Daily analysis 03.02.2014

The risk-aversion remains on the markets. Exchange of remarks between the RBI and the Federal Reserve. Another low inflation reading from the Euro Zone warms up a discussion on the interest rate cut. Strong PMI reading from Poland has been helping the zloty to gain some value.

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

• Before 10.00 CET: Final readings of French, German and the Euro Zone PMIs.
• Before 10.00 CET: Manufacturing PMIs from Spain and Italy.
• 16.00 CET: Manufacturing ISM from the US (survey: 56; range between 55.0 and 56.8).

Risk aversion. RBI and Fed. EBC

There is still a significant risk-aversion on the currency markets. It pushes higher the traditional asset with safe haven status – dollar, franc and yen. On the other hand it is still a visible weakness on EM currencies. The Hungarian forint is close to two-year lows and South African Rand is broadly depressed. In the context of developing economies it is worth to cite an interesting exchange of views between two central banks. On Thursday, during the Bloomberg interview with India's central bank governor he said that “International monetary cooperation has broken down”. Raghuran Rajan, who was also IMF chief economist, added that “The U.S. should worry about the effects of its policies on the rest of the world” (having in mind the recent QE reduction by the FOMC and money outflow – author's note). As Bloomberg reports “Fed spokesman David Skidmore declined to comment”. However, the issue was followed by Federal Reserve Bank of Dallas President Richard Fisher (voting this year, hawkish). “The Wall Street Journal” reports that Fisher said “some believe we are the central bank of the world and should conduct policy accordingly. But that's not true: We are the central bank of America and need to pursue actions that promote the mission Congress has charged the Fed with" - he told the “WSJ”. It was quite plain response both to the Rajan complains and to some market rumors that a coordinated action of central banks can take place in defense of EM.

Friday's data on inflation from the Euro Zone again touched 0.7% y/y. The report pushes up again the expectations that Mario Draghi and his colleagues may lose the monetary policy again on Thursday. When in October we had equally low CPI, a few days later the ECB decided to cut the benchmark. However, taking into the account the recent Draghi remarks and December ECB projections (where the growth was still expected at around 1% y/y and future inflation was just modestly lowered), the probability is quite low. A different perspective is taken Barclays economist Dean Maki. He told Reuters that “We think the low inflation readings in the euro area, along with fears of a further decline into deflationary territory, will lead the ECB to cut the main refinancing rate by 15 basis points and the deposit rate by 10 basis points”.

Summarizing, the currency market is still under pressure from EM sell-off. The EUR/USD has also been hurt by risk aversion which brought the most heavily traded pair below 1.3500 mark. Regarding the manufacturing PMIs from Europe the data was basically in line with preliminary readings and estimates. During the afternoon session it is worth to pay attention to ISM reading. If it falls short of expectations (more than one point) we can expect a slight depreciation of the dollar.

Solid data!

Before 9.00 CET the EUR/PLN was traded close to 4.26 mark. The depreciation moves on the zloty was, however, stopped by the highest in three years PMI reading. According to HSBC and Markit Polish Purchasing Mangers Index rose to 55.4 points from 53.2 reported in a previous month. Commenting the data, Agata Urbanska-Giner, Economist, Central & Eastern Europe at HSBC wrote that: “January manufacturing PMI marks a very strong start to 2014 wit the index at a three year high. Importantly the latest improvement is broadly based. Output, new orders and employment indexes all rose sharply in January”. She also added that “The above-expectation PMI reading will also fit in with recent upbeat comments form policymakers, including several MPC members, on a positive GDP growth outlook”. What was also interesting in the HSBC/Markit is a fact that “the rate of workforce growth was the strongest since the survey started in June 1998”.

Summarizing, after the PMI data was released, the zloty gained around a half of one percent both to the euro and to the dollar. We have to see whether the relative strength of the Polish currency can be maintained till the end of the session. If it happens, then we can expect a stronger correction in the following days (even to 4.22 per the euro). I wouldn't, however, expect that after one report the trend reverses. We have to see a significant sentiment improvement on EM currencies to expect the zloty markedly stronger.

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

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