Daily analysis 08.04.2015

The EUR/USD is traded above 1.0850 before the Fed's “minutes” publication. The Russian currency appreciation continues despite relatively low Brent price. The EUR/PLN is close to almost a 4-year low. Strong zloty appreciation also pushed the franc lower.

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

• 14.00 CET: Fed's governor Jerome Powell statement on monetary policy.
• 15.30 CET: William Dudley statement on monetary policy.
• 20.00 CET: “Minutes” from the March Fed's meeting.

Crucial “minutes”

During the Asian session, the EUR/USD tested the 1.0800 range but at the beginning of European trading, due to some dollar weakness against the yen, the main currency pair returned above 1.0850. Today, investors should be focused on the Fed's “minutes” publication.

Separate opinions of individual Fed members may be quite important because during the March meeting many parameters did change. Firstly, the FOMC recognized a slowdown in Q1 and revised downwards the economic projections for the rest of the year.

The Fed's chairwoman also mentioned the stronger dollar which might be one of the drags of the subdued export. Additionally, in the forecasts the FOMC participants reduced their estimates for the core inflation by around 0.1 - 0.2 percentage points for the current year. The policy makers also lowered the natural rate of unemployment (not fuelling inflation) which also gives more room to keep the lower rates for longer.

The participants also lowered the median estimation for future interest rates by around 0.6 of a percentage point both for 2015 and 2016. It also goes to confirm that any hikes should be very gradual and probably at a pace of 0.25 percentage point increase, every other Fed's meeting would be the preferable scenario.

If the “minutes” confirm a fairly dovish statement, fears on poor growth abroad, negative effects from stronger dollar and expectations of the future interest rate path presented in the macroeconomic projections, the EUR/USD should gain some value and top 1.0900 in the late evening.

The strong rouble

It is hard not to mention the rouble appreciation. The Russian currency solid gains are caused by the following reasons. Firstly, the stabilization of Brent helped to calm the situation. Secondly, the Minsk agreement is working much better than expected so the calmer situation in Ukraine has reduced geopolitical risks. From a macroeconomic viewpoint, Russia significantly reduced import which is the result of lower investments and consumption.

However, in the short run it is currently positive. It allows Kremlin keeping a fairly high current account surplus (3.5% of GDP; 70 billion USD) despite a significant revenue reduction from oil export. It is also possible that the capital outflow markedly slowed from Russia which can be confirmed with the first major currency reserve build up since the Ukrainian/Oil crisis (+7 billion USD at the end of March 27).

The EUR/RUB chart looks also quite surprising. At its peak, the euro was worth almost 100 roubles but it has now dropped to 58. In the longer term, I would not expect further rouble appreciation. Firstly, it hurts the Russian budget revenue which is denominated in the local currency. Secondly, a rouble comeback significantly reduces the inflation pressure and gives strong arguments to the central bank (CBR) to lower interest rates. By pushing the benchmark lower the CBR reduces the appreciation trend on the rouble and gives some relief to the business community, which is unable to properly function with 14% interest rates.

As a result, when the unwinding short rouble positions process finishes, and the monetary policy eases, the rouble should get weaker to the hard currencies. Only a significant oil appreciation can reverse this process.

EUR/RUB in the last 12 months

Source: Bloomberg. EUR/RUB chart. The fall means the strengthening of the rouble in relation to the euro. The last months' losses are a consequence of the global weakening of the euro and the rouble's strengthening.

The foreign market in a few sentences

Investors are expected to wait for the “minutes” from the most recent Federal Reserve meeting. A confirmation of the Fed’s dovish stance should weaken the dollar and push the EUR/USD above 1.09. It is also worth noting the Fed member statements which are due later today.

The EUR/PLN at almost 4-year lows

Despite this, we have been suggesting for weeks the strong probability of the zloty's appreciation to the euro. However, the pace of the EUR/PLN slide to 4.00 was a bit faster than we had expected. Today, in the morning, the common currency was the cheapest to the zloty for almost 4 years and was valued around 4.02.

There are still no reasons for the zloty to halt the trend. The sentiment to the region is positive, the ECB continues its bond buying program, and monetary cycle easing in Poland has ended. Combining it with some fairly positive Polish economic projections and balanced current account we should expect to see the EUR/PLN around 3.80-3.90 as early as this quarter. Falling much lower is rather the alternative scenario due to the fact that the central bank intervention looms.

The solid zloty's performance also translates to falling CHF/PLN pair, despite this the EUR/CHF remains below 1.05. Moreover, the move may be magnified when we see some weaker Swiss franc to the euro. If the EUR/CHF returns to around 1.08 then the franc should fall below 3.70.

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

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