Daily analysis 04.11.2014:
Solid ISM was not able to push the EUR/USD significantly below 1.2500. US election rather neutral for the dollar. Discussion on the Russian central bank policy. The Yen on 7-year lows. The zloty stabilizes at the beginning of 2-day MPC meeting.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- No major economic data which may significantly affect the analyzed pairs.
The ISM. Election. Discussion.
Future data on US manufacturing were really solid on Monday. The ISM rose to 59 points (survey: 56.1; previously 56.6) and met more than 3-year highs. Similarly to the “headline” number the sub-indexes were quite strong.
According to the Institute for Supply Management new orders rose to 65.8 points (similarly to the Chicago PMI which was a good benchmark for ISM this month) and the production index topped 64.8. The employment also looks quite strong remaining in the bullish trend for 16 months (55.5 points).
Not only the plain data showing strength of the US economy, the comments from different industries were encouraging, too. Many of them praise “holiday orders exceeding seasonal forecasts”, “strong demand in multiple sectors” or “business steady and strong”.
Much better-than-estimated data translated the dollar/yen appreciation which exceeded our bullish expectations at 113.50 and rose to the 114.20. The situation looked a bit different on the EUR/USD. After the initial fall (dollar rose) to 1.2470 it started to regain value and during the European session on Tuesday the most heavily traded currency pair is back above 1.2500. The market didn't want to capitulate pretty important technical support revel and we will have to wait probably for the ECB meeting on Thursday either to return to the downside scenario (more probable) or generate a stronger correction.
We should not expect any major reaction on the market after the US midterm election. Americans are scheduled to decide on 1/3 of Senate and the whole House of Representative. Polls are showing that the Republicans should keep the lower house, and also the GOP is expected to gain the majority in the Senate.
The GOP ruling both houses traditionally has had a positive impact on business. Additionally, Republicans are not really eager to introduce the ultra-loose monetary policy what may have some impact on the future Fed's decision. As a result, if we see any effect on the election, it should be rather dollar positive.
An interested discussion about the rouble's future was presented today in the Financial Times. Besides issues heavily presented in our analysis which are pushing the currency down (crude oil slump, geopolitical issues, sanctions, inflation, and etc) the speculative effect has be raised more often.
“The rouble has been subject to a speculative attack” claims Jacob Nell, economist at Morgan Stanley cited in the “FT”. He claims that the central bank has done enough to “prove its inflation-fighting credentials and ease the dollar shortage”.
On the other hand, one of the most respected analyst on emerging economies, is more critical. Tim Ash from Standard Bank told the “FT” that “this was all about trying to defend the rouble and it failed. Unless they do much more, and quickly, things could get out of hand”.
Market participants (both domestic and foreign) are also currently much more vocal about changing the central bank intervention policy. The predictable intervention policy may lure the speculative capital. “The foreign exchange market is sill lacking two-way risk” says Vladimir Pantyushin, economist at Sberbank, who predicts that we may see the changes in the CBR intervention scheme (widen trading band; lower hard currency sales).
Traders positioned against the rouble may be also scared with full-floating policy and unpredictable central bank occurrence. If we see any changes in the intervention scheme, the rouble may gain significantly in value (as it did before the MPC meeting last Thrusday). However, until this happens, the rouble should still be under pressure especially that we are approaching a round level on the euro+dollar basket (50) which may lure the speculators.
Summarizing, the recent resistance of the EUR/USD on solid US data may show that we will have to see more easing suggestions from the ECB to see a further pressure on the euro. Currently Draghi and his colleagues are under pressure to announce new measures (for example confirm the rumors on corporate bonds purchase plans). If it happens we should see the EUR/USD around 1.24 at the end of the week. On the other hand, failing to meet the expectations may push the most heavily traded currency pair higher toward 1.26.
Waiting for the MPC
Today Polish Monetary Committee starts its two-day meeting and according to the current data and new central bank macroeconomic projections it will decide on interest rates.
The Bloomberg consensus shows that 28 out of 39 economists predict the MPC to cut the benchmark by 25 bps. Seven sees 50 bps decrease and three anticipate “no change”. A pretty wide range is a result from divergence of future money market rates and actual comments from the MPC members. Moreover, the governor Belka and his colleagues surprised the market with deeper cut last month so part of the market may be confused whether it was a one-time-event or the dovish/neutral camp wanted the 75 bps cut in months from the beginning.
In our opinion, the MPC firstly would consider whether to move the interest rates at all. Their decision in October was rather one-time event than a part of longer easing cycle. The only factor which can push the central bank to the 25 bps cut is significant cut in economic projections (below 3% in 2015) and depressed inflation which is failing to reach the lower bound of the target.
Summarizing, the zloty will be waiting for the Wednesday's MPC meeting results. Decision to keep interest rates unchanged or 25 bps cut with clear signal ending the short easing cycle should help the zloty to gain some value (no more than 1-2 zloty cents). Today the trading should be pretty calm around 4.22 per the euro and 3.50 on CHF/PLN.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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