Daily analysis 10.12.2012

Reports about Mario Monti resignation, Greek debt buyback, mixed data from China, and coming key FED meeting are the main issues which will shape the market in the following hours. Polish zloty is stable around 4.1250 per EUR.

Macro data:

• No major economic reports today

Currencies evaluate the weekend data.

The weekend break was full with key events. Important data from China was published (better then expected regarding industrial production and retail sales but worse concerning export). In the States we had another Fiscal Cliff meeting which didn't produce any results again. However, the most crucial info came from Italy where the Prime Minister Mario Monti decided to resign after the 2013 budget is approved by parliament. This statement will concern the markets in the longer term because Monit is seen by the markets as a supporter for austerity and reform programs. Just after the opening of the Italian debt market 10 year government bond yields jumped by 25 bps above Friday's close (4.77% vs 4.52%). Joining the charts of the bonds and EUR/USD we can clearly see how it dragged euro dollar lower by 20 pips at the beginning of the European session. The further downside move on the common currency can be weakened by coming FED decisions regarding QE (next paragraph).

On Wednesday FED expands QE?

As I mentioned a month ago the Wednesday's FOMC decision will be key for the currency markets, and can either extend the recent trends or revers it for the following months. On the coming meeting the Federal Reserve will decide how to replace the expiring Operation Twist. According to Thomson Reuters survey ( https://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/1314-L1E8N7DLU-1) most economists predict that Ben Bernanke will decide to start the new bond buying program worth around 45 billion USD a month. When we sum up it with MBS purchases worth 40 billion USD per month it gives 85 billion easing per 30 days (almost 1 trillion a year). Additionally the FOMC plans to set some macro targets (unemployment 6.5%, inflation: 2.5%) and until this targets are met (or exceed) the FED will be using QE to support the economy. Taking into account the recent macro trends it means that the operation will have to last at least for a year (probably much longer) to meet the employment levels. If the analysts' prediction is valid we can see a significant depreciation move on USD (especially on pairs with AUD, CAD and GBP. Also with lower magnitude on EUR and PLN).

No moves on PLN.

In recent months the volatility on EUR/PLN has been extremely low. It does not matter whether we are in risk on or in risk off environment the main PLN pair reaction is muted. Last 120 days showed the average rate of around 4.1300 per euro the deviation was only +/- 0.07 PLN. Only one year ago such a move was normal in the range of few days. Zloty is getting similar to EUR/CZK pair where the volatility is even lower. It is however worth to remember that such periods can be used for accumulation of assets, after the long consolidation the move in either side can be rapid strong.

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

Technical analysis EUR/USD: the technical situation on EUR/USD has not improved. We are still very close to the key support levels (50 DMA, and 23.6% Fibonacci retracement levels). If euro dollar closes under 1.2900 it will generate a strong sell signal with the first target around 1.2780-40.

Technical analysis EUR/PLN: the upside move has been paused. It looks like EUR does not have enough power to go further up. However it is still more possible the upside move with the target around 4.17-4.1800 then the slide under 4.1000 and come back to the PLN strength.

Technical analysis USD/PLN: the rally has been stopped for now but the further weakness of PLN is visible on the chart. The target is still set at 3.24-3.26 and with then even at 3.3000. To negate the recent move it will have to drop under 3.1700 (low probability).

Technical analysis CHF/PLN: similarly to EUR/PLN the upside move on CHF/PLN has stopped but it is still more possible that we go further north then close under 3.4000. The target is still 3.4600 and longs should be reduced after getting under 3.4000 level.