Daily analysis 05.11.2014

Reuters reports pushed the EUR/USD higher again, but the market is waiting for the ECB meeting. Republicans are taking the Senate. Another record yen weakness. Russian central bank is changing the intervention policy. Nervousness in the East. The zloty slightly weaker before the MPC rate decision.

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

• Between 12.00-14.00 CET: Interest rate decision in Poland (survey: 25 bps cut to 1.75%).
• 14.15 CET: ADP report on new private payrolls (survey: 220k).
• 16.00 CET: Non-manufacturing ISM from the US (survey: 58 points).
• 16.00 CET: Marek Belka press conference after the MPC meeting. MPC statement. Major economic projections from the November “Inflation Report”.

ECB. US. JPY. RUB

It's been the third occasion when the Reuters report is significantly increasing the EUR/USD volatility. This time the news agency claims that the central bankers from the euro zone were unhappy that Draghi during the September meeting set the target for the ECB balance sheet (close to the 2012 levels).

The information was quickly interpreted as a some disagreements inside the bank and therefore it may decrease the odds for QE. It pushed the EUR/USD about a half-figure higher in the late trading. It is, however, worth to mention that it is really hard to get a common view in a group of central bankers coming from all euro zone countries (it is often regarded as a weak point especially in the time of market turmoil).

After several hours the market realized that the ECB issue is not groundbreaking and we returned to around 1.2500 and probably we should stay near that range (or a bit lower) till the Thursday's meeting.

The comeback move, was also supported by the strong Republicans' victory. The GOP managed to capture the Senate and increase the majority in House of Representatives. This piece of information was positive both for the stocks and the dollar.

Reports on Congress changes were also coming at the same time as news from Japan. The central bank governor said in Tokio that “BoJ will do whatever it can to overcome deflation”. On the scorching-hot yen market it was enough to give impression on more stimulus on horizon and pushed the USD/JPY to around 114.50. The yen dropped in last four days about 5% to the dollar.

Similar emotions are on the rouble. At the beginning of Wednesday's session (after two holiday days) the rouble slumped after the CBR announced that it resigns from the current intervention policy and getting closer to the free-float rate.

Currently according to the CBR message published on the official website the central bank will be able only to sell a maximum of 350 million USD a day while previously it intervened when the dollar+euro basket broke a range by 5 kopecks. It caused that the CBR has been burning around 2-3 billion USD a day recently.

Theoretically the size of intervention is going to decrease, but taking into account another message that the CBR may “in case of financial stability threats, the Bank of Russia will be ready to carry out additional interventions in the domestic foreign exchange market” we should not that the MPC in Moscow recognized the advices from around the world and changed the intervention policy to much less predictive.

Currently it is hard to judge whether the market tires to test the willingness of intervention or we have already seen the lowest levels. Undoubtedly, however, it brings much more uncertainty to speculators betting for waker rouble. Moreover, we can also be pretty sure that if noting dramatic happens (at least 10 USD oil drop, or significant deterioration between Russia and the West) the most severe rouble slide should be behind us. We can also assume that at the end of the year the Russian currency will be around current level or it should recoup some of the most recent losses.

The situation regarding Ukrainian rebels looks more and more tense. Separatists who run the election during last weekend breached the Minks treaty. The results are not recognized either by the West or by UN and OSCE. Currently Kiev also backfired and tries to undo the autonomy rights for Donetsk and Lugansk regions.

Before the Russian long weekend ministry of foreign affairs Lavrov tried to explain the Kremlin view and push the message that the voting was in accordance with Belarus agreement. Currently the Moscow stance does not seem to be that strong (the Russian press suggests that current separatists leaders can serve as legitimate partners for negotiations) and we will have to wait for president Putin comments to see what is the actual Russian view regarding the issue. What is worrying is that we are getting again to a moment where both sides are in a gridlock which may push the all participants to resume the military action.

Today, the EUR/USD should trade in a narrow range around 1.2500. Some more volatility may be observed around ADP and ISM reports. The data would have to significantly deviate from the expectations to push the EUR/USD out of 1.2450-1.2550 range. Traditionally better-than-estimated readings should gives boost the the greenback.

The decision

Wednesday's afternoon on the domestic currency market will be dominated by MPC data. At the beginning of the trading the PLN rate was slightly deviated from the rouble turmoil and increasing regional risk aversion (Ukraine, stronger dollar) but getting closer to the meeting result we should see increasing impact from the rate decision.

The local currency should strengthen when either interest rates remain unchanged or there is a 25 bps cut and the statement suggests that the short easing cycle ends. The PLN move, in either case, should not be strong, because the global situation still shapes most of the zloty's moves.

On the other hand, the PLN may loose value if we see a 25 bps cut and the central bank message remains unchanged suggesting more cuts on the horizon. The zloty can be significantly lower when Belka's team decides to cut the benchmark by 50 bps. It may push the zloty toward 4.25 on the EUR/PLN.

In our opinion the most possible is the first scenario – interest rate cut and clear message for the cycle end. It should push the EUR/PLN toward 4.22 and the CHF/PLN to 3.50 shortly after the conference starts.

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

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