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Daily analysis 03.11.2014

3 Nov 2014 12:52|Marcin Lipka

The EUR/USD is traded around 1.2500 after the final PMI euro zone data. Further yen weakness. Russian currency on thin market is approaching to record low levels. Tensions in the East arise. The zloty remains stable after solid PMI, but the pound and dollar are at record high to the PLN.

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

  • 16.00 CET: ISM from the US (survey: 56.2 points).

The data. Rouble. East. Yen

Final PMI published from the euro zone (50.6 points vs preliminary number 50.7) didn't bring any groundbreaking news to the single currency countries. German, Spanish or Irish economies performed pretty weel while the French or Italian ones are lagging behind. While giving comments on the data Rob Dobson, senior economist at Markit writes that “the performance of euro zone manufacturing remained broadly flat” and “is therefore unlikely to provide any meaningful boost to the currency union's anemic GDP growth”.

Additionally, Dobson sees that “perhaps most worrying is the trend in new orders, a key bellwether of future output growth, which declined for the second month running”.

Lack of positive signals from Europe may push the dollar much higher if we get better-than-estimated ISM number (56.2). A slight hint was pretty solid Chicago PMI reading which jumped to 66.2 level in October. Moreover, according to the Institute for Supply Management and MNI new orders increased to 73.6 points (the highest since November of 2013). If the ISM rises significantly above economists' expectations (58 points), we should see a slide toward mid 1.24 range on the EUR/USD.

If the Russian central bank (CBR) planned to boost its currency with the 150 bps interest rate rise it clearly failed to achieve the goal. The rouble strengthened just for a few minutes and than returned to the levels from before the decisions were announced. Further, it went back to the south and today we are close to the record low levels.

A weak response from the currency market after a hefty hike is a result of leaving unchanged the predictive intervention policy (350 million USD when the rate moves 5 kopecs beyond the USD+RUB basket).

Only in October the CBR exchanged around 30 billion USD of reserves. It means that the band was moved more than 80 times. The highly speculated market plays a game with the CRB and even if such competition is usually won by central bank (especially if it has a large currency reserves) the rate my be highly deviated for a long time. As a result the CBR will have to changed the intervention policy unless it wants to see another wave of speculator on the horizon.

The Russian currency may also be under pressure of the new tensions between the West and Kremlin. This time the issue concerns election in separatists' republics. Moscow claims that the weekend voting was in line with Minsk agreement while the EU, US, UN and OSCE say that the election date was set for December 7th.

It is hard to say what is the aim of the most recent turmoil, especially given that the December date was not only confirmed by the West, but also accepted by the rebels who “welcomed” the schedule according to TASS news agency reports in mid September.

If the Kremlin recognizes the voting (it leans to that scenario especially after Lavrov “explanatory” letter published on the Foreign Ministry website) it will be really impossible to reduce sanctions in the near future. Moreover, they may be heightened when other parts of the agreement start being violated (especially the weak ceasefire). It is a negative news for the rouble, regional currencies and the euro.

The yen sell-off is currently on of the reasons that the “greenback” has been pushed higher to other currencies. The dollar appreciated to the JPY around 4% after the BoJ and to pension fund announced their decisions last Thursday.

The pace of depreciation is not sustainable but yen's slow weakness combined with the global dollar appreciation may push the USD/JPY toward 120 as early as this year.

Summarizing the most important event today will be ISM reading from the US. If the manufacturing index rises significantly above 58 level than we should see a further dollar appreciation (around 1.2450 on the EUR/USD) and even mid 113 levels on USD/JPY. It it worth keeping an eye on the news from the eastern Ukraine, where - after the controversial elections - we are getting closer to further sanctions escalation (negative mainly for the rouble).

Stable after the PMI

The session was started with the pretty good PMI data. Polish manufacturing rose to 51.2 points with expectations around 50 mark. The survey of future economic performance conduced by the Markit and HSBC showed production gain and the first increase of new orders since in 5 months. Commenting the data HSBC economist Agata Urbańska Giner wrote that “on balance improving business survey support our forecast of growth consolidating in the coming quarters”. “This should encourage the Polish MPC to pause the rate cuts after what we forecast will be a 75bp adjustment in October and November this year”.

Fairly good PMIs didn't change the fact that the tensions in the East are negative for assets in the region. It looks pretty good on the dollar and pound valuations to the zloty. The first one after solid PMI from the UK is testing 5.40, while the latter is clearly approaching to the 3.40 level. Current trends (range trade on the euro and CHF, and weakness both to the GBP and the USD) should continue in the incoming weeks. In the short term the EUR/PLN and CHF/PLN will also be pretty stable hovering around 4.22 and 3.50 respectively.

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

Range EUR/USD 1.2650-1.2750 1.2550-1.2650 1.2750-1.2850
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3200-3.3600 3.3400-3.3800 3.3000-3.3400
Range CHF/PLN 3.4800-3.5200 3.4800-3.5200 3.4800-3.5200

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

Range GBP/USD 1.5950-1.6050 1.5850-1.5950 1.6050-1.6150
Range GBP/PLN 5.2900-5.3300 5.2700-5.3100 5.3100-5.3500

3 Nov 2014 12:52|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:

31 Oct 2014 17:12

Afternoon analysis 31.10.2014

31 Oct 2014 12:48

Daily analysis 31.10.2014

30 Oct 2014 17:11

Afternoon analysis 30.10.2014

30 Oct 2014 12:42

Daily analysis 30.10.2014

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