Daily analysis 10.06.2014:
Gradual slide on the EUR/USD. Record low yields on peripheral debt. Ideal conditions for carry trade? Bullard is getting more and more hawkish. Solid data on Polish trade in April. The zloty weakened to around 4.11 per the Euro but the appreciation trend should remain on the PLN.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- No major macro news that may affect the analyzed pairs.
The US. Ukraine. Hungary
There was no reason to continue the upside move on the EUR/USD and attempt to rise significantly above 1.3650 clearly failed. In result, due to weight from last week's ECB decision we gradually slide and it is possible that the consolidation may move closer to 1.35 then 1.36 level.
Mario Draghi announced three major measures which should spur the inflation and growth – interest rate cuts, SMP sterilization pause and TLTRO. All of them should fundamentally keep the common currency under pressure. A totally different effect is expected from EM currencies. Cheaper and easier accessible money pushes global investors to seek higher than zero returns. The trend is observed all over the world where government yields are dropping and local currencies strengthening. A similar move should continue at least until the moment when the Federal Reserve and Bank of England start truly considering a rate rise. But even at that moment we will not see a major drag on liquidity due to Bank of Japan QE and area dovish bias.
How the capital is hungry for any rate of return we can also observe on the peripheral debt market. The yields on 10-year Spanish, Italian and Portugal bonds dropped to the all-time-record lows to 2.57%, 2.74%, and 3.37% respectively. As a reminder just a year ago Madrid and Rome were issuing debt at around 5% and Lisbon had to pay even 7% annually. Contrasting the number we should recall the same time frame on the German debt which slided only 20 bps what is a good benchmark how much we may really account to the monetary policy and perspective of low inflation for prolonged period.
Dollar bulls should be happy after James Bullard (St. Louis Fed president, non-voting) speech and findings presented yesterday in Florida. Using a fairly simple formula the former dove tried to prove that we are getting close to meet the Federal Reserve targets both on inflation and growth. Later on, while making some comments Bullard said, according to “The Wall Street Journal” that “if you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200.00, if you continue to see inflation moving back up toward target” there may be “more sentiment toward an earlier rate hike”. It is worth to remind that just a year earlier Bullard was quite dovish and dissented from the Committee decision claiming that it should do more to push the inflation higher. Currently he is moving to the most hawkish part of the camp.
Summarizing, the market has still been trying to evaluate the recent ECB decision. However, even if dovish Draghi fails to push the Euro lower, we should see some more pressure for the stronger dollar and overall the EUR/USD should be pushed to the south.
Correction. Solid trade data
The zloty weakened around a quarter of one percent and the common currency is valued around 4.11 PLN. A much stronger move is observed on the dollar, where due to EUR/USD slide we are approaching 3.03 PLN. It is, however, fairly low probability that we move much higher (especially on the EUR/PLN), so the base case scenario till the end of the week should be fairly calm trade around the current levels.
The Polish Statistical Office (GUS) published really good numbers on the foreign trade yesterday. After the first quarter the surplus accounted for around 300 million Euro, but when we add the data for April the cumulative export over import excess is around 700 million Euro. The reading looks even better if we compare the current publication to last year figures when it was almost 1 billion Euro deficit (a good indication for the 2nd quarter GDP reading with the additional net export contribution). It is also worth emphasizing that number account a significant slower trade to the East. For example export to Russia dropped by around 200 million Euro in the first four months of the year. However, taking into the account some sings of political stability and stronger Russian ruble the demand from the east at least stop declining.
Summarizing, the zloty corrects the recent appreciation but it does not rule out the scenario of further strength in the medium term. There is still expected some capital flow into the local assets and we should also see some currency support from the real economy where according to the GUS data there is more demand than supply for the PLN. Today most of the trades should be proceed around 4.10-4.11 on the EUR/PLN and 3.36-3.37 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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