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Daily analysis 04.08.2014

4 Aug 2014 12:30|Marcin Lipka

US job's data was neutral but no wages growth and lower-than-expected inflation pushed the dollar south. Czech Central Bank puts additional pressure on the koruna. Global dollar correction pushed the zloty and local bonds higher.

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

  • No macro data which may affect the analyzed pairs.

The data. Plosser. CNB

In the short-term the Friday's trade was groundbreaking and initiated a correction on the EUR/USD. However, the main reason behind the rebound wasn't a slightly weaker jobs' data (which was actually neutral) but no wages growth and lower inflation reading. We can assume that the dovish part of the FOMC may find more arguments to raise interest rate later.

One of the most important readings in August – Non-farm payrolls – was below the expectations. The NFP dropped to 209k, whereas the projections were hovering around 230k. It is, however, worth noting that the revisions added 15k to two previous months, so overall the publication should be regarded as neutral. The household survey showed that official unemployment rate ticked higher (from 6.1% to 6.2%), but at the same time the participation rate rose showing that some workers decides to return to the market. The employment data was actually pretty neutral, so it probably didn't help the EUR/USD to jump.

The dollar strength was under a radar after wages data was released. Instead of growth at 0.2% m/m we received a flat number. It may be one of the arguments for the Federal Reserve to leave the rates unchanged (no salary pressure = no inflation). The second evidence which gives the Fed more room to maneuver was the PCE reading. On Friday we did write that the Fed's preferred inflation measure should not bring any surprise due to the fact that we had already known the CPI number.

However, the Department of Commerce release was pretty surprising. The PCE rose only 1.6% y/y (consensus at 1.7% y/y) and additionally we had downward revision for the May's data (from 1.8% y/y to 1.7% y/y). Despite the fact that the changes were quite minor we are actually again pretty far from the 2.0% target what may give an “additional argument” for the Yellen's accommodative camp. Taking into account that neutral employment data and low inflation pressure, the dollar bulls decided to cash in some profits which push the dollar lower.

Softer stance to the dollar wasn't really changed by the robust ISM reading (weak Chicago PMI was a false indicator). The Managers' Index for US manufacturing rose to 3-year highs and topped 57 mark (consensus was close to 56). Analyzing different subindexes ware are not finding any cracks. Both “new orders” and “productions” exceeded 60 points value while employment rose from 52.8 to 58.2. It shows that 2014 H2 may be rally bullish for the economy and maybe we will be able to catch up losses after Q1 slump. Bringing the ISM closer to our region we should note that respondents from chemical industry claimed that “geopolitics still present a considerable risk as well as the European market and “Russia's demand for medical devices from the U.S. has dropped by 40 percent”.

Charles Plosser who dissented from the most recent FOMC statement published a page-long explanation on the Philadelphia Fed website. He claims that the Fed should start raising rates (to 1.25% at the of the year) because both the inflation and unemployment are getting closer to the Federal Reserve targets. On the other hand, Richard Fisher on CNBC was trying to explain why he actually agreed with the FOMC statement despite that his views are close to Plosser's. He claims that the Fed is getting closer to his outlook and therefore he didn't dissent. We probably get more clue on the discussion in the incoming “minutes” (three weeks later) but we should imagine that it may be pretty hawkish (dollar positive). Overall, however, the hawkish camp is pretty weak and the most recent data are not giving it a boost.

Due to many events happening last week we “missed” Czech Central Bank (CNB) decision and its macroeconomic projection. The MPC members in Prague are getting even more dovish. They extended the promise to keep EUR/CZK rate above 27 mark till 2016 and didn't rule out a possibility to hike the floor (push the krone down) when we see “a further notable strengthening of disinflation effects”. According to the new CNB projections there are no significant threats to the gradual rise of inflation but the pace of this process seems to be slower than previously indicated. It is interesting whether the Polish MPC is feeling some pressure from the south?.

Summarizing, the EUR/USD received an opportunity to rebound from recent lows. The lower inflation pressure from the US should calm the dollar appreciation appetite. Additionally, on Thursday, despite record low inflation readings, the ECB will have some reasons to be satisfied with the exchange rate. If Draghi gives some hints, that the exchange rate has lower impact on the CPI, we may even see a 1.3500 afterwards.

Taking advantage from improved sentiment

Lower dollar valuation, falling bonds' yields and stock market rebound are casing that on late Monday morning the zloty is stronger to most major currencies. On the next days we should remain below the recent lows and the base-case-scenario is going to be a calm trade around 4.17-4.18 pre the Euro and 3.10-3.11 on USD/PLN. The situation can be changed by a significant sentiment deterioration, but currently many bad news are already discounted and the yield-hungry bond players are trying to take advantage from the recent sell-off and may stop a deeper PLN depreciation.

Both today and during the rest of the week the economic calendar is empty, so the incoming hours are suppose to pass in a holiday atmosphere with low volatility.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0800-3.1200 3.1000-3.1400 3.0600-3.1000
Range CHF/PLN 3.4200-3.4600 3.4200-3.4600 3.4200-3.4600

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

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6950-1.7050
Range GBP/PLN 5.2500-5.2900 5.2700-5.3100 5.2900-5.3300

4 Aug 2014 12:30|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.

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