Daily analysis 07.05.2013

Low volatility on EUR/USD due to holidays in U.K. Draghi is ready to further cuts. RBA reduced the benchmark. The pound is still holding above 1.5500 in anticipation of less dovish BoE. The zloty is getting slightly weaker before the two day MPC meeting.

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

• 8.45 CET: Industrial production in France (survey: minus 0.3% m/m and minus 1.4% y/y)
• 12.00 CET: Factory orders in Germany (survey: minus 0.5% ; minus 2.9% r/r)

Draghi on interest rates; the cut in Australia

After a high daily volatility at the end of last week on Monday we had a relatively clam session with a slight pressure on the common currency. The main reason of the EUR/USD slide was afternoon statement from Mario Draghi during his conference in Rome. The ECB chief said, according to Reuters that “the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero”. After his comments the euro depreciated to 1.3050, but ended the day around 1.3080. The negative deposit rate in the Central Bank should push commercial banks to lend each other and, more importantly, to increase the credit in the real economy. In the recent years it was introduced in Denmark, but Copenhagen main driver for negative benchmark was rather to discourage a flow of capital from the troubled EuroZone countries and to protect Danish krone peg to euro, the boost the SMEs lending. The implementation of the interest rate under zero by the ECB should then weaken the common currency and cause slide of the EUR/USD.

During the Asian session the RBA unexpectedly cut the benchmark rate by 25 bps to 2.75%. There are several reasons behind the decision: slowing growth, lower inflation and stronger AUD. However, comparing the Australian interest rate with other developed nations they are still quite high and there is quite a room for further easing. Today we have some European leaders meetings (mainly regarding the austerity case and more integration of the financial system through the banking union). Concerning lack of macro data today we can see some impact from the meetings on the EUR/USD (rather on the bullish side).

The pound is around 1.5500 and have been waiting for the BoE meeting

The sterling is getting prepared to the Bank of England interest rate meeting. The MPC is not expected to cut the benchmark or increase the asset purchase program (which currently stands at 375 billion pounds). It will be, however, interesting how many members still opt for the additional QE (on the last meetings 3 (including the governor King) out of 9 voted for the increase). If the number is reduced to 2 or less (thanks to recent better-then-anticipated) then we can expect more GBP strength and higher levels on GBP/USD or GBP/PLN (5.0000 mark is in range).

Tough decision on the Polish rates

Weakening economy, falling inflation and aggressive monetary policy in developed countries or recent cuts in the EuroZone and Australia are increasing pressure on the Polish MPC to lower the benchmark. On the other hand just month ago the Committee moved to the “wait-and-see” mode, so the swift “change in mind” can be negatively viewed.

Currently the market is rather favoring the scenario of leaving the rate unchanged, but the EUR/PLN is trying to price in the cut or much more dovish statement on Wednesday. A bigger question mark is the scale of cuts till the July NBP inflation projection report. If investors start evaluating the possibility for the 50 bps cut then we can see a further pressure on the zloty (but 4.20 resistance would rather not be breached); 25 bps slide till the end of 1st half is slowly in the price. No change till July should push EUR/PLN down even to around 4.1000 levels.

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

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

Overall technical situation on the analyzed pairs:

The technical situation on EUR/USD is slightly worse then in the mid of last week, but the support level around 1.3000-.1.2950 still holds and there is still higher probability for more gains then losses. The Polish pairs are relatively stable – CHF/PLN and EUR/PLN in the range trade, GBP/PLN with more odds to go higher and USD/PLN to go lower.

Technical analysis EUR/USD: there is a slight downside pressure on the EUR/USD, but the rising scenario is still not ruled out. There is still strong resistance around 1.3200 and support between 1.30-1.2950.

Technical analysis EUR/PLN: recent EUR/PLN changes broadened the range trade (4.12-4.20). Breaking 4.1200 to the downside (200 DMA) should push the pair toward 4.10 and in extension to 4.05. A move above 4.2000 seems to be currently least probable.

Technical analysis USD/PLN: the pair hasn't moved over 3.2000 so the preferable scenario is bearish trend with the target around 3.06 in the medium term. On the other hand breaking 3.20 to the upside will favor bulls with the target at 3.2700.

Technical analysis CHF/PLN: the come back under 3.4000 again prefers the range trade (3.33-3.40). Falling under 3.33 is currently least probable.

Technical analysis GBP/PLN: the short term target for the pair is a move toward 5.0000 and an attempt to change the mid term trend to rising. The breaking above 5.0000 should initiate the move toward 5.1000. The alternative scenario is a move under 4.85 where bears should take the lead.