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Daily analysis 02.02.2015

2 Feb 2015 12:54|Marcin Lipka

Close to the consensus Fed's members claim to raise interest rates in mid year despite low inflation and slightly weaker GDP. Rumors on SNB intervention and unofficial preferable exchange rate. The highest PMI reading since a year pushes the EUR/PLN below 4.18 an keeps the CHF/PLN around 3.95-3.97 range.

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

  • 14.30 CET: PCE Inflation from the US (survey: minus 0.3% m/m and +0.8% y/y; excluding energy and food 0,0% m/m and +1.3% y/y.
  • 16.00 CET: manufacturing ISM from the US (survey: 54.5)

Fed is getting closer to the tightening

The slightly weaker data from the US didn't have a significant impact on the dollar. Much more attention was brought by fresh comments from the FOMC members. Just after the GDP hit the wires James Bullard presented his views on the monetary policy.

The Federal Reserve president from St. Louis does not vote this year and his views are clearly leaning toward more hawkish side, but he seemed to be really committed to push for earlier rather than later rate hike. Bullard predicts that the unemployment drops below 5% in 3rd quarter, and the growth momentum is expected to remain constant. The FOMC member also sees that the current zero-rate-policy is not appropriate now and it is much better to start earlier with smaller increases than later and be push to tighten by 50 bps. Overall the comments from Bullard were pretty hawkish but didn't significantly deviate from the previous rhetoric.

Much more interesting were John Williams remarks. The FOMC member from San Francisco (dovish camp, close to Yellen's view, voting this year) told CNBC that at the end of the year he expects unemployment to drop toward 5.0% and economy to grow about 3.0% in 2015. Williams does not see the recent GDP reading to be weak and expects the inflation to return toward 2% at the end of the next year after the lower energy prices dissipate.

Williams was not that convinced about raising the interest rate but similarly to his colleague's view claimed that “around midyear is a good guess for when we really are getting close to that point that raising rates will be appropriate”.

We can conclude from both members that the lower inflation, modest world's growth or straightening dollar are not valid enough arguments to keep the zero-rate-policy for longer. Maybe the speed of tightening can be a bit slower than expected but the date of first hike will not probably be moved from the June-September range. It was also a positive message for dollar which pushed the EUR/USD below 1.1300 at the end of the week.

Rumors from the SNB and weak PMI from Switzerland

During the weekend Schweiz am Sonntag newspaper (quotes from Bloomberg) claimed that according to its sources the SNB would like to keep the EUR/CHF between 1.05-1.10 level and the operation is going to cost around 10 billion francs.

Reuters on the other hand citing currency dealers reports that SNB currency purchases “has tended to be machine-driven and extremely difficult for even the biggest banks” to spot when and at what amount are processed.

In the morning the SNB published also the “sight deposit” data. Readings do not have to exactly mean that currency interventions were conducted but the liability side increased by around 20 billion CHF following 25 billion spike recorded two weeks ago. It is possible that at least part of the rise may be contributed to FX buying.

It is also worth to note significant drop to PMI index. The data collected by Credit Suisse showed a fast drop in production, orders and dramatic fall in prices. The overall reading slided by 5 points in January to 48.2 and indicated a risk that Swiss economy may shring in following quarters.

All the mentioned reasons pushed the EUR/CHF closer to 1.06 level in the morning trading what also translated into drop on CHF/PLN toward 3.95. In the following hours it should not deviate significantly from the current level. Moreover this week should be calmer than the previous one and the range on EUR/CHF should be 1.04-1.07 what should be equal to 3.85-4.00 for the CHF/PLN.

Foreign market in a few sentences

Despite a relatively hawkish Fed the EUR/USD didn't manage to remain below 1.1300 and in the morning the most heavily traded pair returned to 1.13-1.1350. Partly it may be explained with some fear before today's data. The market should not be concerned with PCE inflation data as the CPI was already published and both figures tend to move pretty close. Much more important will be manufacturing ISM. The consensus is around 54.5 points. Weaker reading can push the EUR/USD toward 1.1350-1.1400 range, and the reading above 56 mark would be a good reason to resume sliding trend and drop below 1.1300.

Still chance for further zloty appreciation

Today's PMI data confirmed the favorable odds for further appreciation on the zloty but the speed does not have to be that fast. The Purchasing Manager's Index rose to 55.2 points what was the strongest reading in almost a year. Additionally according to the HSBC and Markit survey all key subindexes (production, orders, employment, export) grew markedly.

Commenting the data HSBC economist Agata Urbańska-Giner ponted out that “We expect that prolonged deflation will push the MPC to cut interest rates in March”. Currently the market is not really concerned with the February decision which should not bring any changes but rather with the statement and Belka's conference. If both give a strong feeling that interest rate cut is inevitable in March than further zloty appreciation may be benign. On the other hand if it turns out that the next month cut is not certain we should expect the EUR/PLN to drop toward 4.10 and CHF/PLN to 3.85-3.90.

Today we should not move significantly from the 4.17-4.18 level. Slightly more volatility is expected on CHF/PLN but the range 3.93-3,97 should not be breached.

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

Range EUR/USD 1.1250-1.1350 1.1150-1.1250 1.1350-1.1450
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.6700-3.7100 3.6900-3.7300 3.6500-3.6900
Range CHF/PLN 3.9400-3.9800 3.9400-3.9800 3.9400-3.9800

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

Range GBP/USD 1.5050-1.5150 1.4950-1.5050 1.5150-1.5250
Range GBP/PLN 5.5900-5.6300 5.5700-5.6100 5.6100-5.6500

2 Feb 2015 12:54|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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