Daily analysis 01.04.2014

Janet Yellen's gradual withdrawal from “6 months” and weaker than expected Chicago PMI kept the EUR/USD close to 1.38. Despite lower-than-estimated inflation in the Euro Zone, the expectations on loosening the ECB monetary policy do not change. Ukrainian issues are having an impact on the Polish PMI. Third time in a row – Osiatynski dovish comments.

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

• 16.00 CET: ISM reading from the US (survey: 54 points).

Dovish Yellen. ECB won't change

A strategy of ignoring negative data and taking advantage of the positive ones worked again. The EUR/USD rose on weaker-than-estimated Chicago PMI (there were also some comments that ISM published today can also be under pressure, but it seems that the weather played a smaller role nationwide than in the Chicago region) and dovish comments from Janet Yellen. In result we managed to remain near 1.3800 level. The European PMI has been just published, but they should not bring much excitement. The readings from the major Euro Zone economies are close to the preliminary data (French solid numbers are confirmed) while the Spanish and Italian PMIs are close to market estimates (52.8 and 52.4 respectively).

Janet Yellen speech was quite interesting yesterday. The Federal Reserve chairwoman presented her findings on the job markets and monetary policy in an unusually personal way. She directly contacted three people who lost their jobs during the Great Recession and in the recent years they were unable to get fulltime job, had no salary increase or worked below their qualification. The whole speech was a clever mix between the real stories and macroeconomics, but the main issues with Yellen address is that the unemployment is much more cyclical than structural. In result, the Fed can help to fight the lack of jobs using its tools using its monetary policy for longer (much more dovish remarks than during the latest conference after the FOMC meeting).

One of the major events during the Monday's session was Euro Zone inflation reading. Prices in the monetary union rose only 0.5% y/y, which was the lowest publication in more than 4 years. However, the market majority still expects no move from the central bank (regarding either rate cut or other unconventional tools). The argument for not changing the monetary policy can be a statement from Commerzbank cited in “The Wall Street Journal”. German bank economists claim that “The latest decline (in prices – author's note) appeared to have been driven by an unusually warm winter that weakened food and energy prices, as well as the late timing of Easter, which delayed en expected increase in holiday prices into April. Inflation should accelerate to 0.9% in April”. It s quite possible that Mario Draghi will also go in the same direction and explain his “no decision” in a similar way.

Summarizing, the market is still in “waiting mode” before the ECB meeting and payrolls data. In the mean time, we are also getting ISM readings (today) and ADP employment report (on Wednesday). Despite that the recent market moves were not in line with the overall market scheme (better data from the US should push the dollar higher), we can expect during ground breaking publications “wrong way” moves will be rather short-lived.

Slightly weaker

The EUR/PLN rose around 0.5% during the morning session after the Polish PMI fell short of expectations. The manger's index dropped from 55.9 to 54.0 points. According to Markit and HSBC, the headline reading was lowered by “weaker rise in new orders”, which can also be attributed to the “uncertainty surrounding the crisis in Ukraine”. Overall, however, the PMI is still solid and in commentary to the publication Agata Urbanska-Ginver, Economist, Central & Eastern Europe at HSBC wrote that “we assume further pick up in GDP growth in Q1 2014 with more bias toward some consolidation in the rates of growth in the following quarters”.

It is worth to mention another time some dovish comments from professor Osiatyński. The newly appointed MPC member told the Polish daily newspaper “Rzeczpospolita” (quotes from Polish Press Agency) that he does not see “good reasons to hike (interest rates – author's note) till the end of the next year”. It is another ultra-dovish statement from Osiatyński. The rest of the MPC seems to be fairly close to start tightening the monetary policy, a year earlier (at the beginning of 2015).

Summarizing, the market has already priced in the lower PMI reading and we should not significantly exceed 4.17 level on the EUR/PLN. In the medium term we should closely observe whether Osiatyński remarks spread over other MPC members. If it is a case than there is a good argument to slow the zloty appreciation in the longer run.

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

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