Daily analysis 21.08.2014:
The dollar is gaining value after more hawkish “minutes” from the Fed. After August preliminary PMIs from Europe the German economy still looks relatively strong. Industrial production from Poland slightly above the expectations but the global “greenback” strength and risk of interest rate cuts should weigh on the local currency.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30 CET: Weekly jobless claims from the US (survey: 300k).
- 16.00 CET: Existing home sales from the US (survey: 5 million. SAAR).
The Federal Reserve. Chinese and European PMIs
Our expectations, based partly on Richard Fisher remarks that he didn't dissent due to the fact that the FOMC is turning toward his – hawkish – direction were confirmed by the facts yesterday and the “minutes” were positive for the dollar.
From the first pages of “minutes” the Federal Reserve staff have recognized a significant improvement of the economy. They noted a pick up in employment, industrial production, investments expenses and rise of inflation (all dollar bullish). The FOMC members also noticed that jobs market rebounded and the upswing is not only visible in broadly observed indicators (like payrolls or unemployment rate), but also in categories showing the amount of people who are “long unemployed” and folks who work part-time but would like to have a full time job.
Similar conclusion can be draw form analyzing the part concerning monetary policy (market participants usually look at this paragraphs first). The FOMC members claim that “with respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objective in recent months and most anticipated that progress toward those goals would continue”. If that was not enough for investors, the Fed clarifies its stance in the following sentence. “Moreover, many participants, noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated”.
Despite that in other parts of the “minutes” we had paragraphs claiming that the inflation may return to the target very gradually, the whole message from the Committee looks quite hawkish and it may be one of the turning point regarding the monetary policy. Also, taking in to the account changes presented yesterday, the Friday's Janet Yellen statement on jobs market does not have to be dovish as previously expected.
Moving from the US to China it is worth noting a significant drop in manufacturing. The PMI collected by HSCB and Markit slowed to 51.7 points to 50.3 points. Commenting the data, Hongbin Qu, chief HSBC economist in China, wrote that “today's data suggest that the economic recovery is still continuing but its momentum has slowed again”. Qu also suggests that government in Beijing might start another stimulus to keep the expansion on track.
Lack of optimism is coming from Europe. The preliminary PMI reading from France dropped to the lowest level in 15 months sliding to 46.5 points. Much better data came from its services part (rise from 51.15 to 50.4) but it was not enough to brighten the overall dire picture. Commenting the data Jack Kennedy, senior Markit economist says that “overall, the data point to quarterly GDP tracking around stagnation in the third quarter continuing the flat trend seen since the turn of the year.
A positive surprise (actually quickly used by the EUR/USD to gain some pips) came from Germany. The Purchasing Mangers' Index in manufacturing (the data collected after the Russian sanctions were announced) dropped to 52.0 points (from 52.4) but taking into the account weak conditions in the region and turmoil in the East we should regard it as a pretty solid number. Berlin also managed to keep the services index at surprisingly high level (at 56.4). In the commentary Oliver Kolodselke, economist at Markit wrote that “the PMI data available for third quarter so far point out to a swift recovery in GDP from the ground lost during the second quarter”. The European data (from eight Euro area countries) were overall mixed. The services remained at fairly solid level (53.5) but the manufacturing dropped to 50.8 (from 51.8), what shows that the economic situation in the near future will not improve markedly.
Summarizing, the culmination of hawkish Fed, weak Chinese and French data resulted that we began the European session below 1.3250 on the EUR/USD. After the German readings we saw a small rebound but it should not be important even in the short term. Despite the fact that yesterday we were assuming that Yellen may be pretty dovish and may give some relief rally to the EUR/USD, the situation after the hawkish minutes pushed us to shift the view. It is possible that the Fed's chairwoman also recognized a improvement on the “dash board” and her comments fail to fulfill accommodative expectations.
The zloty tried to price in three issues in recent hours – Polish industrial production, Fed's minutes and European PMIs. It seems that this evaluation processed according to the recent theme – slightly better production helped, hawkish FOMC hurt, and pretty high German PMI stopped the PLN depreciation.
Putting a bit more attention to the production it is worth noting that it was pretty close to Ministry of Economy estimates and slightly better-than private economists expectations. Despite the fact that the growth at 2.3% y/y was not something to be proud of, it is worth noting that manufacturing (main component of the production) rose 3.3% y/y what is significantly better result then last month reading (2.1% y/y) but unfortunately much worse than publications at the beginning of the year (around +7% y/y). We received a really weak construction numbers which rose only 1.1% y/y whereas in June it was +8.0% y/y. This sector should, however, rebound in the following quarters on infrastructure investments and improvement in multi-family housing.
Summarizing, the zloty remains pretty stable but sooner-than-expected withdrawal from the monetary policy across the pond, subdued condition of the local economy and increasing odds of cutting rates caused that risk are deviated toward a weaker PLN (above 4.20 per the Euro and 3.15 for the US dollar).
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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