Daily analysis 05.06.2014

Mixed data from USA cause a certain anxiety of dollar bulls before Friday's payrolls. The day of Draghi has come. ECB decision – extreme scenarios. Zloty is strongest in relation to Euro since a year after the president's words on adopting the common currency.

Most important macro data (CET). Estimations of macro data are based on Bloomberg's informations, unless marked otherwise.

• 13.45 CET: Decision of European Central Bank about interest rates (survey: decrease of reference rate by 15 base points to 0.1%; decrease of deposit rate by 10 base points to minus 0.1%).
• 14.30 CET: Mario Draghi's press conference after ECB summit.

USA. ECB. Extremely

Before we head on to the event of the month which is the summit of European Central Bank, it is worth taking a look at yesterday's publications from the other side of the oceanfor a while. First to hit the market was the report of private ADP agency about new jobs in private sector. Data were clearly below the forecasts (179 thousand vs consensus 210 thousand). Despite the calming comment of Carlos Redriguez, ADP managing director, that “179 thousand is a figure higher than in May last year and accordant with the average from the previous twelve months”, it is not a good omen before the Friday's publication of Labour Department. Especially that the market expectations are above 200 thousand, and high NFP for April did not found a confirmation on ADP.

The reading of balance of trade from USA was also negative for the dollar. Deficit in April increased to the highest level since two years and amounted 47 billion USD (estimations in limits of 41). It was most of all caused by a clear increase of import (only the demand for fuel from abroad decreased). Luckily for the dollar optimists, the service ISM was better from the estimations, along with the improvement of all subindexes (including employment). However, the data were in general weaker but the investors will not remember about them until Friday morning.

The decision of European Central Bank remains in the centre of attention. During previous weeks I have probably presented all possible scenarios that circulate on the market. And that is why today I would like to shortly describe those possibilities which should surely cause some serious changes on EUR/USD. Starting from those advantageous for the common currency, leaving the interest rates on their current level (or decreasing only the reference rate) would definitely cause a real “groan of disappointment” of short positions. If we would combine this fact with relatively little dovish conference and e.g. no downwards revision of inflation projection for years 2015 and 2016, the increase of main currency pair could then cross as much as 200 pips. However, the chances that will be no cutting of money cost on today's summit, are lesser than 5%.

The movement by 200 pips on EUR/USD only downwards, would probably cause the announcing of QE program. And it would be irrespective of the fact whether concerna the purchase of ABS (instruments based on private credits) or/and national debt. If the interest rates' cutting would be much stronger than expected (e.g. reference rate to 0.05%, and deposit rate to minus 0.2%), it would also cause a strong fall pressure on Euro. If it would be related with e.g. resigning from the sterilisation of SMP program, we could expect fall close to 200 pips on the main currency pair. However, just like in case of the increase scenario, the probability of such big “bazooka” can be at the moment also estimated as possible for 5%.

In conclusion, today's decision of ECB will have consequences during at least upcoming months. That is why every word in the communicate, as well as Draghi's statements, will be analysed in detail. We can also expect that this afternoon we will observe sudden movements upwards and downwards. That is why everyone who is making non-speculative transactions, should keep away from this period.

A lot of commotion on zloty

Recent days on the national currency's market are very interesting. After its Tuesday's weakening caused by the slight deterioration of sentiment on Emerging Markets and dovish communicate of Monetary Policy Council, yesterday we witnessed a clear strengthening of zloty, that begun in the early afternoon. An easy explanation would be the thesis that this movement was provoked by another game under today's ECB summit. However, Reuters' communicate slightly disturbs this argument. In the news of this information agency entitled “Representatives of Polish authorities declare interest in adopting Euro” quite a lot of space is devoted to yesterday's statement of the president about adopting the common currency.

President Komorowski has been a supporter of adopting Euro for a long time. However, Reuters quotes amongst others the Finance Minister Szczurek, who says that he “fully agrees with the president about Euro” and president Belka, that he “shares the president's view”. Further on the information agency in some sort specifies the communicate by writing, that it is rather about starting a discussion about adopting the common currency and there are some serious formal matters about which one should remember (constitution, majority in the parliament, elections in 2015). However, the market likes to react on the news headlines and the fact is that Poland was recently commented in the media quite widely (Obama's visit could cause the part of the players observe the national market with a bigger involvement and pressed “buy” or restrained from pressing “sell”.

Additionally, specifying the approach of Finance Minister, it seems that his opinion did not change since the interview for TVN24 Biznes i Świat, when he claimed, that Poland's access to Euro Zone is very unlikely until the end of 2020. President Belka also remains sceptical about adopting the common currency, especially if it would occur on current rules (remaining in ERM2 corridor).

However, irrespectively of for what reason has zloty's strenthening occurred, right now the basis level on EUR/PLN are the areas of 4.12. If ECB will fulfil the market's expectations, it is not excluded that we will fall in the limits of 4.10 per Euro and 3.36 per franc and these levels should maintain until the end of the week. USD/PLN pair has the smallest chances for an upgraded variability. It should be relatively most stable (if ECB will not fulfil the expectations, EUR/USD will then increase, but at the same time also EUR/PLN will probably go upwards, so the sum of these changes should put itself on USD/PLN; it should be similar also with the opposite scenario).

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

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