Daily analysis 12.02.2014

Yellen will continue Ben Bernanke monetary policy. What was interesting for the dollar bulls and bears in the new Fed's chairwoman testimony? The House raised the US debt limit. The zloty is slightly stronger due to improving global sentiment.

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

• 11.30 CET: BoE inflation report.
• 14.30 CET: Polish BOP.

Continuity. The House decision

Janet Yellen should be happy after yesterday's hearing. Both in the statement and during the Q&A part before the House Financial Services Committee, the new Federal Reserve chairwoman didn't say anything controversial. We can even conclude the whole presentation in a sentence taken from her statement “I expect a great deal of continuity in the FOMC's approach to monetary policy”. Regarding some more interesting parts of her testimony it is worth to underline the elements which can change her approach to the asset purchase reduction. She said that (according to Reuters Q&A transcript) the following elements “would case the Committee to consider a pause is a notable change in the outlook”. The Fed will look into a broad range of data in the labor market, including unemployment, job creation and many other indicators of labor market performance. We also be looking at indicators of spending and growth in the economy. She also added that the inflation “running well below our objective” can bring the Committee into the consideration to stop the QE reduction. Replying to the question about possible asset purchase increase, Yellen said that it will require “a significant deterioration in the outlook, either for the job market, or concerns, very serious concerns, that inflation would not be moving back up over time”. In the same answer she repeated a well known phrase that “purchases are not on a preset course, and we will continue to evaluate the evidence” (what can be considered quite dovish, especially that we can currently think firstly about pausing the tapering, but not increasing the purchases). She also told the Committee that “I was surprised the jobs reports in December and January, the pace of job creation was running under what I had anticipated”. She cited however, that “there were weather factors” in the data which should be regarded as a dollar positive (not economy, but the weather is to blame). Finally Yellen kind of reaffirmed what Rosengren told the during the “WSJ” interview: “we will meet in March. We will have a broad range of data on the economy to look at, including an additional employment report”. It does confirm that the next NFP data will be crucial both for the dollar and for the further asset purchase pace. If we get again a number significantly below 200k, we can expect that Fed may pause the tapering “for one or two meetings” as Bernanke indicated back in December when he announced the QE withdrawal operation.

Taking into the account the whole hearing, the base case scenario is still valid. The Fed will withdraw 10 billion USD at each meeting from the asset purchase program. Only a clear deterioration in the economic data will push the Committee to consider changes in the pace of the tapering.

Besides the Yellen report it is worth to mention that the House decided to raise the debt ceiling to mid-March 2015. The agreement between Republicans and Democrats was highly anticipated, so it did not bring any market reaction. The deal will have to be also approved by the Senate, but in the upper house Democrats have a majority so the voting is just a formality.

Summarizing, the EUR/USD should be mainly focused on data from the US. The key will be March jobs report. If we get a dire number again then we should expect a further dollar depreciation.

The stronger zloty

The zloty, in line with other EM currencies and equities, was boosted by fairly predictable Yellen hearing. On the wave of positive sentiment, the EUR/PLN is falling around 4.16 at the beginning of the European session. It is also worth to note that we returned to the levels where the zloty was traded before the EM turmoil. It only confirms that the Polish currency is fundamentally solid.

Polish Press Agency published another interview with MPC member. Answering to the question regarding changes in the monetary policy, stance professor Zielińska-Głębocka said that “It is hard to say what strategy will implement the Committee. We all wait for the March inflation report. After we get the report, we will probably make some decisions”. Głębocka, who is considered as a dove, seems to be more hawkish than Chojna-Duch, who claims that the interest rates can stay at the current level till the end of the year.

Summarizing, the zloty should be still stable with a small appetite to gain some value. Currently the base case scenario for the EUR/PLN is a trade around 4.16 plus/minus 0.01PLN.

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

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