Afternoon analysis 14.11.2014:
Few very interesting days on yen are behind us. Japanese currency weakened due to the speculations related with earlier elections. Zloty also survived a few moments of fear, after Thursday's data on inflation but the rates are slowly becoming normal thanks to the stron reading of GDP.
Yen's influence on the currency market
Since many weeks yen is generating many movements on the global currency market. The situation looked similar during recent days. On the wave of market speculations about the possibility of conducting earlier elections to the lower chamber of parliament, the Japanese currency lost over one and a half per cent since Monday.
Theoretically early elections should not have a bigger impact on the interest rates in developed democracies. However Japan's situation is different. Since the moment of electing Shinzo Abe as a prime minister, he conducts fiscal stimulation, which is very atypical for developed countries. He receives a big help in this process from central bank, lead by Haruhiko Kuroda. It purchases all available assets (including shares) from the market, to realize the plan of reviving inflation.
Thus there are no reasons to be surprised, that during recent two years yen lost 30% of its value in relation to the dollar. Another part of prime minister's plan is now in progress. After Monday data on GDP (which will probably be below prognoses), he plans to announce, that the increase of sales tax planned on October 2015, will be moved. However, this only seems to be an election propaganda. On the same press conference (the media informs that it will occur on November 18th), we will also know the date of earlier elections for the parliament (it may be mid December). The aim of this whole plan is to legitimize Shinzo Abe's policy.
This week the Japanese currency had several times broken the weakness records of seven years in relation to the dollar. The investors expect, that if the hypothetical plan will come true, then the Japanese prime minister will realize “Abenomics” even more eagerly, which will convert on yen's further wearing off. For a longer time the market has assumed, that target level for USD/JPY, will be the areas of 120. However, currently there are rumours about testing 125 yens per dollar in the perspective of few upcoming months.
Tosses on Japanese currency, have slightly dimmed the movements on EUR/USD. Throughout the majority of this week, the main currency pair was moving in the division of 1.2400-1.2500, while waiting for the data about GDP from the euro zone. Because the data appeared to be close to the economists' prognoses, this factor did also not cause any bigger changes.
The market bears tried to take advantage of good readings from USA (consumers' sentiments; retail sale), and take EUR/USD lower. However, they did not manage to do that and as a result, we are finishing with rates very close to the Monday's opening.
In conclusion, the global currency market is currently concentrated on Japanese currency. The movements on yen will absorb most of the attention in the upcoming days. If Shinzo Abe's plan is implemented, we should witness another wave of the JPY weakening and consequent approach to the level of 120 per dollar. On the other hand, if the rumours do not appear to be true, we should observe a significant (but short term) working off on yen.
Throughout longer part of the week, the zloty remained stable. We have observed a bigger evaluation right after GUS published the information, that deflation is much deeper, than it was expected in October. Consumers' prices index descended by 0.6% y/y, while the economists' prognoses assumed a descend by 0.4%.
During the morning trade on Friday, the EUR/PLN pair was only 0.02 PLN below the annual records and the anxiety was felt before the data about GDP. They, however, appeared to be much better than estimations. The increase of national economy in the tempo of 3.3% y/y in third quarter, was by at least half of per cent better, than the consensus assumed.
This fact will allow to decrease the probability of money rates cutting on December summit (and maybe even in January). A smaller chance for soothing the monetary policy is a positive information for the currency and, thanks to that, EUR/PLN returned in the mid areas of 4.22. The zloty also gained in relation to franc, slightly moving away from the limit of 3.52.
Apart from the global factors, the national currency will wait for Thursday data on the industrial production in the upcoming week. If they will confirm the acceleration of this economy branch, we can expect stabilisation on zloty. On the other hand, if the readings would be clearly below the prognoses, the anxiety of cutting money rates may come back, and then the areas of 4.24 on euro and 3.53 on franc, may be again in the game.
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