Daily analysis 07.02.2017

An interview with the ECB Board of Directors member and weaker data from Germany, caused a clear overvalue of the EUR/USD. Harker does not rule out voting for rate hikes in March. The zloty lost its value slightly at approximately noon.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact the analyzed currency pairs.

Comments from Coeure and weak data from Germany

The EUR/USD has been wearing-off since morning. The main currency pair finished the Asian session above the 1.0700 level and went near 1.0650 during the first part of the European session. One of the elements that caused a negative condition of the euro was an interview with one of the ECB Board of Directors member.

Theoretically, Benoit Coeure’s statements for Le Parisien regarded the 25th anniversary of the Maastricht Treaty, as well as the success of implementing the euro. However, this interview also contained a question regarding France’s potential exit from the euro zone.

Coeure replied that, “leaving the euro would threaten savings and jobs in France. It would certainly lead to a rise in interest rates. Debts incurred by French businesses and households would increase. Inflation, which would no longer be restrained by the ECB, would eat into savings, the fixed incomes of households and small pensions. It would be to choose impoverishment.”

The above comment is nothing unusual. However, they are consistent with the French election campaign. Marine Le Pen, the chairwoman of the National Front, announced a referendum regarding the leaving of the euro zone. Moreover, basically every survey has been predicting her victory in the first round of the elections. However, surveys also suggest that her chances for becoming a president are limited. According to polls, she would lose by 20%-30% against her rival in the second round, regardless of whether it would be Emmanuel Macron or Francois Fillon. Additionally, the Eurobarometer surveys from December indicated that 68% of the French would vote in favor of staying in the euro zone.

Nevertheless, the recent election surprises (Donald Trump’s election, Brexit) have caused investors to be cautious about surveys. Therefore, Coeure’s comments were a catalyst for today’s changes on the euro. Moreover, JPMorgan published an analysis yesterday, which states that in the case of Le Pen’s victory, the euro may lose approximately 10% within a few weeks. Such estimations also impact the market’s attitude to a certain degree.

The main currency pair’s situation has also been deteriorated by weak data regarding the German industrial production. This index went down 0.7% YoY, against the expected result at the level of positive 2.5% YoY. This was even more surprising, because yesterday’s data regarding orders in industry suggested a positive result of production.

Harker does not rule out hikes in March

During the Q&A session after Patrick Harker’s testimony in San Diego, there was a question regarding potential rate hikes in March. Chairman of the Philadelphia Fed (hawkish, with the right to vote this year) said that, “March should be considered as a potential (date – author’s footnote) for another 25 basis point increase, but at this point I have not made up my mind. I still am supportive of three rate hikes this year.”

These comments should not be a surprise. What’s interesting is that the FOMC members have become increasingly homogeneous when it comes to their statements regarding the future monetary actions. This theory is confirmed by statements from other members of the Fed that we cited yesterday. Both Evans (dovish) and Williams (neutral) are also near the view of tightening the monetary policy by 75 base case points in 2017.

Worse condition of zloty

The zloty’s condition was very positive at the beginning of today’s session. Not only was it gaining against the euro, but also reached its six-month maximum against the forint. However, depreciation pressure on the emerging market currencies started growing at approximately noon. This translated to a clear wear-off of the PLN. The euro went above the level of 4.30 PLN and the dollar was testing the area of 4.04 PLN.

Today, we won’t be receiving any crucial macroeconomic data. The market will focus on increasing political risk in Europe. This may be a good test for the zloty’s internal strength. If the recent appreciation of the zloty is corrected visibly (the EUR/PLN above 4.32), this may suggest a deterioration in sentiment towards the Polish currency. However, if the EUR/PLN ends this day below 4.30, we will be able to say that the zloty still has the chance to sustain its relatively strong position.