Daily analysis 09.10.2014

High volatility on currencies after the “minutes” release. The dollar is sliding after the Fed's concerns regarding strong dollar and world's economic performance. Fischer and Draghi conference at Brookings Institution. Polish zloty not really affected by a deeper interest rate cut. Dovish “minutes” helped also the PLN.

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

• 14.30 CET: US jobless claims from the US (survey 293k).
• Between 16.00 CET and 17.00 CET Mario Draghi is scheduled to speak at Brookings Institute on euro zone economy. Later the discussion between the ECB chief and Fed's vice chairman Stanley Fischer is planned.

'Minutes'. Short-squeeze. Discussion

The FOMC published yesterday discussion from the last meeting. The minutes were supposed to be pretty hawkish and the market speculated that the Fed's officials were concerned about “considerable time” phrase and the pace of unemployment/inflation changes in connection with accommodative monetary policy.

Actually the truth was just the opposite. The main “actor” during the members' debate were the current and the future consequences of stronger dollar. At the beginning of “minutes” where economic staff projections are discussed the “greenback” issue was already raised. The FOMC experts claimed that slightly lower GDP path and subdued inflation prospects are the results of the dollar appreciation. Additionally, the staff discussed how monetary policy abroad may weaken local currencies (euro, yen), and as a result push up the dollar in the further.

Similar findings were reported by the Fed's participants. Some of them pointed out that the European economic problems may cause the further dollar strengthening and reduction of the US companies competitiveness abroad. Some of them also claimed that slower Chinese and Japanese growth combined with the Ukrainian and Middle East crises may result in similar consequences. Additionally, a couple of members also said that the USD appreciation can be a threat for the inflation goal.

Such quick recognition of the dollar problem by the Fed wasn't expected, but if market more closely watched the recent Dudley meeting (we covered the subject yesterday; concerns regarding stronger dollar and commodity slump on the future inflation) the reaction wouldn't have been such strong.

Investors had also different expectations on “considerable time” discussion. The Fed kept the phrase due to fears that “changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions”.

As a result, instead of the hawkish 'minutes' we received a promise that the interest rates will remain at current level for longer time as the adverse effects of its earlier hikes might be more challenging than keeping the accommodative policy for longer. It is a clear victory of the doves' camp what was quickly translated into the dollar weakness, stocks rebound and a significant drop on sovereign bonds yields all over the world.

The effect (especially on currencies) was magnified by record high dollar positions. When they started to be unwind (profit taking/ loss cut) it caused that the EUR/USD almost touched 1.2800 which is close to 300 pips north side move.

The EUR/USD appreciation wasn't even affected by another weak German data. August was not only unlucky for industrial production, but also for the export which dropped on y/y basis by 1% (actually this time countries outside the euro zone dragged the numbers down). Now investors will be watching closely the following reports on the largest European economy to evaluate whether the recent data is an “one-off” issue or a beginning of more significant slowdown.

Summarizing, the yesterday's Fed's minutes showed that the dovish camp at crucial moments is able to push its stance pretty successfully. That fact may slow the dollar appreciation in the medium term unless the US data keeps surprising on the upside.

Today it is worth focusing on Mario Draghi speech at Brookings Institution. The main subject will be the euro zone economic conditions. The presentation will be also followed by the discussion with the Fed's vice chairman. Investors will be mainly focus on the future monetary perspective in both Europe and the US.

Planned surprise

The Wednesday's 50 bps cut was surprising for the markets but not due to the economic reasons, which actually demanded such decision, but concerning the recent statements from the MPC members. Those participants who voted for a half percentage point reduction (at least two members from Belka, Zielińska-Glebocka, Hausner netural camp) may have reduced the previous expectations on purpose in order to generate a stronger impact on the real economy. Much more discussion on a surprise decision and its consequences should engage more publicity.

The statement (especially regarding the future conference) where the MPC left some room for maneuver was also interesting. It claimed that 'the council does not rule out further adjustment of monetary policy, should the incoming data, including November NBP projection, confirm a considerable risk of inflation remaining below the target in the medium term'. During the Q&A part the governor Belka suggested that the MPC wanted the cut to be concentrated in time. Currently it is really hard to asses whether we will end the year with 2.0% reference rate or 1.75% especially after the recent surprise.

The reaction on the zloty was pretty calm, but the main reason that we are starting the day around 4.18 on EUR/PLN is the fact that Fed's minutes were pretty dovish. If we didn't have dollar slide the zloty would have been around 4.19-4.20 per the euro. Incoming hours for both EUR/PLN and CHF/PLN should be fairly calm. The USD/PLN will be probably under the impact of the “Brookings” conference findings.

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

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