Daily analysis 07.10.2014

Strong work off of dollars recent enforcement. Another very weak data from Germany. A change on position of chief of RSA central bank should stop rand's wearing off. Intervention of Russia's central bank. Mixed signals from BOJ. Zloty traditionally remains stable both on franc and Euro. Very small chances for cutting bigger than 25 base points.

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

• 21.00 CET: William Dudley's public appearance.

Working off. Germany. Rand. Rouble. BOJ

One-sided trade in the recent weeks has found its “outlet” in yesterday dollar's rebound. The correction of American currency's value was much stronger than most of market observers expected, because it has actually evened out the effect of Friday labour market data on many currency pairs. Decrease of USD value in recent hours, will unlikely turn into a change of tendencies and the market will rather wait for an excuse (e.g. Fed's “minutes” on Wednesday) for come back to appreciation.

After yesterday's weakest since 2009 orders in industry, we have wrote that the similar effect can concern the production. It appeared today, that once again the readings fro Europe's biggest economy have also failed. Industrial production in relation m/m for August (seasonally equalled) decreased by 4%, while Bloomberg's estimations assumed minus 1.5%. A similar discrepancy between the prognoses and actual figures concerned year to year relation (minus 2.8 vs minus 0.5%).

However, it is worth noticing that Germany's readings could have been disturbed by moved forward summer holidays calendar. It would be confirmed by a fact, that a sudden rebound to 2.7% y/y occurred in previous month, while since the beginning of the year, the production was in a clear descend trend (January 2014 almost 5% y/y, but June +0.1% y/y). However, the calendar disturbances do not change the general, more and more weaker attitude towards German economy and increase anxieties will Berlin not enter a technical recession after GDP data for third quarter (II quarter was after all negative). There is a big probability that it would not improve sentiments at our western neighbours, and at the same time it would be a good argument to introduce our elements of monetary simulation by EBC (disadvantageous for euro).

Apart from world's main economies, there is also a lot going on. At the beginning of current year we have wrote in details about the problems of emerging markets countries, whose currencies were disturbed by a high double deficit (of public finances and current account). For some time the situation of Turkish lira or South African rand was relatively calm. However, recent global enforcement of the dollar caused that both currencies, are again close to the historical records of weakness in relation to the buck.

As the further appreciation of the dollar is a base case scenario, we should expect that both rand and lira will lose on value. Although in case of ZAR this tendency may stop for a while, thanks to appointment of new chief of Central Bank. Lesetja Kganyago will probably be more hawkish than his predecessor Gill Marcus. Still, it does not change the fact, that the economy of RSA is in a difficult situation because of decreasing prices of ore or mineral resources, high deficit on current account or inflation at the level of more than 6 per cent (by money rates on the level of 5.75%). We can also add to it the social problems going on for years (recurrent strikes in mines, unemployment higher than 25% and disturbances in income redistribution), and also lack of will for reforms, that could decrease RSA dependence on raw materials export.

Another “raw material” country that is currently in trouble is Russia. In previous days there probably has been an intervention of central bank, which was worth at least 700 million USD because of the fact, that the basket (euro and dollar) reached the upper alteration limit and crossed it double by 5 copecks. However, Moscow's perspectives are far much better than Pretoria's. Kremlin keeps on reaching the surplus on current account, the budget is constructed without deficit, the public debt is in the limits of 10% of GDP and the unemployment maintains on the level of 5%. Additionally, the central bank introduced far more restrictive monetary policy, which, if not for the geopolitical situation, would surely keep the inflation in check. Just as we wrote many times earlier, rouble can still rebound but this depreciation should not be sudden and in case of calming down of situation in the East, the Russian currency should regain a part of its lost value.

Today's conference of Bank of Japan (BoJ) has not brought in any new informations on the market. Kuroda avoided the answers on the question, what is the yen's level preferred by BoJ. The chief of Central Bank also did not denied the possibility of introducing additional monetary stimulation on one hand, but on the other he also noticed that yen's value decrease has negative consequences on the economies that import energy. Thus BoJ communicate was neutral, and the upcoming changes on USD/JPY will be mainly caused by the global change of dollar's value.

In conclusion, changes on currency market in previous hours are a correction of recent dollar's enforcement. However, its strength was significant, which can mean that for a longer time we will not see any new minimums on EUR/USD and the main currency pair will move in the division of 1.25-1.27, ignoring majority of data and waiting on significant “news”. Today's major event is the appearance of William Dudley. However, he will speak about local, New York economy, so we do not have to see any references to the monetary policy. Thus this event might be omitted by the market.

Still calm

Only 7 out of 40 Polish and foreign economists surveyed by Bloomberg assume that tomorrow MPC will decrease money rates by 50 base points. Other thirty three thinks, that the Council will cut money's cost by 0.25 per cent (nobody thinks, that benchmark will remain on the constant level).

The chances for a cutting bigger than 25 base points are very small, due to the conservative approach towards monetary policy, by majority of the Council's members. The outvote of a deeper monetary stimulation requires votes of president Belka and Hausner (assuming that Chojna-Duch, Bratkowski and Osiatyński would see the money rates on the level of 2.0% after October). There is also a possibility of a different combination in which the greater doves are joined by Belka and Zielińska-Głębocka. In general however, both scenarios are very unlikely, because president Belka will rather not support them.

It should be calm today on CHF/PLN and EUR/PLN. We can observe slightly more diversity on the pound or dollar. However, there will be certainly less emotions than it happened in recent days and the rates will mainly move close to the current levels.

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

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