Daily analysis 12.01.2015

, author:

Marcin Lipka

Mixed data form the US – more payrolls but wages dropped. Russian rating cut by Fitch. Goldman Sachs sees oil at 39 USD and predicts EUR/USD slide toward 0.90. Speculations on rising floor on the EUR/CZK pushing down the krone. The zloty weakens after significant gains last week.

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

  • No major economic data which may affect the analyzed pairs.

Wages creates more uncertainty

On Friday afternoon the market couldn't make up its mind whether if the received data did suggest any change to the FOMC view on interest rate or rather keep the status quo to rise the benchmark in mid-year.

At the first sight the payrolls were surprisingly bullish. The US economy added 252k jobs in December while economists expected numbers around 240k. Additionally the Labor Department revised upwards two previous readings by 50k. Moreover, the household survey was better than expected and the unemployment dropped to 5.6%, but in that case the slide was achieved partly due to participation rate fall so the outcome is not that positive.

As we stressed in last week analysis the market participants focused also on wage growth. It should answer a question whether fatter paychecks can push the inflation higher and therefore give the Fed strong argument to tighten the monetary policy. However, the average salary fell short of expectations. Month on month wages dropped 0.2% while economists expected a 0.2% gain. Additionally, the previous reading was revised downwards what translated into a yearly rise only by 1.7% while market consensus was at +2.2%.

The chart shows a percentage chanhe to the wages y/y in the American economy

Chart Source: Bloomberg. The December report shows the second lowest reading in 5 years.

Despite the fact that the wage slump was rather a one-time-event, the doves can exploit that fact to keep the monetary policy loose for longer. However, I would not expect that this topic brings much attention during the incoming Federal Reserve meeting and there is a slim chance that the “paycheck issue” is included in the January statement. As a result the market will be mainly observing the comments for FOMC members during their appearance in the media.

Russian rating

The rouble reacted fairly calmly to the rating cut. Fitch downgraded the Kremlin by one notch to the last investment grade (BBB-) keeping the negative outlook. The main Russian economic issue is oil price slump and foreign sanctions. Investors expected that decision and much more severe impact would have another downgrade by Standard & Poor's.

It may happen as early as in mid January. Currently S&P, similarly to Fitch, grades Russia at BBB-. Any cut would result in “junk” credibility. Despite that “speculative” Moscow rating is partly priced in (for example in the CDS), the volatile currency may feel the additional pain and we may soon pay more than 65 roubles for the dollar.

Goldman Sachs estimates

The news agencies inform about new estimates from Goldman Sachs. The well known investment bank claims that in 6 months the WTI should drop to 39 USD per barrel and recover some losses at the end of the year (65 USD).

The “GS” published also new forecasts on EUR/USD which put the pair at 1.14 in 3 months and at 1.08 in 12 months. “Goldman” also claims that the parity will be achieved at the end of 2016 while in 2017 the euro would be at only 90 US cents. The FX is pretty resilient to long-term estimates but the WTI seems to be feeling the pain from the expectations.

Czech krone under a pressure

Since Friday we have observed a significant krone depreciations. The Czech currency lost around 2% in two days. During the recent year the EUR/CZK was fairly stable after the National Bank (CNB) decided to set a floor on EUR/CZK at 27 level in November 2013.

EUR/CZK during last year

Chart Source: Bloomberg. EUR/CZK strengthening means the weakening Czech krone against the euro.

But the weaker industrial production and inflation slide towards 0.1% y/y caused some speculations that the CNB may push for another intervention. Expectations were partly confirmed by the comments from central bank research chief. Tomas Holub during his interview with state TV said that he cannot exclude increase the minimum EUR/CZK level if the inflation expectations caused by oil slide transmit to the CPI. Theoretically the oil slump should be a transitory event and start to diminishing in the following quarters, but taking into the account the CNB aggressive police the new floor cannot be excluded. The level, however, should not exceed 29 mark.

The foreign market in a few sentences

The current week macro calendar is fairly empty. Market sentiment will be rather shaped by comments from central bankers. Regarding the FOMC, investors would like to know whether the recent data changed members' view on future interest rates. Concerning the ECB, expectations are set at the QE program, its scale and timing. The base rate on the EUR/USD before any news hit the wires is around 1.1800.

Slight correction. MPC and inflation

The US data was pretty favourable for the zloty. On one hand, it was solid enough to keep the US economy at good shape and on the other it gave some hope to longer zero-rate-policy across the pond. It pushed the EUR/PLN briefly below 4.26 but later risk aversion increase brought the pair above that level.

The main event this week is the MPC meeting. The Committee has some major issues to consider. Firstly it should decide what strategy is the best regarding the “ECB QE” and how to deal with deepening deflation. If Marek Belka stays neutral with both issue, the zloty should gain some value.

The other interesting issue is Polish inflation. According to Bloomberg consensus the prices in December dropped to minus 0.9% y/y and there are many economists predicting even deeper deflation. However, if the MPC does not change its neutral approach, the CPI may have fairly muted impact on the PLN.

Today, however, the EUR/PLN and CHF/PLN should be traded around 4.28 and 3.56 respectively. A slightly higher volatility due to changes on EUR/USD is expected USD/PLN but it should not move beyond 3.61-3.64 range.

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

Range EUR/USD 1.1850-1.1950 1.1750-1.1850 1.1950-1.2050
Range EUR/PLN 4.2600-4.3000 4.2600-4.3000 4.2600-4.3000
Range USD/PLN 3.5800-3.6200 3.6000-3.6400 3.5600-3.6000
Range CHF/PLN 3.5400-3.5800 3.5400-3.5800 3.5400-3.5800

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

Range GBP/USD 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Range GBP/PLN 5.4700-5.5100 5.4500-5.4900 5.5300-5.5700

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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