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Daily analysis 02.07.2014

2 Jul 2014 11:58|Marcin Lipka

Close to estimates ISM reading is preserving the “risk on” sentiment but does not put the downward pressure on the dollar. Yellen conference at the IMF. Thursday's Riksbank decision on interest rates in Sweden. The zloty is slightly stronger before a crucial MPC meeting.

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

  • Between 12.00 CET and 14.00 CET: Interest rate decision in Poland (survey: no change at 2.5%.
  • 14.15 CET: ADP report from the US (survey: 213k private payrolls).
  • 16.00 CET: Marek Belka conference after the MPC meeting.
  • 16.00 CET: Factory orders from the US (survey: minus 0.3% m/m).
  • 17.00 CET: Janet Yellen speech at the IMF conference in Washington.

ISM. Yellen. Riksbank

In the recent hours the dollar rebounded slightly and we dropped on the EUR/USD under 1.3660. Today the market will be waiting for the June jobs data published by private ADP agency (the recent readings seem to be not really accurate indicator before the official BLS publication) and Janet Yellen speech at the IMF.

Published on Tuesday ISM reading matched the market expectations set around 55.5 level (actual 55.3) and it still predicts solid manufacturing expansion in the US. Different subindexes were also pretty healthy with new orders and production hovering around 60 level. Employment was also pretty good with reading above 50 mark for 12 months in the row. A minor setback may be observed in trade balance with slower export and faster import growth. Overall the Manager's Index confirms the broad expectations that the economy should be pretty strong in the Q2 of 2014.

The market may pay some attention to the Janet Yellen conference. The FOMC chairwoman is scheduled to speak at 17.00 CET at the IMF headquarter in Washington DC. According to the Fund's website, after half of the speech she will have a discussion with Christine Lagarde. It is hard to expect that Yellen can be more dovish than during last Fed's conference after the interest rate decision when she clearly “dismissed” all the threats regarding possible inflation pressure. In result if we get any remarks on future possible higher prices it should slightly boost the US currency.

16 out of 17 economists asked by Bloomberg predict that Swedish central bank should cut interest rates by 25 bps to 0.5% on Thursday. There are several reasons which may force the Riksbank to lower the benchmark: threat of deflation, fairly high unemployment and recent ECB moves. It is also worth pointing out that EUR/SEK has already weakened significantly so we should not expect the krone to slide just after the cut. To continue the depreciation we need at least pretty dovish MPC statement with some indication that the further moves are not ruled out. In such scenario the EUR/SEK should rose clearly above 9.20 mark.

Summarizing the market will focus on Yellen speech and ADP reading. If both the data and Fed's chief will not surprise the market we need to wait for Thursday's payrolls to get more concrete action on the market. The stronger dollar scenario is still probable, especially given that the market rumors that NFP may be significantly above 200k.

MPC decision

The zloty is slightly gaining some value before the MPC meeting and the EUR/PLN returns to around 4.15 level. During the recent days the market have rumored on several scenarios which may be used by the MPC.

The first one is a rate cut as early as today. However, according to recent Committee members comments and MCP statements, such scenario is highly unlikely and we should rule it out.

Another one assumes that the forward guidance (promise to keep the interest rates till the end of Q3) will be scrapped. It is true that there is some debate regarding that issue but rather not to extend the “promise” period than withdraw from the promise. However, if such a move is introduced (due to a meaningful revision of inflation pace and weaker GDP in the macroeconomic projections) then we may observe the weaker zloty and a move toward 4.17-4.18.

The base case scenario is still leaving the interest rates unchanged, leaving the current forward guidance (ends in Q3 of 2014) and get the growth projections fairly in line with March expectations. Such statements should give some support the Polish currency and EUR/PLN probably will slide below 4.15 for longer and CHF/PLN move toward 3.40.

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 5.1700-5.2100 5.1900-5.2300 5.1500-5.1900

2 Jul 2014 11:58|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.

See also:

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Daily analysis 01.07.2014

30 Jun 2014 12:12

Daily analysis 30.06.2014

27 Jun 2014 12:20

Daily analysis 27.06.2014

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Daily analysis 26.06.2014

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