Daily analysis 30.10.2014:
Slightly more hawkish Fed pushed the dollar significantly higher. Rumors on the Friday's Russian central bank decision. Very close to the gas deal. The decision as early as today? Frank discussion entirely the effect of rumor not real threat. The zloty stabilizes both the franc and euro, but significantly losing value to the dollar.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 13.30 CET: GDP from the US (3rd quarter reading, annalized, seasonally adjusted; +3.0%.
- 13.30 CET: Weekly jobless claims from the US (survey: 285k).
Fed. Rouble. Gas
The only dovish message in Fed's statement was keeping the “considerable time” phrase between the QE end and first interest rate hike. Clearly it wasn't enough to meet the expectations mounted before the announcement.
The FOMC skillfully played the issue choosing the solution which is favorable to both the equities and the dollar. The monetary policy makers suggested that the economy is strong enough not only to withstand the asset purchase end but it is also ready for interest rate hike in mid 2015.
Firstly, Janet Yellen and her colleagues claim that the employment conditions improved “with solid job gains and a lower unemployment rate. On balance, range of labor market indicators suggested that underutilization of labor resources is gradually diminishing”. It is the best description of job market since many years. Concerning the Fed's dual mandate (focusing both on the employment and inflation) it shows that the FOMC is on the path to tighten monetary policy on schedule.
Doves should be also disappointed by the inflation comments. The Federal Reserve completely ignored the last meeting discussion (“minutes”) where the risk of disinflation was frequently raised. In the recent statement we read that “although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year”.
A good indication of more hawkishness was also the fact that Narayana Kocherlakota (strongest dove) dissented while previous dissenters (Plosser and Fisher) signed the statement.
As a result the combination on dovish expectations combined with more hawkish reality pushed the dollar significantly higher and the EUR/USD slumped below 1.2600 level. However, it is hard to expect that we may finish the week markedly lower even with stronger GDP reading from the US and lower jobless claims.
There is still a lot of action on the rouble. The CBR burned more than 10 billion USD reserves in last four trading days. Today's Financial Times spends a considerable amount of time on the Russian currency. Besides the information presented in our analysis during the last few days the “FT” claims that many investors expect that the CBR not only hikes the interest rate but also combine the decision with allowing the rouble to trade freely.
Tomorrow's CBR decision will be really interesting. If we see a significant interest rate hike (more than 50 bps) and the resignation of the intervention schedule then the ruble appreciation should extend. On the other hand if the central bank fails the expectations we may see another wave of speculation on the Russian currency.
Trilateral talks between the UE, Russia and Ukraine were scheduled to finish yesterday. Despite the fact that all sides claim that most of the details are already agreed, the main problem still seems to be unresolved: who is going to pay for the Ukrainian gas or at least who is suppose to guarantee the future payments?
This conclusion may be drawn from Geunther Oettinger statement. The EU energy commissioner said that “Ukraine has a large payment problem, it is practically insolvent. He also added that the country still “gets billions in aid” and “now has to earmark some of the funds for gas purchases”.
No matter how the conflict is resolved, the agreement should be signed pretty quickly and the question who is going to pay for Kiev gas is rather the question of negotiation skills of EU and Ukrainian officials.
Summarizing, yesterday's Fed meeting showed that the FOMC is quite optimistic regarding the US economy what confirms the mid 2015 rate increase schedule. As a result the outcome for the EUR/USD is negative and the most heavily traded currency pair will be looking for a good reason to test 1.25 level (but rather not today even if both GDP and claims beat the expectations).
The 4.00 PLN Swiss franc rumor seems to be quite long lived. It is partly a result of the government using it via the official channel and send the issue to the local Security and Exchange Commission to investigate the threat.
Currently the case does not have any issue on the PLN and with high degree of probability it will not be the ground breaking moment for the folks indebted in the CHF. Moving to the current developments the Fed decision didn't spur much action on both euro and the franc. The effect was mostly seen on the USD/PLN and the pair soared to more than one-year-high.
Summarizing, the zloty should remain within the current range till the end of the week, but from Monday more attention will be focused on the the local data – PMI on Monday and the MPC meeting on Wednesday.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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