Daily analysis 03.04.2017

The ECB has been trying to calm down the market expectations regarding rate hikes in the eurozone. The British PMI is worse than expected. However, this index is still at a relatively high level, taking Brexit into consideration. The zloty remains stable after the negative PMI reading. The EUR/PLN is near the 4.23 level.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• 16.00: The industrial ISM from the USA for March (estimates: 57.2 points).

Hikes before the end of QE seem unlikely

Last week was negative for the euro. The EUR/USD was at the level of 1.0900 last Monday, only to go approximately 250 pips lower at the end of last week. This was caused by two factors. Primarily, the dollar’s condition has improved. The American currency was supported by the statements from the Federal Reserve representatives, who have sustained the plan of at least three rate hikes for this year.

In addition, the euro had been weakened by relatively low inflation readings from the eurozone, as well as by comments from the ECB representatives. The latter indicated a small likelihood of the rate hikes initiation before the ending of the QE operation. This has been confirmed by today’s statements from Peter Praet for Expansion, which were cited by Bloomberg.

The ECB senior economist claimed that, “there is no number, period of time in months or anything like that which will determine when interest rates go up after the debt purchases end.” He also added that, “current sequencing of monetary policy normalization makes a lot of sense.” This suggested that the actions from the European monetary authorities regarding exiting from the extremely mild monetary policy, will be similar to what has happened in the USA.

It’s also possible that this topic will be brought up during a collective testimony from Praet and Mario Draghi on Thursday. If Draghi supports Praet’s view, an additional pressure may appear. This may also end speculations regarding this topic, at least for a while.

Weaker data is not weak

This morning, we have received the British industrial PMI readings. The data was slightly worse than expected (54.2 points vs 55.0 points) and wore-off the pound slightly. However, it’s worth noting that the reading’s level was still relatively high. This is taking into consideration that IHS Markit made these surveys during the period of the most intense discussion regarding Brexit.

We should also keep in mind that the current account deficit for the fourth quarter decreased by more than half (from 5.5% GDP to 2.4% GDP). If this trend is sustained, this would mean that one of the most crucial reasons for the pound’s wear-off (external imbalance) has lost its significance. This may increase the chances for the pound’s rebound, if the British economy shows that it is relatively immune to Brexit.

Zloty is stable

The industrial PMI from Poland was slightly weaker then expected (53.5 points vs 54.6 points). Nevertheless, the report alone was in a relatively positive tone. Markit IHS wrote that, “business conditions improved solidly amid further rises in output, new orders and employment.” In addition, “optimism about the year ahead picked up to a 13-month high.”

The condition of the emerging markets should remain the most significant factor for the zloty in the forthcoming days. It is worth observing the Mexican peso, the Russian ruble and the South Korean won, in particular. In the past quarter, these currencies have gained 10%, 9% and 8% against the dollar, respectively. The zloty’s gain against the dollar was at the level of 5.4%. If these currencies experience a negative correction, the zloty may lose value as well.