Daily analysis 07.08.2014

Another weak data behind us – return to the recession in Italy and flat production reading from Germany. EBC summit in the centre of attention. Lockart still remains relatively dovish. Russia imposes a ban on food import from European Union. Polish zloty returns in the limits of 4.20 per Euro but the nervousness maintains.

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

• 13.00 CET: The decision concerning interest rates in United Kingdom (estimations: 0.5% / no changes).
• 13.45 CET: The decision concerning money rates in Euro Zone (estimations: 0.15% / no changes).
• 14.30 CET: Mario Draghi's conference after EBC summit.
• 14.30 CET: Applications for unemployment benefits from USA (survey: 305 k).

Data. EBC. Lockhart. Sanctions

American stock market quickly worked off the losses from yesterday's opening, which also allowed to slightly improve the sentiment on EUR/USD (return above the limit of 1.3350) and decrease the risk aversion in second part of Wednesday's session. However, we start the European market quotations in not very good moods again, especially after the information from the biggest economy in Euro Zone.

German industrial production descended in July by 0.5% in year-to-year relation, which was the worse reading for 12 months (in first months of this year we had 4-5 per cent increases). Considering yesterday's publication about the orders in industry, it indicates that the third quarter begins very weakly for our western neighbour. What is even more disturbing, that the data should not contain the real effect of sanctions between Russian Federation and European Union yet.

Mario Draghi faces more and more difficult tasks in managing the monetary policy. Italy's return to the recession, Germany's fast restraining and record low inflation causes, that chief of EBC is now under pressure of “doing something more”. The problem is, that the Board of Governors imposed negative interest rates two months ago and announced initiation of liquidity operations, addressed to the real economy (TLTRO). However, before this second tool will begin to work, a lot of time might pass, because the whole initiative starts not until September (first round) and December (second round). Next there still would be a need for at least few months, to observe any positive effect in macro data.

Thus the market begins to speculate that today's summit may be more dovish and considering geopolitical tenses, the risk of even lower inflation (if the food will not be exported and its prices on the local market will descend) or worse macro data, Draghi may suggest acceleration of quantitative easing. However, on the other hand, assuming that the situation will probably not improve quickly, EBC president should save a “bigger bazooka” for later, and he will rather repeat, that QE is in our mandate's sight, but we still have to wait for the effects of the tools, that were already activated. If this scenario would be the conference's result, we can expect a slight enforcement of EUR/USD and exit above 1.3400.

It is still worth following FOMC. A suggestion of one of the central or dovish Fed representatives about the possibility of acceleration of interest rates increasing, will be a very important element. At the moment (apart from Bullard joining the hawks) such situation does not exist. In yesterday's interview for “The Wall Street Journal” Dennis Lockhart (dovish, his views are close to the consensus, without the right to vote) said, that he “does not exclude” that the Fed might increase the interest rates faster than the majority expects, but for now he thinks, that the first raise will occur in the second half of the year. This statement can be considered as neutral, and even slightly negative for the dollar (despite good data, the dovish camp still holds back from more unambiguous comments).

According to Russia Today information, Dmitry Medvedev signed today the decree about total ban on beef, pork, poultry, fish, milk, vegetables and fruit import from Australia, Canada, USA, Norway and European Union. Russia's prime minister claims, that the sanctions are a “dead end”, but they are necessary due to the actions of West and they can additionally help in development of local agriculture. The trade restrictions seem to be much more serious than anyone could expect and they will hit mainly the European countries. It is also worth noting that other countries can take advantage from this scenario. Itar-Tass informs, that Brazil has the abilities to replace the whole poultry import from USA.

The negative attitude towards the European currency should maintain. For a short time the market can concentrate on EBC summit, however, the deteriorating economic situation and aggravating trade conflicts will lay weight on Euro. Not only because of the really lower demand on European currency (descend of export) but also because of maintaining pressure on EBC related with the risk of lower and lower inflation or Europe's economic development perspectives, that are worse than expected.

Nervously and under pressure

Depreciation of zloty, as well as of Euro, has been stopped yesterday by the better condition of American market of shares and part realisation of profits by short term investors. Some players also assume, that today's EBC summit might be a little more doveish, what should make the currencies of our region more attractive.

However, we can assume with a big probability, that until we will not witness a calming down on the line West-Russia and not observe the return to growths on American stock market, it will be difficult to expect any longer stabilisation on PLN (a longer analysis on WP: http://finanse.wp.pl/kat,1033779,title,Zloty-gwaltownie-traci-na-wartosci,wid,16802201,wiadomosc.html?ticaid=11338c#stgOpinie). On the other hand, in case of further escalation of economic actions (e.g. ban on flights over Syberia; another round of sanctions from EU) or more serious confrontations in the East (official appearance of Russian soldiers), we can quickly fly to the limits of 4.25 per Euro or 3.20 per USD, and franc will probably cross the level of 3.50.

The summit of EBC should be in the centre of attention today. The PLN market should receive it relatively calm and will rather not deflect by more than PLN 0.01 from the level of 4.20. In hours to come we will return to the observations of global sentiment (with American stock market as a determinant) and its results will determine whether we will finish the Thursday's market quotations above or below 4.20 per Euro.

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

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