Daily analysis 25.04.2014

Slightly higher volatility after solid US data. Mario Draghi's speech in Amsterdam wasn't that dovish. Increasing risk aversion pushing the yen higher despite lower than expected inflation rate. Ukrainian issues and Russian's rate cut are pushing the EUR/PLN above 4.20 mark.

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

• No major macro news that can affect the analyzed pairs.

The data. Draghi. JPY

We have been observing unusually stable trading on the EUR/USD where majority of trades were made at 1.3820 plus/minus 30 pips. Such a low volatility can be considered as calm trading even at the daily basis, not to mention weekly horizon. However, the characteristic of the FX has been relatively high level of volatility, so such conditions observed in the recent days probably will not last for much longer.

After the Ifo data yesterday the only event which speeds up the blood pressure on Thursday was pretty solid data from the US. New durable goods orders rose by 2.6% m/m, whereas the expectations were at 2%. A better outcome was observed even in the figure which excludes transportation (actual: +2%, consensus: +0.9%). Such a strong rebound from previous months has both a result from depressed data during the winter months but on the other hand, it also can be derived from higher orders for capital goods, what can be a good indicator for solid GDP growth in the following quarters. The reports initially pushed the EUR/USD lower but we quickly came back to the levels before the publication. Observing the euro-dollar both during the European data (strong PMIs and Ifo) and US readings we can conclude that investors are waiting for something “big” (probably Euro area inflation scheduled to be published on Wednesday, GDP from the US or Payrolls).

Some expected that Mario Draghi during his speech in Amsterdam can bring some “big” news. The headlines showed again that the ECB is ready to use the unconventional policy if the conditions warrant such a move but Draghi also stressed conditions against such perspective. He claimed that “the policy stance may also be affected by a continued appreciation of the exchange rate. The exchange rate is not in itself a policy target, but a rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery. If so, this would call for policy action to maintain the current accommodative stance. This is why we have said that the exchange rate is an increasingly important factor in our assessment of the outlook for price stability” (dovish message). However, a paragraph later he said “This assessment, however, needs to take in the whole picture. To the extent that the exchange rate is rising because confidence in the euro area is returning and capital inflows are increasing, this leads also to looser financing conditions. While exchange rate appreciation contributes to low inflation in the short run, falling long-term rates support rising inflation over time, insofar as they are passed on into lower bank lending rates and stimulate demand. As a result, the overall policy stance has to take this balance of forces into account” (pretty hawkish). During his remarks on monetary policy (how it has changed recently due to the crisis etc.), Draghi also said that “broad-based deflation risk are not what we see in the euro area today”, which still gives him a “way out” not to change the monetary policy.

Since we started the Friday's session, the yen has been strengthening. However, the Japanese currency gains are not a result of the inflation data published today, which turned out to be lower than expected (for Tokio rose 2.7% vs expectations at 2.8% in April; data for the whole country in March was in line with expectations) but are due to most risk aversion caused by more tension in Ukraine. The inflation data sill does not rule out more monetary stimulation, which is expected to be implemented in the second part of the year. The closer we are to this date, the more volatility of yen and stronger reactions to the macro data will be observed. If the economic reports warrant more easing, we may expect much weaker yen which can translate to test 105 on the USD/JPY with a target set even at 110.

Summarizing, the EUR/USD conditions still does not rule out the possibility of testing 1.3900 level as early as this month. Additionally, if the Euro area inflation turns out to be above market consensus for April (at least 0.9% y/y), then we should expect that the EUR/USD may remain close to its multi-year highs (probability of any action by the ECB decrease).

4.20 test

Market participants betting the EUR/PLN rise got a good argument to proceed an attempt to break 4.20 level. Starting a counter-terrorist operation in the east of the country and Russia's rating cut by the S&P (form BBB to BBB minus – the lowest investment level) caused that global investors to cut some positions in the EM currencies. On the other hand, it is also worth to mention that the overall zloty depreciation is fairly limited (0.25%) and it is fair to expect that the sentiment improves (for example no new dire news does comes from the region), so we can quickly regain the loss and trade again below 4.20 level. A slightly higher depreciation was observed on the CHF/PLN (due to some weakness on the EUR/CHF) were we are getting closer to 3.45 level.

If the following days do not bring another wave of conflict escalation (Russian troops intervention on the Ukrainian territory) or much more severe sanctions (trade), we should expect that the EUR/PLN may return below 4.20 level and CHF/PLN should slide to 3.43.

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

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