info came from Standard&Poor's. According to rating agency (quotes from PAP) “the tape scandal will not have impact on Polish credibility, Polish institutions are credible for us. If there is a political change, we would not see any threats to the country credibility”. S&P is also impressed that Polish economy is untouched from the Ukraine crisis.

Summarizing, scrapping “forward guidance” from the statement was a dovish signal but Belka's assurance that the base case scenario is still keeping the rates at current level causing that the MPC message should be regard as neutral or slightly leaning to hawkish. It should give a minor support to the zloty in the medium term. Today, however, despite US and Euro area data we do not expect major changes on the zloty and the Polish currency should be traded around 4.15 per the Euro and slightly below 3.42 on the franc.

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

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