Daily analysis 09.04.2014

The EUR/USD is flirting with 1.38 level. Dovish comments from Fed's officials. Another set of opinions from ECB members. 12 hryvnias per dollar. The FOMC protocol is in focus today. The zloty is stable in anticipation of Marek Belka conference. Polish export to Ukraine and Russia in Q1.

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

• Between 12.00 CET and 14.00 CET: decision on interest rates in Poland (survey 2.5%; no change.
• 16.00 CET: MPC governor conference after the interest rate decision.
• 20.00 CET: FOMC minutes from March Committee meeting.

Higher. Dovish. Euro area. The Eest. FOMC

Lack of cohesive stance from ECB members and softening some previous comments on QE pushed the EUR/USD higher. The bulls' appetite is also visible at the beginning of the European session when the most heavily traded currency pair is traded around 1.3800 level and is only 1.5 cents below more than two-year highs. Elements which can stop the upside tendency are firstly much more unanimous stance toward the future elements of monetary policy (currently less probable due to many different opinions) and quite hawkish “minutes” from the FOMC.

Regarding the latter it also won't be easy. Yesterday we had some pretty dovish comments, even taking into the account that they are regarded as proponents of loose monetary policy. Charles Evans, Chicago Fed president said (according to “The Wall Street Journal”) that “one of the big risks is that we withdraw our accommodative policies prematurely”. He reminded that the February inflation was only 0.9% y/y which is far below the central bank target. However, the most dovish Evans comments was saying that “overshooting (inflation – author's note) would not be a problem as long as it's done in a reasonable fashion”. Moreover, Narayana Kocherlakota, Minneapolis Fed president, said that (also according to “WSJ”) “low inflation rate is a signal that the FOMC is underperforming with respect to its maximum employment objective”. He also expects that it may take 4 years for the inflation to return to the FOMC target of 2%.

Besides some interesting comments from the Federal Reserve, officials on the other side of the pond were also active. French central bank governor, Christian Noyer, said (quotes from the “WSJ”) that “it's not monetary policy that is making the Euro too strong, it's the attractiveness of the Euro Zone” (the opinion cannot be regarded as dovish despite it can be right). Some more remarks were also presented by Jens Weidmann. He said (quotes from Reuters) that “against the backdrop of low inflation pressure, the expansive bias of monetary policy is appropriate” but “at the same time, I want to stress that the risk evoked by some people of a self-reinforcing deflationary downward spiral form falling wages and prices is low despite the euro zone's current very low inflation rates”.

Another record low levels are observed on Ukrainian currency. The dollar was valued at 12 UAH in the midday trading. Since the beginning of the year the hryvnia lost around 1/3 of its value. Despite that it seems that the conflict with Russia has played a major role in the depreciation, the truth is that the blame goes rather to the economy than international politics. The main reasons of such significant depreciation is years of uncompetitive economy (with very large, reaching 8% of the GDP current account deficit) and USD pegged currency rate. The economy was not able to reach the balance through the currency channel and when the UAH has started to be set by market, the proper rate is searched by market participants. In the coming months I would not count on the currency appreciation. The positive scenario is just staying close to the current level until the economy regains some competitiveness and bring some FDI (also watching whether the inflation does not shoot up).

The FOMC protocol will be in focus today. Minutes from last Fed's meeting should show whether Yellen comments were a result of the discussion (positive for the dollar), or just a slip of a tongue (greenback negative). If the latter scenario is more valid we can even observe the EUR/USD marching over 1.3850.

Very limited volatility

It is hard to write something interesting on the EUR/PLN besides that its stability is comparable to pegged currencies. However, we may expect more interesting developments on the USD/PLN. The broad weakness of the US currency pushed the dollar/zloty pair close to more than two-year lows. Additionally, if we fall under 3.00 level, we may experience similar downward pressure on the USD/KRW. The Korean won rose today more than one percent to multi-year highs after it breached the most recent resistance. In case of similar situation happening on the zloty, we can expect a rapid slide toward 2.95.

Yesterday Polish Press Agency published some comments from Janusz Piechocinski. Polish economy ministers said that in the first quarter of 2014 the export to Russia and Ukraine dropped by 7.7% and 19% respectively. Piechocinski also stressed that he does not get any reports that companies encounter some major issues regarding the recent political disputes between Russia and the West.

Summarizing, the zloty should be stable today and most of the trades will be probably processed with in a narrow range and around 4.17 level on the EUR/USD. A slight pick up in volatility can be expected during Marek Belka conference and only in case of much more dovish comments (pushing any interest rate hike further into 2015).

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

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