Daily analysis 08.08.2014

Draghi relatively neutral but strong comments on currency were pretty surprising. US air strikes in Iraq and more geopolitical tensions pushing the stocks lower. Solid trade data from China and jobless claims from the US. Sanctions in numbers. The zloty is still loosing value, but the rebound is getting more probable.

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

• No macro data which may significantly affect the analyzed currency pairs.

Draghi. Iraq. The data. Sanctions

The market tried to forget for a while about the current issues and focus on Draghi's words. During the first part of the conference we didn't get any interesting news. The ECB chief praised countries which made economic progress and criticized that which failed to reshape their tax system or the red tape. He also spent a few minutes on the incoming data which, according to Draghi, seems to be mixed (better – PMI, retail sales capacity utilization and worse – Ifo or the GDP). Regarding the inflation, the ECB is aware of the issue but in the medium and longer term the HICP is still well anchored and excluding food and energy the readings seem to be stable (0.8% y/y). This part we should be consider as less dovish which sent the EUR/USD a bit higher.

We moved to more dovish camp in the second part of the conference. After Draghi was asked about the QE he started saying that “the fundamentals for a weaker exchange rate are today much better than were two or three months ago". He pointed out to the “slowing net trade surplus” and a “decline in short-term capital inflow”. The ECB also quoted the CFTC data claiming that “there has been quite significant increase in short-term positions on the Euro”. This remarks on currencies were pretty odd especially given that Euro value is not in the central bank mandate but it may confirm that the ECB would do much more if the EUR was set to return to appreciation trend. Such a commitment from Draghi pushed the common currency lower.

Further USD performance was supported by the US data. According to the Labor Department jobless claims dropped to 289k (consensus at 305k) and the four-weak average decreased to 293k which was the lowest level since April of 2006. It is another indication that American economy and especially jobs' market, has improved markedly. We had also pretty strong readings form China. The trade surplus rose to $47 billion (the highest since 2008). It is a positive indication for Beijing regarding the future GDP growth.

The hard data wasn't enough to generate a rebound on US markets and during the CET night president Obama announced air strikes on Iraqi insurgence what combined with tensions between Russian and the West increased the risk aversion (despite that there is a pretty close agreement concerning the Iraqi situation between the major players).

The main topic around the world was Russian sanctions on food from major western economies. There was, however, a significant amount of data which was quite far from the truth. Focusing on the facts we can read that according to the European Commission (EC), cited by the Polish Press Agency (PAP), claims that the ban will include products valued 5.25 billion Euro which is 46% European Union food export to the Russian Federation. For companies focused on sending foods to this eastern destination the sanctions would be really painful. However, if we move to the total EU export to Russian the numbers are not that serious.

According to the “EC” the total export to Russia in 2013 is valued 120 billion Euro, so the sanctions account for around 5% export to that direction. Even less spectacular the ban looks when we compare the total EU external export which topped 1.7 trillion (1700 billion Euro) in the last 12 months. In result the restrictions account for only 0.3% (0.003) of the EU products sent abroad.

Summarizing, the EUR/USD received quite a lot of negatives news, but overall the slide has stopped. We may then assume that a rebound can be expected pretty soon and the move should be pretty significant especially taking into the account that many investors “are packed” with “short”.

Under pressure, but the chances for rebound are increasing

During a relatively dovish Draghi statement (especially in the second part) the EUR/PLN dropped even below 4.19 level, but later the slide on US market and Obama's announcement regarding the Iraqi air strikes pushed the zloty lower and we tested 4.22 on the EUR/PLN. It is, however, worth noting that we had a pretty visible build up of negative news and most of them should be already included in prices. So if we see no selling pressure on the US market we should drop below 4.20 on EUR/PLN at the beginning of next week.

There was a substantial amount of news yesterday regarding the sanctions. To organize it we would like to present a set of data and the possible impact on the economy. According to the European Commission (cited by Polish Press Agency) the total banded food export was wort in 2013 841 million Euro, what accounts for around 80% of agriculture products sent to Russian Federation. For companies focused on that destination it will have serious consequences.

However, when we look at the total value of products sent to Russia (8.1 billion in 2013 according to the Ministry of Economy) it accounts at around 10% of export. Moreover, if we look at the total value of eatable products exported (20 billion Euro in 2013 according to the Ministry of Economy) it accounts for around 4% of the value. It is also worth remembering that the food exports rises more than 10% annually so the bank may cut the growth by less than half (assuming that the products will not find the alternative markets).

Ending the sanctions topic it is worth emphasizing that the embargo on products worth around 800 million Euro accounts only for 0.5% (0.005) of total Polish export (according to the Ministry of Economy it was valued more than 150 billion Euro) and the expected growth is around 10% (15 billion) annually so the ban can cut the growth only by few percent.

Summarizing, if investors across the pond evaluate that stocks seem to be pretty attractive after the recent sell-off we should expected also a return of some capital toward the PLN. This being possible, we can begin the new week with rate below 4.20 on the EUR/PLN and closer to 3.45 on the CHF/PLN. Next days will sill be depended on the conditions of western equities and local data (GDP and inflation – hard to expect positive surprises...).

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

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