Daily analysis 29.10.2014:
Almost all scenarios concerning today's Federal Reserve decision. Rumors on free-floating rouble put additional pressure on the local currency. Swedish krone stabilizes but an intervention perspective might weigh on the market. The zloty strengthened due to the bullish US session but in the morning trading the PLN is giving back most of the gains.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 19.00 CET: The Federal Reserve is due to publish October meeting statement. No conference. No new economic projections.
Scenarios. Rumors. Perspective
The slightly lower dollar is a result of weaker than expected durable goods orders from the US (more in the yesterday's afternoon commentary). It also pushed the EUR/USD to the level around 1.2730-40 shortly before the FOMC meeting.
The Tuesday's data will not really matter when we see slightly more hawkish statement from the Federal Reserve. The changes do not have to be really significant to increase the dollar demand. The market is currently dovish biased and believes that recent equity/bond turmoil will cause that the Fed would try to issue as dovish as possible statement.
We may find a confirmation to that theory in the recent Bloomberg survey. The news agency asked economists about their expectations before today's FOMC meeting.
Almost all surveyed by Bloomberg claim that Yellen and her colleagues are set to announce the end of QE today. 80% also noted that the Fed leaves “considerable time” phrase. Others predict that it may be changed to the word “patience”, regarding the time between asset purchase end and first interest rate hike.
The highest probability is that Fed finishes its asset purchase program and either leaves the “considerable time” unchanged or delete it and adds at the same time a dovish element (lower inflation and global low growth threat). If the majority is right we should see EUR/USD approaching 1.2800 level. At that moment some question marks should be raised whether that rally can be sustainable.
Bloomberg also tried to find out whether the “significant underutilization of labor resources” is going to be scrapped. Most economists predict that dovish message regarding job market will remain. It does not have the same effect as “considerable time” but it also describe the attitude of the FOMC.
The Committee may be get even more dovish than many expect. It can also bring back the June phrase concerning inflation which says that if prices run persistently below 2 percent it “could pose risks to economic performance” Such message can push the dollar lower and lengthen the correction mode on the EUR/USD.
On the other hand, it is still worth remembering that the FOMC cannot go “all in” concerning its dovishness especially given that the unemployment is at multi-year low and the inflation does not want to drop.
Since the early morning investors on the east part of the continent have to pay more for the euro and the dollar. The basket of both currencies rose above 48 roubles what means that the Russians Central Bank (CBR) will have to sell at least another billion USD of reserves (during last three working days the intervention burned more than 7.5 billion USD of the reserves and since October 1st more than 20 billion).
A significant pressure on the rouble is caused by the fact that some market participants fear that CBR resigns from its intervention policy (we covered that issue also yesterday). The confirmation of the rumor may be a statement from former finance minister Alexei Kurdin, who claims that the central bank should allow the ruble to free float, because the current policy allows speculators to profit on rate changes. Currently no official opinion was presented either by government officials or monetary policy members.
The rouble investors should also keep in mind that the CBR is scheduled to decide on interest rates on Friday. The consensus is set on 50 bps increase (from 8.0% to 8.5%) but there are some opinions that the MPC may hike the benchmark toward 9.0%. If the latter scenario realizes the ruble should strengthen or at least stop the slide.
One of the most discussed issues was the yesterday's Riksbank decision. Taking the determination of the MPC to prevent the low inflation/deflation threat into account, the market speculates that the central bank may push for additional easing elements if the current measures fail to push the CPI higher.
The widely discussed tool is a currency floor on the EUR/SEK (similar to the EUR/CZK and EUR/CHF). In that scenario the MPC would promise to keep the rates above certain level and not allow the krone to strengthen toward the euro.
Summarizing, the news of the day will be, of course, the Fed's statement. Investors expect the outcome to be dovish and all phrases describing forward guidance on interest rates will remain in place. However, if the considerable time is erased it would cause the dollar to strengthen. On the other hand, in the FOMC decides to put more attention to the threat of lower inflation the EUR/USD correction will be significantly extended.
Inside the range
The zloty took advantage from global sentiment improvement (bullish session on the US equities) and rose to 4.21 per the euro. Today, however, most of the gains were pared and the European currency costs again above 4.22 PLN.
Local investors, similarly to their foreign colleagues, are waiting for the Federal Reserve decisions. Traditionally, the more dovish Fed is, the more odds for the higher zloty especially to the dollar. The hypothetical move should not exceed the 2-3 zloty cents appreciation to the greenback and 1-2 to the euro.
After the FOMC outcome the zloty is supposed to position itself before the next Polish MPC meeting. The base case scenario is a 25 bps rate cut. We should not rule out that the Committee leaves interest rates unchanged. As a result it might push the EUR/PLN toward 4.20 level.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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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 Cinkciarz.pl Sp. z o.o is prohibited.
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