Daily analysis 04.04.2014

The Euro slides after dovish ECB statements and comments from Mario Draghi. The US data can be the key to the medium term for the dollar valuation. Another record low yields on the peripheral countries. The zloty is slightly higher after the ECB remarks.

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

• 14.30 CET: Non-farm payrolls from the US (survey: 200k; unemployment rate 6.6%.

Dovish. Yields. Payrolls

This time the most were right regarding the main message from EBC. Mario Draghi and his colleagues didn't change the parameters of the monetary policy, but the central bank president sounded more dovish than previously. As I pointed out yesterday, the level of dovishness will be the key to the EUR/USD behavior. The first lines of the statement were in line what the ECB presented in the previous meetings, but the next paragraphs were markedly changed. They strengthened the need to “act swiftly if required”. The board of governors also “unanimously” agreed on the “commitment to using also unconventional instrument within its mandate in order to cope effectively with the risks of a too long prolonged period of low inflation”. It was also important that the Bank stressed a need to monitor “exchange rate” developments (but it is still not a policy measure). There is, of course, a question what is a chance of the ECB rally changing its monetary stance. Firstly, a second inflation reading can be important and the data for April can also be crucial. If there is no pick up in the HICP (as expected regarding the holidays), then we can see some action as early as in May. Will that be a QE? By analyzing Draghi comments - probably not. It is pretty possible that we can get another rate cut (maybe also with pushing the deposit rate into the negative territory), LTRO operation or halting the SMP sterilization operation. Draghi's remarks also indicate that QE can be the last option. The ECB chief claims that the operation can be harder and less effective than in the US (it is not clear which countries debt can be bought) and lower bond yields do not have to translate into lower loan rates (as in the US, where mortgages rates are connected to the treasuries yields). Concerning the ABS purchases (QE on private assets) Draghi also said that there is a problem with liquidity of this market.

Traditionally, with the first Friday of the months we are expecting US jobs data. The NFP are supposed to rise, according to Bloomberg median estimate, by 200k. If we get a reading 50 k above the survey (including revisions), then we may expect the dollar appreciation. On the other hand, in case of softer figure (by the same amount), it is possible that the “greenback” can weaken substantially (fears on weaker economy, not only due to cold winter, can get more attention and therefore push forward the first rate hike).

Yesterday I wrote that 5-year yields on Spanish debt dropped to the levels of yields on 5-year US treasuries. After Draghi conference we were observing another wave of demand for peripheral debt. In result the yields on 5-year Italian and Spanish bonds slided to the lowest levels in history (1.87% and 1.80% respectively). Additionally, the spread between German and Spanish 10-year benchmarks dropped to 162 basis points (the lowest level since October 2013).

Summarizing, investors will be a bit nervous today if the data significantly deviate from the market survey. In case of readings above/below 50k consensus, we should expect the dollar appreciation/depreciation which can be more than 50 pips on the EUR/USD. Still the hypothetical rise on the EUR/USD can be less significant and shorter lived (still investors have in mind ECB statement).

Stable

More dovish than estimated ECB message pushed the zloty a bit higher to the Euro. If we get solid data from the US we can expect that the move can reverse, but overall the PLN still should be pretty resilient to the external factors. On the other hand, when the “payrolls” falls short of expectations we may gain up to 0.5% to the Euro, but levels 4.15 on the EUR/PLN and 3.00 on the USD/PLN should not be breached.

Summarizing, the base case scenario will be: stable trade on the zloty close to the current levels. Only a significant deviation from the survey can increase the volatility but the moves on the PLN will be still subdued.

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

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