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Daily analysis 06.11.2014

6 Nov 2014 12:48|Marcin Lipka

Rumors on tensions inside the ECB and suggestions on further stimulus measures are set to be the main topic of the conference. Speculators are testing the patience of the Russian central bank. Friday's payrolls data. Some disagreements in the Polish MPC dovish camp prevented a further cut? The zloty remains stable after Wednesday's decision with an opportunity to gain some value.

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

  • 14.30 CET: Mario Draghi conference after the ECB meeting.
  • 14.30 CET: Weekly jobless claims from the US (survey 285k).

The ECB. Speculators. Jobs market

The US data on Wednesday weren't groundbreaking. Non-manufacturing ISM was slightly below the estimate (57.1 vs 58.0) while private employment data collected by the ADP marginally exceeded expectations (230k vs 220k + 12k upward revisions for the previous months). Neutral signals from the US caused that the EUR/USD was broadly unchanged and was moving close to the 1.25 level most of the session.

Today the situation may change if Draghi fails to meet market expectations. Investors assumes that the ECB skillfully cut the speculations regarding significant tensions inside the bank and confirmed that the governing council members are “unanimous in its commitment to using additional unconventional instruments within its mandate”.

The consensus also expects that Draghi will try to keep the doors open to further monetary stimulus, but on the other hand probably confirms that we will have to wait for current measures to take effect (2nd TLTRO round, which may bring more participants after the recent AQR, ABS and covered bonds purchases). The market, however, does not expect that we may get some more data on future covered bond purchases (the fact which Reuters covered recently) or plans regarding government bonds.

There is a high degree of probability that the first issue will be addressed successfully and the negative picture from the Tuesday's Reuters report would be erased. As a result we wouldn't count that there is a chance for stronger rebound concerning more tension in the ECB and less odds for a QE.

Regarding the confirmation of his dovishness the ECB chief will have to steer the conference toward a balance between current measures (what is the consensus expecting) and a smart way to open the doors to more asset purchases in the future.

This may be successful fro example during the qustion regarding covered bonds purchase. If Draghi confirms that such a plan is in preparation it will be a substantial argument to push the EUR/USD to around 1.2450.

Wednesday's Russian central bank deputy governor conference didn't bring much insights. Ksenia Yudaeva confirmed that the recent Bank's actions are steps to bring the rouble closer to the free-floating currency and the current intervention policy is only limited by the amount of reserves.

The verbal intervention wasn't enough to keep the speculative funds out of a game against the Russian currency. The rouble has already lost around 1% to major counterparts sliding to another record-low levels and extending the two-month losing streak to around 20%.

Currently the game against the rouble is much more risky than in the previous months. According to Goldman Sachs analysts currency traders will test the banks commitment in the following days and the RUB may gain some value if the CBR decides to act.

One-time intervention would have to be around 10 billion USD (similar to the size when the Crimera was annected) to spread the fear around speculators. Additionally we should assume that when the CBR confirms its effectiveness the short-term capital may also play in line with central bank. If it happens it may halve the recent sell-off (10%) even though the RUB slide is mostly economically justified.

Summarizing, the main event today will be the ECB conference. Confirming its dovish statement and the lead in the governing council Mario Draghi should push the EUR/USD toward 1.2450. Further slide is rather not probable due to the Friday's payrolls report. Despite the bullish estimates (around 225k) and high odds for increasing that number (solid weekly jobless claims, higher employment subindexes both for the non-manufacturing and manufacturing ISM) the market will be frightened to push the most heavily tested currency pair below 1.2400 before the job's reading.

Tensions not only at the ECB

Not only the yesterday's decision on keeping rates unchanged was a surprise (more on the subject in yesterday's afternoon commentary), but there were also some tension during the conference. We observed the governor Belka was a bit in retreat and fairly often answered for questions only “yes” and “no”. He didn't also hide that the MPC decision was against his view.

We may assume that he was outvoted. Taking into account composition of the MPC where 4 members are hawks and 2 are doves at least two out of three remaining (Hausner, Zielińska-Głębocka, Chojna-Duch) probably voted against Belka. It is almost certain that Hausner didn't want the cut so it is possible that Chojna-Duch (who was also present during the conference) wanted to keep the rates unchanged (even though that she was pushing for the September cut at 50 bps).

Yesterday's decision was not only inconsistent with the statement (the cycle was paused but the dovish approach remains) but it also would threaten further measures. It would be really illogical to decrease the benchmark either in December or in January. It may simply mean that the MPC is too much depended on the short-term signals from the economy.

Summarizing the Wednesday's decision is bullish for the zloty what confirms the behavior of the money market where at the beginning of the week investors were betting for a 50 bps cut in the 3-month horizon and now they are expecting only a quarter percentage point decrease. As a result if we get a dovish message from the ECB and tomorrow's payrolls will be below expectations we may even see the EUR/PLN around 4.20 on Friday and CHF/PLN below 3.49.

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

Range EUR/USD 1.2450-1.2550 1.2350-1.2450 1.2550-1.2650
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3600-3.4000 3.3800-3.4200 3.3400-3.3800
Range CHF/PLN 3.4800-3.5200 3.4800-3.5200 3.4800-3.5200

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

Range GBP/USD 1.5950-1.6050 1.5850-1.5950 1.6050-1.6150
Range GBP/PLN 5.3700-5.4100 5.3500-5.3900 5.3900-5.4300

6 Nov 2014 12:48|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.

See also:

5 Nov 2014 17:26

Afternoon analysis 05.11.2014

5 Nov 2014 12:49

Daily analysis 05.11.2014

4 Nov 2014 17:14

Afternoon analysis 04.11.2014

4 Nov 2014 12:39

Daily analysis 04.11.2014

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