Daily analysis 08.04.2014

The ECB members are lowering expectations on QE implementation. Despite some more turmoil in Ukraine, the news has been ignored by currency markets. Are EM countries benefiting from capital inflow? The zloty returned below 4.17 mark per the Euro.

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

• No major economic data which can significantly affect the analyzed pairs.

ECB. Ukraine. Emerging markets

Last week the ECB tried to convince markets that it takes the inflation situation seriously and decided to convince investors that the QE is a truly discussed solution. Mario Daghi and his colleagues finally spotted that Euro strength impacts the inflation and overvalued currency may hurt exporters. Taking this communication shift seriously, it was really hard to understand why ECB members tired to backtrack from previous messages and tone down the probability for asset purchase program. As Reuters reports, Ewald Nowotny, the Austrian central bank chief, said that “there was not immediate need for the bank to take steps to counter stubbornly low inflation because a strengthening of Europe's economy should reduce the danger of deflation”. Moreover, Yves Mersch, member of the Executive Board claims (according to Bloomberg) that "inflation risks and deflation risks are more or less level in the Euro Area, which means we don't see an imminent risk of deflation”. Further he added that “however, we are ready to prepare for such a fat tail event” and described it as a “Plan B” (regarding the recent Draghi announcement). Similar comments were also made by Jens Wiedmann, who said that “I gave an interview to a newswire which I think was widely interpreted by people who hadn't read it”. In results, after these backing down comments, the EUR/USD gradually (in a period of several hours) gained around 30 pips. Additional 30 pips were added today before the afternoon. Investors are currently starting to doubt whether the last comments were for real or it was just bluff (kind of unsuccessful – lasted only few days). We still have to remember that even if the ECB had a strong willingness to implement QE, there are some technical/procedures issues (not clear which sovereign bonds would be bought, whether if private debt would be included, etc.) which would diminish or undermine the effectiveness of the program. Concluding, the probability that we would see an asset purchase program lowered to single digit percentage points.

Yesterday the news agencies reminded investors that there is still some escalation threat in the East Europe. This time, however, the reaction was pretty muted. The Russian ruble, which is the most sensitive to any news on Ukraine-Russia conflict, slided 0.8% to the dollar, but today in the morning it halved the Monday's loss. Other EM currencies were also lower, but the depreciation can be regarded as a correction after the recent gains. It is quite certain that if we don't see a full scale military intervention (very unlikely currently), we would see no more nervous reaction. Some investors may even use it as an opportunity to increase the positions on riskier assets and therefore even flatten a slight move.

A kind of confirmation of such approach can be the news that Bloomberg index, which tracks 20 EM currencies, regained all 2014 losses. The slide was reversed by Turkish lira, South African rand, Indonesian rupee and Brazilian real. Moreover, some investments banks bet that the EM assets can further appreciate. Benoit Anne, chief EM strategy for Societe Generale claims that “I am turning increasingly bullish on EM assets” He also described the sentiment shift as “doom to bloom”. Others, however, are still skeptical about developing countries. Morgan Stanley claims that the US interest rate increase make developing countries assets less attractive and UBS is also not convinced that the worst is over.

Summarizing, the EUR/USD is using the opportunity of some recent withdrawal from QE by ECB members. If the FOMC minutes does not show too much hawkish discussion (similar to Yellen remars) then we would expect that the EUR/USD can move above 1.3800 in the current week.

The zloty remains flat

The recent days were really calm for the zloty. Polish currency remained fairly unchanged both during major events last week (ECB and NFP) and on Monday, where some additional tensions in Ukraine hit the wires. Currently it is really hard to find any possible (and probable) elements which can move the PLN from the current range trade. Only on Wednesday it is worth to pay some attention to MPC meeting results. The zloty can be hurt only if more Committee members join professor Osiatyński calls to leave the interest rate unchanged till the end of 2015.

In the coming hours both EUR/PLN and CHF/PLN should be stable and most transactions will be processed at current level with a deviation of no more than 0.01 PLN.

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

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