Daily analysis 14.11.2014:
Slightly better data from the euro zone, handful of comments from Fed and descending prices of raw materials can slow down the appreciation of USD in relation to EUR. Bigger chances for earlier elections in Japan. Will the G20 summit be a chance for Europe? High reading of Polish GDP evens out yesterday's low inflation. Zloty has a chance to come back below 4.22 per euro.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30 CET: Retail sale from USA (+0.2% m/m; with exclusion of cars and fuels +0.5% m/m).
- 15.55 CET: Index of consumers' sentiment prepared by Reuters and University of Michigan (estimations 87.5 points).
Better. Fed. Yen. G20
Published data from the euro zone were slightly better than economists' forecasts. GDP in the countries sharing the common currency has increased in relation y/y by 0.8% (estimations +0.7%) and 0.2% quarter to quarter (expectations was +0.1% q/q). From the positive signals, Germany managed to avoid entering the technical recession and after GDP descend in the second quarter, they achieved increase on the level of +0.1% q/q. France also appeared quite better, although in case of Paris the result has been upgraded by the lower basis from Q2, where we witnessed reading's review downwards (in relation y/y the result was as estimated: +0.4%). General data were not that bad as some could expect. Thus one of the elements wearing off the common currency has been suspended at the moment.
The appreciation of the American dollar may also be suspended in a certain way. Yesterday in Washington Janet Yellen said, that due to the deeper connections in the financial system around the globe, USA should reach “a bigger understanding” of the economic process going on abroad. Additionally, the FOMC chairwoman claimed that the monetary authorities in USA have to be aware of “how the decisions in the United States influence the economy abroad”. This general understanding of the processes is rather inconvenient for USD.
On Thursdat William Dudley also showed his dovish side. The third most important Fed member said that the early interest rates raise is more dangerous that prolonging the mild monetary policy for too long.
One of the arguments which begins to gather attention on the market is pressure on lower inflation related to the falling prices of the petroleum. In energy-intensive economies diving prices of the raw materials should affect lowering production costs significantly. This should be even more visible in the USA as the States take a great advantage of lower prices of the 'black gold' due to the quotation of goods in USD. This fact should inevitably reflect in the hard data but chances for this to have results in the petroleum prices are low. Therefore it is safe to assume that this effect should maintain for months, what should be a good arguments for the doves camp in the Fed.
It is still very exciting on the yen. USD/JPY is close to the level of 116.50 what causes the level of 120 is closer and closer. The market scenario is as follows: during the Sunday night the Japanese GDP data are published. The consensus is about +2.2% (seasonally adjusted q/q, annualized) amd 0.5% q/q. However, the investors are widely speculating about the reading being significantly lower (because of anuualization of the data the difference might be of meaning; e.g. if we get 0.3 q/q, then there will be only 1.2% on the headlines insted of 2.2 after the annualization).
Weaker data will be a very good reason for Shinzo Abe to declare moving the date of the tax raise and call for early election. It would be a negative signal for the yen which could cause the sell-off on the Japanese currency (however, reaching the level of 120 at once is unlikely as a part of the information is already taken into consideration). On the other hand, if the taxation plans turn out to remain unchanged, it can anticipated that USD/JPY is corrected downwards.
The G20 starts this weekend in Australia. It is hard to expect a break through solution to the world problems, but some of the participants (e.g. Philipp Hildebrand, vice-chief of the BlackRock fund in today's 'FT') count on a newly elected chairman of the European Comission, Jean-Claude Juncker to present some plans for fiscal and structural reforms in Europe (a positive signal for euro).
Summarizing, the situation should be most interestning regarding yen, especially if the GDP data are below expectations (neagtive for JPY). EUR/USD should remain stable with small chances for rebound to the latest falls (going under 1.25). For now the base case scenario is not to impose new sactions on Russia, too. Additionally, authorities in Kiev get softer in terms of the situation in the East of the country and may start new talks with the Donabas representatives.
A series of differences
It is worth getting back to the inflation data for a while. The fall of the CPI to the level if -0.6% y/y was quite a shock for the markt and a clear signal for the MPC to lower the interest rates. However, when we look into the data closely, then apart from expected fall of the food and petrol data it was mainy caused by a significant contribution to the prices in the 'connectivity' category.
Although the connectivity is only 5% of the inflation bucket in comparison to last month, it fell almost 4% (y/y). It means that exactly 0.2% less in the inflation bucket (thus exactly the amount that economists did mis-forecasts). The change is rather a result of inteference in the methodology of GUS where not long ago the connectivity raised the inflation. Today's HICP publication is a confirmation to this thesis. Eurostat informs that inflation in Poland y/y was -0.3% in October and -0.2% in September. The GUS data, on the other hand, showed -0.6% y/y and in August it was -0.3% (the difference got significantly bigger in one month).
The market participants who started to sell the zloty after the CPI data were quickly punished by higher than expected domestic GDP reading. The Polish economy developed in 3.3% y/y and +0.9% q/q ratio, seasonally adjusted. Additionally, in y/y relation (better for describing the prolonged trend and less affected by singular events) we are the fastest developing country in the EU (probably apart drom Ireland, but Dublin has not published it's results yet).
Summarizing, yesterday's calling for the interest rates cut this December after the CPI data will most probably quiet down after today's GDP reading. It is very likely that the rates are kept on the current levels in a month as well as in January 2015. It should be a positive signal for the zloty, thanks to which EUR/PLN and CHF/PLN can start next week respectively below 4.22 and 3.51.
Expected GBP/PLN levels according to the GBP/PLN rate:
Expected levels of PLN according to the EUR/USD rate:
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