Daily analysis 04.02.2014

The ISM manufacturing is significantly below expectations. Was the weather the main issue in the report? The euro is gaining “safe haven” status? Second part of the week can be crucial for the dollar. Polish currency stronger in the morning. The Federal Reserve member upbeat on Poland.

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

• No major macro data in the calendar

ISM. Safe haven. The following days.

Monday was dominated by ISM data from the US. The manufacturing index unexpectedly slumped from 56.5 points to 51.3 (readings below 50 suggest expansion and below that mark contraction). Analyzing the sub-indexes in the report, we can see that the largest fall was recorded in New Orders (from 64.4 to 51.2) and Production (from 61.7 to 54.8). The dire number pushed primarily capital markets lower, but the dollar was also a victim of falling manufacturing. Many respondents in the report claimed that weather played a big role in their business (mainly from Fabricated Material Products, Petroleum & Coal Products and Plastics & Rubber Products). On the other hand against the “weather theory” is Michael Feroli, chief U.S. economist at J.P. Morgan Chase. He told the MoneyBeat portal that “his statistical analysts shows weather accounted for 0.1 point of the 5.2 – point decline last month. Feroli claims that there are other issues behind the number. “First, the ISM had generally looked too strong relative to some other indicators. Second, inventories had been running hot so some pullback in manufacturing makes sense”. Another explanation was presented by Bradley Holcomb, chairman of the ISM's manufacturing report who said on a conference with reporters (according to Bloomberg) that “The outlook for the rest of the year remains solid. This is blip on the screen”. Regardless which view is the closest to the truth, the data put dollar bulls to some uncertainties and nervousness before the Friday's payrolls.

There is an interesting analysis in today's “The Wall Street Journal”. In an article “Euro May be Resurfacing as a Safe Haven” the author points out that the European currency does not fall when the risk aversion rises. In the analysis there is also HSBC data which shows a correlation between the euro and “general risk sentiment”. In the past four years the correlation was pretty strong (up to +0.75 – euro weaker vs bad market mood), but in the recent weeks it has fallen into the negative territory, suggesting that when the risk aversion spreads around markets the common currency is rising into value. We could have easily observed this effect yesterday when the Dow dropped around 300 points, whereas the euro gained some value to the dollar. It is debatable whether the correlation changed for good or it is just short-term deviation.

Summarizing, the ISM data increased the uncertainties regarding the future dollar performance. Currently investors will try to focus on Wednesday's ADP numbers (still having in mind the last month's “miss”) and Friday's NFP. If they get payrolls under 100k then we can expect a stronger “geenback” sell-off. In the meantime, we also should remember about the ECB meeting on Thursday. Any decision regarding a looser monetary policy should markedly push the euro lower. Overall, the following days look pretty interesting.

Fisher on Poland

Yesterday during an interview at Fox Business TV Fed's Dallas President Richard Fisher made some remarks on current stock market situations and Federal Reserve role in the global monetary system. He claimed that the Federal Reserve is not under influence of the stock market. The FOMC observes the economy and the expected GDP growth justifies further asset purchase reduction. He also made some comments (again) toward EM central banks. In that context Fisher said that ”certain countries took advantage of this lower period of very cheap money and made structural adjustments, and Mexico is a good example, and Poland is a good example”. It was a direct response to some EM central bankers who blamed the Federal Reserve for their currency/capital flow issues.

Moving directly to the market situation, the Tuesday morning is quite bullish for the PLN. I wouldn't connect it with Fisher remarks but rather with some correction on EM currencies. The zloty has clearly taken advantage of Monday's solid PMI number and today, in line with other developing currencies, is also moving higher. It is even possible that during the day the EUR/PLN will be able to test the 4.20 mark.

Summarizing, after some weakness in the second part of the last week, the zloty is taking a lead in EM currencies. When the situation calms down and more market participants will look further in the fundamentals we should expect PLN to return in the 4.14-4.18 range.

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

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