Daily analysis 02.04.2014

The EUR/USD was supported by “optimal” ISM reading. ECB vice president does not see inflation threat for the euro area. Yuan depreciation is causing troubles both for Chinese exporters and speculators involved in derivatives transactions. The zloty has stabilized at around 4.17 per the euro.

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

• 14.15 CET: ADP report from the US jobs market (survey +193k).
• 16.00 CET: Factory orders in the US (survey +1.2% m/m).

ISM. Constancio. Yuan

Tuesday's session was pretty bullish for risk assets what in result pushed US equities to another all-time-high levels. It was partly due to “optimal” ISM reading. The data published by the Institute of Supply Management was better than in previous month (53.7 vs 53.2) and even though it was slightly below the market expectations it could be regarded as positive for equities. Firstly, the subindex for new orders rose from 55.1 to 54.5 and the production significantly rebounded from 48.2 to 55.9 (what can be an indication of diminishing weather effect). Secondly, and maybe most importantly, the employment part fell from 52.3 to 51.1. The slide was not that large to undermine the recovery but should keep the Federal Reserve longer with the accommodative policy (especially if we recall the recent Yellen speech, where she clearly linked unemployment to the monetary policy). A lower employment index gave also some hope for the dollar bears that the NFP reading does not have to be as good (200k) as some economists expect.

It is also worth to point out (regarding quite solid performance of the Euro) Vitor Constancio's remarks. He said in Athens (according to Bloomberg) that “we expect the low figure in March (inflation – author's note) will be corrected to a high figure in April” (in line with Commerzbank comments present in yesterday's commentary). He also added that “We see no deflation prospects, that this regime of low inflation could lead to real deflation. We don't expect that”. It means that the ECB does not see an immediate threat that consumers can move their purchases forward in anticipation of lower prices in the future. As a curiosity I would recall the most recent ECB conference. At the end (when the Q&A session ended) there was a regular picture taking session. At that time Constancio twice said “it was a very good today”. Draghi replied “it means a lot, coming from you". It could be a part of usual courtesy, but it also could mean that Mario Draghi was intentionally pretty hawkish and the strategy was set before the meeting started (just to decrease expectations of any monetary move in the incoming months)

There is still pretty vivid issue with yuan depreciation. Bloomberg reports that clients of US banks (let's call them speculators) lost around 2 billion dollars on option trades. Moreover, the exporting firms, which were hedging their positions against constantly appreciating (for years) renminbi are poorer by 3.2 billion USD (theoretically, if the real export was hedged, they are supposed to receive more from their trading partners). The case is unusual also due to the fact that the Chinese central bank (PBOC) controls the currency rate, so there is a spreading opinion that the PBOC tries to put some pressure on market participants not to trade in one direction. A similar conclusion is also brought by David Loevinger, a former senior coordinator for China affairs at the US Treasury. He told Bloomberg that “the depreciation was engineered to burn the fingers of speculators”. We can also conclude that the PBOC wants to warn the local companies that when the yuan gets more freely trade-able (and it's supposed to be in the near future), easy transactions may end and derivatives are not only a good source of income.

Summarizing, the market is still trying to position itself before the EBC meeting and Friday's payrolls. Today's data will be probably ignored unless it will deviate significantly from the expectations (at least 50k on the ADP number).

Stable

After Tuesday's slightly higher volatility on the zloty caused by weaker PMI reading from Polish economy, today the market should be calm. I wouldn't also expect large moves, even during the ECB conference or NFP. The data will be key for the majors but the zloty should stay fairly balanced in any of the scenarios.

From other market information, we get a statement from Polish deputy finance minister Wojciech Kowalczyk. He told Polish Press Agency that “in the medium term the zloty may be appretiated due to further fundamental improvements caused by accelerating economy growth. Kowalczyk also mentioned that the PLN was stable comparing to the other EM currencies which is hard to disagree.

Summarizing the PLN should be pretty stable today and most of the trades will be probably made around 4.17 per the euro.

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

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