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Daily analysis 11.03.2014

11 Mar 2014 11:45|Marcin Lipka

We are moving toward the areas of 1.3850 on EUR/USD. Fed representatives' statements confirm the base scenario of Federal Reserve, initiated by Ben Bernanke in December. Zloty begins to react nervously to the information from behind the eastern boarder. Because of that we have started today's session in limits of 4.21 per Euro.

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

  • No macro data that could significantly influence analysed currencies.

Some bull's estimations. Plosser and Evans

A part of the market still “lives” the Thursday's hawkish speech of ECB president Mario Draghi and his decision to maintain the rates on constant level and not introduce any extra tools, that would soothe the monetary policy. Reuters “wonders” if it is possible to enter 3-years' records of EUR/USD and exceed the level of 1.40. Nomura Yujiro Gato, bank's currency strategist quoted by Reuters, claims that “we will not take short positions on EUR/USD and we do not exclude a movement to 1.40 in a short time”. Yujiro also added hat “only a movement towards 1.45 would change ECB attitude”. On the other hand, Morgan Stanley's money rate strategist, Anthony O'Brien, declares that “currency market has interpreted Draghi's comments in a more hawkish way than money rate's market did”. O'Brien also thinks, that on basis of ECB president's statement “10% increase on Euro value decreases the inflation by approximately 40-50 basis point, what may give 3-5% of space for common currency's further increase. How big is a chance for above mentioned expectations fulfilment? It all depends on the market being able to construct some coherent “history” which would be a base for the game. As for now we will wait most of all for FOMC summit. In days of 18th-19th March, the investors will position themselves to the meeting of Federal Reserve.

Before Fed summit, it is worth quoting hawkish, as well as a dovish representatives of the Comittee. Yesterday on Bloomberg Charles Plosser (with a voting right this year, supporter of more restrictive monetary policy) asked about the tempo of exiting from quantitative easing, replied that “from his perspective it would be better, if we would start (tapering – author's note) faster”. As a expansion of his statement, Philadelphia Fed's chairman said that “considering the fact, that we have started from a balanced reduction (of quantitative easing – author's note) it is important to give some certainty or at least clarity about what we will be doing. It is OK to continue 10 billion (quantitative easing's reduction on every summit – author's note)”. The break-even (in this case it is a level by which current scenario would alter) is set high in every way. The statement suggests that the hawkish part of FOMC does not want to accelerate the exiting from quantitative easing unless the base scenario for the economy (approximately 3% GDP) will not fulfil. In result, both doves (they have not suggested altering the tempo of exiting from QE, even when the data published in recent weeks was weak) and hawks are planning tapering's maintenance on the level of 10 billion USD. It means that the whole operation of quantitative easing should end in October.

On the other hand, we have some facts brought by “The Wall Street Journal”. Charles Evans (dovish representative of Fed, this year without a voting right) suggested during his yesterday's appearance at Columbus State University in state of Georgia that forward guidance will be altered soon. This forward guidance's main guidelines were: maintaining money rates in the areas of zero, until the unemployment will be maintaining below 6.5%, and the future inflation will not exceed 2.5%. Chairman of Chicago's Federal Reserve declared that current forward guidance will be replaced with “something, that will properly describe the fact” that money's value will remain on a low level for a long time. Will this change occur and when? It is not excluded that it will happen on the following summit as William Dudley (currently second most important person in FOMC, until vice president Stanley Fisher formally sits on a committee) already spoke about this fact in a similar tone.

In conclusion, the base scenario will remain unaltered. Draghi's hawkish statements can be already considered discounted, so the dollar's weakening is necessary in order for EUR/USD could continue its increases. Given the current situation (on the line West – Russia, as well as the situation of Federal Reserve) it is difficult to assume “the buck's” clear weakening. Thus in the following days we can count on slow descending of main currency pair, unless the market will “come up” with some reliable reason, that can be used to wear off USD (very unlikely at the moment).

Weaker zloty

We have started today's session above the level of 4.20 on EUR/PLN. The market begins to treat zloty with a certain reserve. The main reason for this lack of interest in national currency is the development of conflict between Russia and western countries. It is also indicated by quite nervous reactions to the information that are relatively of small meaning or/and not confirmed (like yesterday's news about possible gunshots on Crimean posts brought by Interfax). Marek Belka's dovish speech during recent Council's summit and his clear suggestion about maintaining the money rates on current level until the end of 2014 could also be in some degree a burden on PLN.

In conclusion, if the situation will not improve in following days, we can observe further zloty's weakening. In perspective of few days reaching a level of 4.25 per Euro and above 3.50 on CHF/PLN pair is not excluded. Understanding between Moscow and western countries would assure sentiment's improvement. However, until Crimean elections (they are planned for the following weekend) it is very unlikely.

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

Range EUR/USD 1.3750-1.3850 1.3850-1.3950 1.3650-1.3750
Range EUR/PLN 4.1800-4.2200 4.1800-4.2200 4.1800-4.2200
Range USD/PLN 3.0300-3.0700 3.0100-3.0500 3.0600-3.1000
Range CHF/PLN 3.4400-3.4800 3.4400-3.4800 3.4400-3.4800

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

Range GBP/USD 1.6750-1.6850 1.6850-1.6950 1.6650-1.6750
Range GBP/PLN 5.0500-5.0900 5.0700-5.1100 5.0300-5.0700

11 Mar 2014 11:45|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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