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Daily analysis 11.06.2014

11 Jun 2014 12:18|Marcin Lipka

The EUR/USD lower again. The common currency is under pressure after the ECB decision and some call for earlier than expected rate rises in the US. Third in the row hike in New Zealand. Governor Belka and other MPC members on future monetary policy. The zloty is lower around a quarter of one percent to the Euro.

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

  • No major macro news that may affect the analyzed pairs.

Downside pressure. Kiwi higher

There is still a significant downward pressure on the EUR/USD. Investors are clearly not eager to wait for another negative news (for example more hawkish statements from the FOMC) and continue to shell the common currency. We are also getting closer to some important technical levels. The most heavily traded pair is getting closer to the lows reached during the ECB conference and YTD bottoms reached in January and February (1.3470).

The situation was well described in the “Financial Times” article “Euro falls as ECB measures sink in”. The leading daily paper for professional investors explains how and why the EUR/USD jumped just after the ECB conference even though the tools implement by Draghi were really dovish and should push the Euro down. The “FT” citing a number of analysts claim that “last week's bounce was driven by hedge funds taking profits on short positions they had built up ahead of the ECB's decision”. If we have short positions on a currency pair (for example selling Euro/buying dollar we have to proceed the opposite transaction – buy Euro/sell dollar, to book profits). Further the “FT” writes that “Now, institutional investors who had previously been cautious were starting to sell the single currency – suggesting its weakness might be more persistent“. If that was the case, the expected more risk to the downside is higher probability of falling under the recent lows, at least in the short/medium term.

Moving on the other side of the globe, the central banks have different problems. According to 13 out of 15 surveyed by Bloomberg, economists claim that policy makers from New Zealand will rise interest rates third time the row and the benchmark should reach 3.25% after tomorrow's RBNZ meeting. The NZD/USD pair have been rising since a few days but it is not only the result of tighter monetary policy run by the local central bank but also a result from more easing from the ECB. New Zealand is a first developed nation which started rising the interest rates so the disparity should widen in the coming months. Additionally, Wellington enjoys trade surplus so fundamentally there is more demand than supply of NZD. In result the perspectives for the kiwi seems to be favorable and we should at least hold to recent gains.

Summarizing, there is still a strong selling pressure on the EUR/USD and we may quickly revisit the recent lows and fall below 1.35 level. Investors who bet on gains may have some hope that incoming data from the Euro area (industrial production) and retails sales from US may change the trend. However, if the data turns out to be worse for Europe and better for the States we may even end the week in the mid 1.3400 level.

Comments part II

The recent 24 hours was shaped by another set of comments from Polish MPC members. Starting from the most important one – governor Belka, he told to Polish Press Agency (PAP) that the ECB decision does not alter the probability of changes regarding the local monetary policy and agreed with opinion that “the base case scenario is leaving the interest rates unchanged for as long as possible”. Concerning the zloty Belka said that “We had expected that the effect will be stronger than it was. There was some move on the local currency but in the much smaller scale than estimated”. The governor confirmed expectations that “forward guidance” will be either scrapped or not extended during the July's meeting.

Comments made by Andrzej Bratkowski were also pretty interesting. The MPC member who just a few weeks ago was pretty close to rate hikes and warned about possible higher inflation now changed his view to much more balanced one. He also said that interest rate cut should be rather a result of slower growth (under 3% GDP) rather than prolonged low inflation.

On the other hand professor Hausner besides confirming the broad based view that the MPC will leave the rates unchanged he told Reuters that “the current zloty's appreciation is not a problem” and the PLN rate should not shape the monetary policy.

Summarizing the recent MPC members' comments (Belka, Winiecki, Glapiński, Zielińska-Głębocka, Hausner oraz Bratkowski) the majority (besides Glapiński who sees a cut at the beginning of 2015) claims that the interest rate will remain at the current level and a possible cut should be rather a result from slowing GDP growth than falling inflation. The market currently prices (according to FRA contracts) a 25 bps cut in the fall but it seems to be much more aggressive approach than the MPC members' view. It is also worth to note that the MPC does not seem to be really concerned with the strengthening zloty. Therefore we may conclude that unless the EUR/PLN does fell below 4.00 we should not see any kind of intervention either from NBP or BGK.

Today we should not observe any dramatic moves on the PLN. The zloty is giving back another quarter of a percent but the 4.12 level on for the Euro should not be breached (even taking into the account another negative y/y CPI from Hungary). The same situation should be observed on the CHF/PLN where 3.38 should stop the buying appetite. On the other hand, the dollar may further gain the value and USD/PLN may reach 3.05 in the following hours.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1000-4.1400 4.1000-4.1400 4.1000-4.1400
Range USD/PLN 3.0200-3.0600 3.0400-3.0800 3.0000-3.0400
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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 Jun 2014 12:18|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.

See also:

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Daily analysis 10.06.2014

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