Daily analysis 10.10.2013

The dollars strengthen at 1.35 per euro thanks to gossip about possibility to work out a short-term solution for the debt ceiling. Janet Yellen was nominated by Barack Obama to be the Chairman of Federal Reserve. Interresting minutes from last FOMC meeting. The zloty is steady while EUR/USD can foresee its later strengthening.

• The most important makro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
• No key macroeconomic data today

Correction. Partial solution. Yellen. Minutes

After the latest EUR/USD increases, the market needed correction. Gossip of possible raising the debt limitation in order to avoid problems with meeting liabilities by the USA was a perfect excuse.Wednesday was full of other important news: Janet Yellen was nominated for the position of the Federal Reserves’ Chair, we also leaned the decription of discussion about the last, controversial Fed meeting.

The market started to speculate seriously about the possibility of a short-term solution regarding raising the debt ceiling (I have also wrote about it two days ago). It is a much more serious matter than the government shutdown (i.e. sending the federal employees on a forced leave), however, the agreement can only assume pushing the deadline further by few weeks. This should at once help to work out a more complex solution and prevent the insolvency of the United States after October 17. On the one hand it is good news for the dollar as both parties agreed to talk (the Republicans will meet with Obama in the White House this evening), on the other, looking at the matter in a few week’s perspective, a relief for the dollar might be delusive. Assuming that polititians will give themselves another month for talks and the deadline will be pushed until the middle of November, concidering what’s on stake the agreement should be reached at the last minute. That shall have impact on the dollar as soon as the end of October and additionally not only will cross out the October tapering (which after yesterday’s minutes seems improbable anyway), but also may be a strong argument for doves to prolong the full QE until for example the beginning of 2014.

Janet Yellen was at last nominated by Barack Obama as a candidate for the position of the Chairman of Federal Reserves. There is a broad consensus on the market that she has the adequate qualifications and has at the same time strongly dovish attitude towards monetary policy (it is even speculated that in order to stimulate the employment she can take a risk of exceeding the inflation goal). Two and a half months ago the Wall Street Journal carried out a proffesional analysis concerning her economic projections, that turned out to be closer to the reality compared to all the FOMC members (https://cinkciarz.pl/nowosci/komentarze-walutowe/komentarz-walutowy-z-29-07-2013). Yellen now faces the discussions regarding her candidacy in the Senate’s Banking Comittee and the voting in the Senate. It is expected, though, that all the Democrates and a part of the Republicans will support the small lady with a large IQ and Yellen will end up being the Chair of the largest financial institution in the world. This should at least in medium and long term induce the downward pressure on the dollar.

The publication of the yesterday’s minuts is worth getting familiar with (especially pages 7-10). It is clear that the Comitee was divided, and contrary to what Bernanke had said, took the market moves into consideration. FOMC still assumes that QE can be reduced until the end of the year (the only realistic date is the December meeting, generally positive for the dollar), the economic has to show, however, that its development proceeds as expected (what should be easier after the latest update). The Fed seriously considered the tapering, however, lower than expected GDP, fiscal problems (with the budget and the debt ceiling) and low inflation have foredoomed keeping QE in its full amount. It is worth mentioning that of the Board of Governors only 1 person voted for the tapering (out of 5 people, excluding the Head and Elizabeth Duke, who has stepped down from the postition before the meeting). Those who wanted to reduce the quantitative easing were mostly the non-voting members: the chairman of the regional branches of the Fed, what may be an argument against the dollar (these are the governors who have stronger position in FOMC). The significance of the minutes was neutral and moved us closer towards the tapering in December rather than Q1 2014, however, the confusion concerning the debt ceiling and the budget as well as their consequences may change this situation.

Reassuming, we should remain around correction levels - 1.35. The important event today will be the meeting of the Republicans with the president and if the partial solution is reached, it can give short-term downward impulse. However, throughout next few weeks the dollar should remain under pressure and new EUR/USD highs are probable (after the October FOMC, but before the December one).

The stable zloty with the desire to stregthen

No surprises concerning the domestic currency - the zloty is still stable. However, the movements of PLN over few last days indicate slight strengthening. The zloty, despite the EUR/USD decrease has not weakened, what shows that the Polish currency is resistant to the decrease signals. We can deal with another try at 4.18 on EUR/PLN. This time we will have bigger chance to fall under this level and go to 4.15.

Today, however, the 4.18 level should last. Especially if the firm solution from the White House comes, the growth of the zloty value will be hard to maintain in pair with the strengthening dollar. The base scenario for the hours to come will still be interval 4.18-4.20. Tomorrow, however, one should remember about the current account balance. A small deficit is expected, so any result above zero is an argument for the zloty strngthening (around 1 grosz).

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

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