Daily analysis 06.02.2014

Mixed data from the US are keeping the EUR/USD close to 1.35. Investors are supposed to wait for the ECB meeting and Friday's NFP. Lockhart on possible changes in the forward guidance. Ukrainian Hryvna under pressure. Polish governor Belka a bit more dovish than expected. The zloty remains stable under 4.20 per the euro.

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

• 13.45 CET: ECB rate decision on interest rates (survey: no changes at 0.25%).
• 14.30 CET: Mario Draghi press conference and the ECB statement.
• 14.30 CET: Weekly jobless claims from the US (survey 337k).
• 14.30 CET: US traded balance (survey: minus 36 billion USD).

The data. ECB. Lockhart. Ukraine

Overall, the US data published on Wednesday was neutral for the markets. The ADP report was in line with expectations. According to the private agency, the economy created 175k jobs in January and the number matched the economists' estimates. A small downgrade in the previous data (11k to 238k) does not actually change much in the investors' perception. Moreover, the ISM non-manufacturing reading also matched the survey results (53.9 vs actual: 54 points). In the details of the ISM report there was no surprises. Some research participants were reporting that weather was an issue in their business, but the sub indexes show a fairly solid growth and an expansion of the sector for the incoming months. In result the EUR/USD was fairly stable and we start the European session around 1.35 again.

62 out of 66 economists asked by Bloomberg expect that the ECB will not change the benchmark today. There is supposed to be more uncertainties regarding the Mario Draghi conference (which will probably be more visible when around 14.30 the volatility picks up). Some market participants speculate that Draghi (with “yes” vote form Bundesbank) can pause the weekly sterilization operations (it would result in a mini-QE operation). The discussion about the matter has stated last week (more info in Brian Blackstone article in the “The Wall Street Journal”, “Bundesbank Would Favor End of ECB Sterilization”). If such action is taken then we can expect a significant fall in the euro value, and it would not be a result from a massive QE but rather a symbolic decision showing that the ECB is more eager to implement aggressive monetary policy (similar to the Fed's, BOE or BOJ).

It is worth to put some emphasis on the Dennis Lockhart (dovish, not voting this year) statement. The Federal Reserve President from Atlanta said (according to Bloomberg) that “When we get close to - or even beyond - the 6.5 percent, I think it is reasonable to expect the FOMC will revise forward guidance, maybe even well before that, to help the markets and the public have an ability to gauge how the economy is performing relative to some senses of goal”. It is clear that the dovish camp of the FOMC is still trying to build the perception that the interest rates will stay at record-low level for longer, despite that the Federal Reserve has already started the tapering. Regarding that matter it will be extremely interesting to scrutinize the first Fed's meeting under Janet Yellen leadership.

There was a significant slide on the Ukrainian currency yesterday. The USD/UAH pair briefly topped 9.00 level which resulted in more than 10% depreciation since the beginning of the year. As Bloomberg reports “Some Kiev banks have run out of dollars, Ukraine's Channel 5 reported yesterday”. Moreover, analysts quoted by the news agency claim that Ukraine's reserves probably shrank by almost 2 billion USD in January (from 20.4 billion to 18.8 billion USD). Finally Bank of America analysts (Vladimir Osakovskiy and Vadim Khramov) cited by “The Wall Street Journal” forecast that “hryvnia will fall as low as 10 to the dollar by the end of the 2014”.

Summarizing, the ECB decision and Mario Draghi conference will be in focus today. If we see no new elements loosening the monetary policy than we should see the EUR/USD rising, but the upside move should not exceed 50 pips (investors still have to wait for the NFP). On the other hand, if we get a rate cut or other non-standard changes in the policy, a slide more than 100 pips is possible on the most heavily traded currency pair.

Belka relaxed on the zloty

Marek Belka sounded pretty calm during the MPC conference yesterday. He is confident that EM issues will not hit neither the Polish economy nor the zloty. Some might say, however, that he was a bit more dovish than expected. In regard to recent MPC member professor Housner comments (suggesting a possible change in the monetary policy stance), he said that we will be very cautious to change our policy guidance and we still have plenty of time to do it. Overall, both the decision and the conference were neutral for the Polish currency.

Summarizing, the zloty should be rather stable today and stay below 4.20 per the euro. The only element which can depreciate the local currency further is another EM sell-off (much more probable tomorrow than today).

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

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