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Daily analysis 01.08.2014

1 Aug 2014 12:42|Marcin Lipka

Risk aversion jumps after a steepest sell-off on US equities in months. Key economic readings are scheduled for today. Cumulation of negative reports for the zloty. Osiatynski on weaker GDP growth for 2014 in the “WSJ”. PMI below 50 mark.

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

  • 14.30 CET: US jobs data (survey: payrolls at 233k; unemployment rate at 6.1%, salaries growth +0.2% m/m.
  • 14.30 CET: PCE inflation from the US (+0.2% m/m).
  • 16.00 CET: Manufacturing ISM from the US (survey: 56 points).

Risk aversion. The data

Recent hours were pretty dire for US investors. Stocks dropped at the fastest pace since February, what at the same time worsened the sentiment around the world. It is hard to find a single reason which caused the sell-off. It was rather a combination of many factors – Argentine default, geopolitical tension, fears of earlier rate hikes (maybe the recent Fed's statement was more hawkish than previously though?) and weak Chicago PMI reading. The EUR/USD, however, remained pretty stable and has been primarily focused on today's data.

Regarding all the reasons which pushed the markets south and concerning the impact on the EUR/USD, I would focus on the Chicago PMI. The Purchasing Managers Index from the Midwest dropped 10 points and instead of receiving reading around 63 points we got 52.6 number which was the steepest decrease since October 2008. Commenting the data prepared by MNI and ISM, we can see that the production subindex was hit the hardest. However, as Philip Uglow, chief economist at MIN, points out according to the surveyed firms the slowdown should be short-lived and it is worth waiting for the August data to evaluate how long it is going to last.

Investors, observing how Chicago PMI is closely correlated to ISM, quickly got concerned that the reading from all states may also fall short of expectation. It could have been one of the reasons why the dollar didn't gain yesterday (weaker manufacturing means later interest rates hikes).

Besides the ISM reading we are also having the Fed's favorite inflation reading – the PCE. However, we already received CPI for June (it dropped from 2.13% to 2.07%) so the expectations for the PCE should be a bit lower and due to rounding we may see a drop from 1.8% y/y to 1.7% y/y. In result, we should not expect any impact for the markets.

All in all everyone will focus on the payrolls data. Economists' expectations are anchored around 230k. After the Wednesday's ADP data (220k) rumors on figure above 250k kind of muted. However, if we hit such a number, we may expect a further dollar appreciation and a slide toward 1.3350 on the EUR/USD. On the other hand, a weaker reading (below 200k) the chances for a rebound on the Euro-dollar increased and we may close the week above 1.3400. It is also worth noting that the BLS will also publish salary changes (above +0.2% m/m may give additional boost to the dollar) and official unemployment rate (slide toward 6.0 is also greenback positive).

Today the market will be waiting for the Labor Department publication. Investors are supposed to be focused on payrolls reading (July + revision) and the unemployment rate and hourly salaries will be next in line. If the data turns out to be mixed, the ISM data should also have a visible impact. Traditionally the better data, the chances for further dollar strength are rising.

Cumulation of negative news

Since several days we have been warning that the current week was going to be tough for the zloty and there was much higher probability that we would see weaker rather than stronger PLN. Investors dismissed negative signals, especially regarding the tensions between Russia and the West (mainly due to a strong demand for the domestic government debt) at the beginning. However, when the sentiment worsened, all Polish assets slumped and pushed the zloty much lower.

Moreover, the macro data seems to be less and less bullish. In Thursday's “The Wall Street Journal” interview with professor Osiatyński we can read that Polish growth may rise only 2.8-3.2% in 2014, which would be much slower than the central bank expects (+3.6%). The MPC member is also surprised by the scale of the slowdown in the Q2, because we was predicting rather Q3 and Q4 to be on the weaker side. Osiatynski will decide whether to vote for the cut after readings published in August.

Not only current, but also future publication may be pretty disappointing. Polish manufacturing PMI complied by Markit and HSBC dropped below the 50 mark (separating expansion from contraction) for the first time since 13 months. What may really concern is the fact that “new export orders fell from the third month running and at the fastest rate since October 2012 in July”, writes Agata Urbanska-Ginber, economists, Central & Eastern Europe at HSBC. Giner also adds that weak industrial production “combined with looming deflation in summer months, supports market pricing of interest rate cuts in Poland”.

Summarizing, the pressure on the local currency should remain in the following days and the EUR/PLN will probably move above 4.20 in the next week. A bit calmer may be on the USD/PLN due to pause of EUR/USD slide. Overall, however, the PLN will be under pressure mainly due to lack of reasons (besides interest rates disparity) for buying the zloty.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1200-4.1600 4.1200-4.1600 4.1200-4.1600
Range USD/PLN 3.0400-3.0800 3.0600-3.1000 3.0200-3.0600
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Range GBP/USD 1.7050-1.7150 1.7150-1.7250 1.6950-1.7050
Range GBP/PLN 5.2100-5.2500 5.1900-5.2300 5.1500-5.1900

1 Aug 2014 12:42|Marcin Lipka

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 acknowledgement of the source is prohibited.

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