Daily analysis 10.11.2015

Longer stabilization on the EUR/USD at a mid 1.07 level. Rosengren from the Fed in favour of the December hike. Kazakh tenge still under pressure. The zloty gained some value after the presentations of economy related ministers.

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

• No macro data that may significantly affect the analysed currencies.

Rosengren close to the consensus

Readings which have been published in the recent hours have had no significant impact on the EUR/USD. The Chinese CPI was slightly lower than expected (1.3% y/y vs 1.5% y/y), but it is too early to expect any reaction from the PBOC as the rates were cut last month. Investors will probably have to wait till next year for the next monetary policy loosening, as there is some more room to stimulate the economy, especially noting that inflation is low and the benchmark stays at 4.35%.

No major impact is seen from French industrial production, which rose 0.1% m/m with expectations at minus 0.4% m/m. Paris is far behind other large eurozone economies and a slight improvement would not be any argument for the ECB to resign from its plans to proceed with more QE.

Interestingly, a fairly hawkish statement was published by the FOMC member Rosengren. Boston’s Fed chief (voting in 2016), who has been regarded as more dovish than the consensus, claimed that the December rate hike is appropriate unless the economy slows. Additionally, his whole presentation was fairly optimistic regarding the job market. He tried to show that the economy is strong and the country is close to full employment.

The base case scenario regarding the December hike is getting stronger. However, in the following weeks it will be really interesting to see how the market interprets the pace of tightening. Currently, the base case scenario is around a 100 bps increase in 2016. But, for example, Capital Economics cited by “The Wall Street Journal” sees that US rates would rise to 2% at the end of next year. It is worth noting that even if the actual hiking pace is not that steep, similar projections might impact the market and push the dollar even higher.

Kazakh tenge under pressure

There is still downward pressure on the Kazakh tenge. The USD/KZT markedly exceeds the 300 value, which means the local currency depreciated by 40% in three months. The main reason behind the KZT slump is the oil slide as this commodity account for 60% of the country's export. But the direct impact came from Chinese RMB devaluation in August, which markedly increased the pressure on the KZT.

Firstly, the Kazakh central bank allowed the currency to trade freely after the tenge was pegged to the dollar for years. The pressure on the currency was high so the authorities returned to market interventions burning foreign currency reserves and sovereign oil fund assets. In the meantime, the central bank chief was dismissed and the benchmark rate was hiked to 16% annually.

Assuming that the Kazakh economy is very similar to that of Russia, at least regarding its dependence on commodity exports, and inflation was very similar, we can evaluate that a good benchmark can be the tenge relation to the rouble.

Currently, as the tenge regime is floating, it returned to multi-year averages to the rouble – around 4.5-5 KZT to the RUB. Even noting the strong volatility, which has been present for months on the KZT, further significant deterioration is less probable unless there is more significant pressure on commodities.

The foreign market in a few sentences

The EUR/USD is in waiting mode before some new messages come regarding further monetary policy loosening. There are some market calls that the interest rate hike in the US may decrease Draghi's appetite for more QE in the euro area. However, if these suggestions are dismissed, the EUR/USD should remain within its base case scenario and fall towards the 1.05 mark. In the short term, it is worth remembering about tomorrow’s Chinese retail sales and industrial publication.

Calm on the zloty

The zloty positively reacted to the announcement of development and finance ministers presentation. Today the EUR/PLN is around half a percent lower comparing to the previous opening. Further zloty appreciation is possible, if the market receives a strong promise that the new government will not exceed the 3% budget deficit in 2016.

Currently, there can be more doubts regarding the new MPC candidates. If minister Morawiecki will not be a strong advocate for monetary loosening the next Council does not have to be as dovish as some might have expected. As a result, it may decrease the odds for interest rate cuts. Additionally, assuming that the ECB is on the way to further loosening of the monetary policy, the rate differential may increase slightly. As a result, it might even open a path for the EUR/PLN to return towards the 4.20 mark.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: