Daily analysis 08.10.2014

Main currency pairs are looking for balance after recent varieties. Discussion about the economic contidion of Germany and the euro zone is getting wider. Interesting appearance of William Dudley. Another “standard” intervention of Russian Central Bank. The interest rates cut might even slightly strengthen the zloty.

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

• Between 12.00 CET and 14.00 CET: announcement of the decision about the interest rates.
• 16.00 CET: Press conference of the MPC chairman, Marek Belka.
• 20.00 CET: Readings from the discussion from previous summit of Federal Reserve (“minutes”).

Trial. Discussion. Appearance. Intervention

The currencies related to dollar are “trying” to stabilize after last week's falls and the weakening from previous two days. At the moment there are no views for any impulses which could dramatically change the situation, although the appetite for generating stronger rebound of EUR/USD can take the main currency pair even above the limit of 1.2700. However, a strong pressure of euro sellers should appear there and further descends are certainly more probable than maintenance of increase tendency.

There is quite a lot of reasons for selling euro, although not all of them are of the same power. The main burden of common currency is a predicted disparity of interest rates, related to the monetary tightening in USA expected in second half of 2015 and very mild attitude of EBC, at least for the upcoming two years. Of course a part of this catalyst is already in the prices but the upcoming economic information from the common market, confirm the possibility of these disproportions increase. Let us quote the recent IMF report (we wrote more about it in yesterday's afternoon analysis), where the chances for recession in euro zone within upcoming quarters increased up to barely 40% (approximately 20% in estimations from April). In the same time the probability of economic regress in USA, has practically not changed.

Along with the economic activity decrease in the area of common currency area, a threat of deflation increases. IFM estimates it currently on 30%. Combination of this negative prices' dynamic and stagnation, is an unusual invitation for further monetary policy easing by EBC (independently on Berlin's refusal).

Apart from that, Germany's refusal will probably decrease (maybe not officially, but inside EBC the hawkish camp clearly loses their arguments) due to obvious slowdown of “European locomotive”. And it is not only about data on orders from industry or production from this week, which were disturbed by change of summer holidays calendar and crump in cars' production. Other indexes (PMI, Ifo, ZEW) also show, that it will be harder and harder for Berlin to pull whole Europe up, with GDP growth in lower limits of 1% and a threat (mainly for sentiment and image) of falling into a technical recession in this year's third quarter.

Yesterday's appearance of William Dudley on one of technical colleges in the state of New York, did not caught the attention of financial press. Although it was interesting, because of at least two reasons. First of all, the chairman of New York Federal Reserve has sacrificed a lot of time to national economy and acctually agreed with a general market's attitude, that consensus assuming the interest rates raise in the middle of next year, seems to be “a reasonable approach for me”. This should be considered as a hawkish element (supportive for dollar), especially that this opinion comes from a declared dove.

There is also another conclusion from the text published on New York Fed website. The recent descends of raw materials (most of all oil) and enforcement of American dollar, can decrease the level of inflation in USA. Additionally, the expectations of prices themselves are low and “well rooted”. It is also worth adding, that there is also a lack of salary pressure (recent data from the Department of Labour). Both of these elements (dollar, raw materials) were dovish, however, their actual use by Federal Reserve would be possible only in the scenario of economic growth tempo decrease, which is probably not going to happen soon.

The press pays quite a lot attention to the interventions of Russian Central Bank (CBR). However, they are quite coherent with well known market rules. If the basket made of rouble and dollar comes to the upper division of fluctuation, automatic intervention worth 350 million dollars occurs. The division of allowed (without intervention of CBR) intervention moves by 5 kopecks upwards (of course another interventions are also allowed but at the moment they are relatively small). Similar actions took place already in 2013 (on slightly different rules) and also during the annexation of Crimea or the escalation of conflict in the East. Additionally, currency reserves of CBR are melting quite slowly, due to the clear surplus on current account (during first 6 months o 2014 it was 40 billion USD). In the mid term there is no threat for the scenario introduced by us earlier – slow rouble weakening and its later rebound in the scenario of situation's in the region calm down.

The “minutes” from previous summit of FOMC should be in the centre of attention today. They will probably show a lively discussion about the moment of monetary policy tightening and they should sound clearly more hawkish, than the communicate published earlier. However, in general the dollar should not enforce dramatically after this document's publishing, because the market is aware of most of these news. That is why in the upcomming hours we should expect the maintenance of EUR/USD near the current levels.

The MPC decision

The decision concerning the interest rates in Poland will be announced in the early afternoon. As yesterday's analysis read, 7 out of 40 economists surveyed by Bloomberg assumed the cut will be deper than 25 base points. However, if the alternative scenario comes true, EUR/PLN could quite quicly hit 4.20 (especially if the MPC suggests the cuts are not over).

It is the most likely that the rates will be cut by 0.25% to the level of 2.25%.Such development of situation might lead to a mild strengthening of the domestic currency (a confirmation about the MPC being cautious with its moves). Additionally, if the decision isn;t too dovish and the president Belka reduces the speculations about the November cut (by 0.5%) , around 4:00 pm EUR/PLN could go under 4.18.

Summarizing, the Council's decision will affect the zloty, but despite the outcome of the meetingand the conference, EUR/PLN should not go above or below the range of 4.17-4.20. The situation on CHF/PLN will be probably the same - the zloty is unlikely to leave the fluctuation range 3.44-3.47.

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

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