Daily analysis 04.11.2013

The EUR/USD was traded even under 1.3450 during the Asian session. What are the reasons of such sell off on the most traded currency pair? Macro data and Thursday's ECB rate decision are in focus this week. The zloty, regarding a large slide on the EUR/USD, was fairly calm to the euro. Strong Polish PMI reading.

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

• Already published final PMI readings from the Eurozone (close to the preliminary readings and therefore without major impact on markets).

Rumors on EBC rate cut. Almost 300 pips slide

We are starting the European session around 1.3500 level. It is much lower than the EUR/USD was traded at the begging of last week, when market was trying to move toward 2-year highs. Before 10.00 CET euro area PMIs hit the wires. They confirmed a relative strength in Germany (51.7 points) and weakness in France (49.1). Overall the final PMI in the Eurozne (in 8 countries) was unchanged in comparison to preliminary readings (51.3) and 0.2 points higher than in September.

The EUR/USD slide, in the last two trading, surprised most market observers. We can conclude that all began after weaker-than-estimated ADP job report from the US. The dollar didn't want to move lower after the disappointing employment data. Later that day we had less dovish than expected FOMC statement and we ended the Wednesday session around 1.3700. On Thursday, before the noon Eurozone inflation data hit the wires. The CPI report usually does not bring too much attentiondue to fairly low volatility of the data. This time, however, the situation was much different. The headline number turned out to be the lowest since November 2009 and it was 0.4 percentage points below economists' estimates (0.7% y/y vs 1.1% y/y). Not only the headline data was low, but also the core reading was disappointing (0.8% y/y vs 1.0% y/y). It immediately spurred a discussion whether Mario Draghi and his colleagues are able to cut the benchmark as early as on Thursday. The ECB can also decrese the deposit rate (under zero which will be really negative for the common currency) or run another liquidity operation (similar to the LTRO). During the Thursday trading day many investment banks issued statements that they are expected some kind of action from the ECB after the inflation data and it brought the further pressure on the EUR/USD (just after the data hit the wires it slided, in the first hour, around 30 pips but ended the day 150 pips lower). Later the common currency was under pressure by strong Chicago PMI and US manufacturing ISM (56.4 points, the highest reading since 2011; the weaker spot was only the employment subindex). In result we ended the week with almost 300 pips slump.

Summarizing the EUR/USD slide to around 1.3500 was quite surprising. In my opinion, however, the disussion on the rate cut is still premature. The ECB will probably wait for any reaction until the December meeting when the Bank will get a new GDP growth and inflation estimates. Even at the last meeting in 2013 the ECB will rather run another liquidity operation than move the rates. In the coming days the market will be focused on the ECB meeting and on Friday's Payrolls. In the meantime we have also the non-manufacturing ISM and Mario Draghi speech (no direct remarks to the monetary policy is expected) on Tuesday.

Fairly calm zloty. PMI the highest since April 2011

Taking into the account the EUR/USD turmoil, the PLN was fairly calm. Only on Friday we almost touched 4.20 level, but it was rather a result of local holiday than a broad sell-off. Today we started the day at around 4.18 and this rate should be the base case scenario for the zloty in the coming days. More volatility we were observing on the USD/PLN which has briefly exceeded 3.10 level. If the sliding trend on the dollar is scheduled to resume than we should not move above the recent highs on the dollar-zloty pair.

In the morning Markit and HSBC published Polish manufacturing PMI index. The headline number was quite strong (53.4) and “new business from export markets expands at fastest rate in 15-year survey history”. However, in the commentary to the data Agata Urbańska-Giner, economist for Central and Eastern Europe at HSBC says that “The highlight in October survey was a surge in new export orders while output and employment indices inched lower”.

Summarizing the zloty should be fairly stable to the euro and Swiss franc – around 4.18 and 3.40 respectively. The dollar will be directly affected by the EUR/USD rate, but we should not retest 3.11 in the coming hours.

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

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