Daily analysis 03.04.2014

Pretty good ADP report and slightly better than anticipated factory orders pushed the dollar higher. Somewhat dovish comments from Bullard and Lockhart. ECB and Mario Draghi conference in focus today. Spread between 5-year Spanish bonds and 5-year US bonds are approaching to zero. The zloty remains stable around 4.17 per the euro.

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

• 13.45 CET: ECB decision on interest rates (survey: no change; left at 0.25%).
• 14.30 CET: Mario Draghi conference after the ECB meeting.
• 16.00 CET: ISM non-manufacturing reading from the US (survey: 53.3 points).

The data. FOMC. ECB. Yields

We start the morning session around 40 pips below the previous close on the EUR/USD. The decline of the most heavily traded currency pair was mainly a result of pretty solid employment data from the States. The survey run by ADP showed that the US economy created 191k jobs in March. The headline number was in line with market expectations, but it is worth pointing out a significant revision in the February data (+39k). Additionally, before the data hit the wires there was some rumors that ADP can be a bit lower due to disappointing employment index in the manufacturing ISM. Moreover, we had better-than-estimated publication of factory orders (+1.6% vs +1.2%) but in that case we had a downward revision for the previous month publication (by 0.3%). The stronger “greenback” was mainly a result from better overall ADP. If the official payrolls are in line with estimates and get a similar revision, we may expect that it will support the dollar.

We had two statements from FOMC members (a bit counter to the data). James Bullard from St. Louis Fed (leaning dovish, non-voting) in a Bloomberg radio interview said that inflation “has stabilized at a low level” and is “about to head higher”. Further he said that “if inflation fell meaningfully below 1 percent and looked like it would stay there, I think the committee would have to take action”. The reaction, as Bullard claims, can “delay the tapering program. We can delay the tapering program. That would change the entire timing of the exit program. On the other hand, as “The Wall Street Journal” reports Dennis Lockhart, president of Atlanta Fed (close to the Committee consensus) said that”Based on my working medium-term outlook, I see that latter half of 2015 as the likely time frame for the first move higher rates”. However, the FOMC member also pointed out that if the growth does not deliver expected results “a later liftoff date than I am assuming will likely be appropriate”. The both statements were rather ignored by market participants, but if the US data falls short of expectations in the coming weeks their remarks will be reminded and a pressure on the dollar may be observed.

Only 3 out of 57 economists surveyed by Bloomberg expect that the ECB will not change the monetary policy on today's meeting. One of them is Goldman Sachs economist Sebastian Graves. He claims that Draghi and his colleagues cut the benchmark rate by 0.1 percentage point. Graves, however, does not predict that the ECB may proceed with negative interest rates or QE. Besides the broad based expectations that Draghi does not change the interest rates, there are rumors that he will probably we much more dovish than previously. He can also elaborate much more than the cut was discussed and other unconventional policy measures are on the table. Regarding how much he is committed to his dovish statements we will see the EUR/USD reaction. Less probable scenarios are that which include change in the monetary policy or pretty hawkish statements dismissing the recent inflation reading. They will either lower the euro-dollar significantly or strengthen the euro toward 1.3850 respectively.

An interesting story is now happening on bond markets. The 5-year yields on Spanish bonds are almost at the same level as US 5-year treasuries. The spread between the two (according to Bloomberg data) was only 6 bps (0.06%) yesterday. In the second part of 2013 the difference was 200 bps and in mid 2012, when many thought the euro area was close to a breakup, the spread was 700 bps. The mentioned changes are extremely significant taking into account the overall behavior of the fixed income market. What are the reasons of such turnaround? Firstly, a meaningful depreciation of the default risk (after famous Draghi words “to do whatever it takes to save the eurozone”) and changing perspective on the future interest rate differential between the euro area and the US. However, even taking into account the mentioned reasons, the move is incredible and probably was predicted by very few participants.

Summarizing, the market will focus on the ECB meeting results today and especially on Mario Draghi conference. The base case scenario is leaving the monetary policy unchanged with much more dovish comments from the Committee. Any deviation from the base case scenario should increase the volatility significantly.

Oasis

The zloty was pretty stable in the last hours and the EUR/PLN changes were lower than 0.01 PLN in both ways. In a base case scenario regarding the afternoon ECB decision the Polish currency should not significantly move from the 4.17 level. Even if we get a rate cut, I don't expect that we can slide below 4.15. On the other hand, if Draghi gets as hawkish as in March, then we can expect the EUR/PLN jump but also that move should not exceed the 4.19 level.

Summarizing, the zloty should be pretty stable, regardless the events on the base markets. Even in the unexpected scenario we will probably stay within 4.17 plus/minus 0.02 PLN range on the EUR/PLN and 3.40-3.44 on the CHF/PLN.

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

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