Daily analysis 02.09.2014:
Geopolitical signals for markets – Obama's visit to Estonia, the NATO summit in Wales, Merkel remarks regarding the conflict. Another look at the Jackson Hole symposium - not so dovish? Japanese yen is getting closer to a 5 year low. The PLN is weakening due to another set of problems in the East. Market consensus shows no interest rate cut at the upcoming MPC meeting.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 16.00 CET: US ISM manufacturing reading (consensus 56.8 points).
Geopolitics. Another look at the Jackson Hole. The yen
The situation in this region is still having a significant impact on the asset valuation in Europe, including EM currencies and the EUR/USD. Investors are trying to predict how future events between the EU, Ukraine and Russia may evolve in hours to come. Economic interest may be intensified due the anticipated visit of Obama in Tallin, where the US president is scheduled to meet with both the Estonian authorities and two other Baltic state officials. Overall, these countries have adopted the toughest stance toward Russia, therefore the visit seems to be relevant. Tomorrow, the NATO summit is scheduled to begin in Wales where it is probable that the North Atlantic alliance will form special forces, able to be swiftly deployed anywhere in Europe.
Ukraine is also trying to take advantage of the current situation, by claiming it will focus mainly to counter attacks from Russia rather than fight the separatists. An important opinion regarding this issue came from the German Parliament, where chancellor Merkel said: “It's become ever clearer that, from the beginning, this hasn't been about a conflict within Ukraine, but a conflict between Russia and Ukraine”. Merkel also clearly signaled another set of sanctions claiming that “being able to change borders in Europe without consequences and attacking other countries with troops, is in my view a far greater danger than having to accept certain disadvantages for the economy”. Traditionally, the more tensions there are in the region the more pressure there is on risk sensitive currencies, such as; rouble, forint or the zloty.
Besides the geopolitical events, investors should also focus on the crucial European Central Bank meeting on Thursday. During the recent Jackson Hole symposium, the ECB chief fueled expectations on possible further monetary easing. However, in the last few days his latest speech was ballooned to an unprecedented size. Market participants have rumored that Draghi may get much closer to the full-blown QE or even call to loose fiscal rules to push the economy to growth. The facts seem to be a “bit” different. He was talking about intensified work towards ABS, which is actually nothing new, however, there were no remarks regarding sovereign debt purchase. He was also speaking about the fiscal policy, how “it should be possible to lower the tax burden in a budget-neutral way”. In reality, the only direct comments towards the monetary policy changes came in the statement of a 5year/5year swap rate decline by 15 basis points to just below 2%. He claimed that “this is the metric that we usually use for defining medium term inflation”. It is, however, worth noting that in June the ECB announced the TLTRO, lowered the interest rates, and stopped sterilizing the SMP program. He has also mentioned many times that we have to wait for the results until new tools can be introduced. Not much can be determined after three short months, at least a few quarters are necessary to see any outcome.
As a result, during the meeting in June, Draghi declared that he will remain dovish. Those who expect interest rate cuts or a clear message regarding the “full QE” may be significantly disappointed. The disappointment should quickly translate into the euro appreciation and the move during the conference may even exceed 100 pips.
Last night, the yen displayed an interesting development. The USD/JPY rose to the highest level this year approaching 105 level. Additionally, if the Japanese currency loses 0.5% more it will slide towards a 5-year low. The cause of the depreciation is also an interesting issue. Tomorrow the Prime Minister Shinzo Abe may announce the new health minister who is will be responsible for the government pension fund (GPIF). The GPIF assets are valued around 1.2 trillion dollars and its investment strategy will probably be shifted. More funds are supposed to be directed towards stocks (today's equities rises) and less towards bonds, which brought some pressure on the JPY. It is possible that the current situation may also bring more rumors concerning the possibility of further monetary/fiscal stimulus, which in the end should extend the yen’s weakness.
Summarizing, until the ECB meeting on Thursday the EUR/USD may still remain under pressure and a test of 1.3100 level is reasonably possible. However, after the Draghi's conference a significant correction can be anticipated, which should even exceed a 100 pips move.
The zloty remains under pressure
The demonstration of force from the World's Powers (more in the first paragraphs) translated into increasing downside pressure on the zloty and as a result it was pushed toward 4.22 on the EUR/PLN and 3.50 per the Swiss franc. The situation in this area is the main factor behind the recent zloty's move.
A short pause in following the geopolitical events should be observed during tomorrow's MPC meeting. Only 7 out of 36 economists surveyed by Bloomberg claim that the Committee will cut the interest rate by 25 bps. It seems that it closely represents the market's view, especially as only four of them (Zielinska Głebocka, Bratkowski, Chojna-Duch and Osiatyński) confirmed a will to decrease the benchmark and only two of them will do it in September. Therefore, expectations continue to lie with “no change” . Major changes can be seen in tomorrow's statement which should open the path to the monetary easing in the following months.
Until Wednesday's session the approaching hours may be tough for the zloty. News from Estonia (Obama), the situation in Ukraine and the Kremlin’s response may increase volatility for the zloty. The base case scenario is trading below 4.22 per the euro but the probability is skewed markedly toward the a stronger weakness (up to 1-2 zloty cents).
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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