Daily analysis 12.03.2015

Another records of the euro's weakness in relation to the dollar and strong weakening of the main currency pair in the morning. First important macro data from USA this week. Central Bank of Mexico will intervene on peso market in order to prevent the decrease of MXN value. The zloty should remain stable in relation to the euro and franc with a chance for further appreciation. USD is still record expensive.

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

• 13.30 CET: Data on retail sale from USA (estimations: +0.3% m/m; with exclusion of cars and fuels +0.3% m/m; with exclusion of cars only +0.5% m/m).
• 13.30 CET: Index of import prices (estimations: +0.2% m/m and minus 8.9% y/y).

Records of weakness and market's expectations

At the end of Asian session, EUR/USD fell below the level of 1.05, and achieved the lowest level for 12 years. However, before the trade in Europe has actually started, the main currency pair tested the areas of 1.0650. At that time, no macro data appeared. It is also difficult to find any signals from technical analysis, which could explain this action. Thus, one can assume that the speculation capital is only searching for stop losses, that can be easily activated in one way or another, and gain relatively easy profits.

Those short term movements, however, have a very small meaning. The belief about future strength of the dollar is so dominant on the market, that only the extension of zero interest rates' period on the other side of the ocean, could clearly correct this trend. Of course there is a chance, that the trend fades away.

In the first option, the Federal Reserve would have to leave the “patience” statement on Wednesday's summit, and e.g. mention the strength of the dollar in communicate, or at least at the press conference. This strength could e.g. influence the decrease of inflation expectations, or negatively impact the exporters. The weakening can really be strong then, and we even could not exclude the return in the areas of 1.08-1.10 on EUR/USD. However, at this moment chances for such a solution are small. Fed did not prepare for this movement gradually, to resign the path of normalizing the monetary policy, for the sake of dollar's appreciation.

Of course we can also be the witnesses to exhaustion of potential for decreases. That is what happened with yen, which lost 20% of its value after initiation of QE, and afterwards we had a few quarters of stabilisation. However, this time two movements overlap. These are quantitative easing in Europe, and the monetary policy's tightening in USA. Such fundamental reason can be still used as an explanation of movements on currencies for a long time. Thus, even if we will observe the wear off, it will rather be used to open another short positions on EUR/USD, than mass purchase of European currency.

Interventions in Mexico

Strength of the dollar is visible not only in relation to euro, but also to many currencies from emerging markets. Many of them lost few dozens per cent of their value from the beginning of the year. Reduction of prices has also not omitted the peso, which caused the USD/MXN pair to go up to its historical record. In order to prevent too strong movements on the currency market, the local central bank decided for daily interventions up until June.

Banko de Mexico spent 3 billion USD for the interventions, which gives approximately 50 million USD for a single session. The monetary authorities will sell the currencies independently of rate. Additionally, 200 million USD will be sold, if MXN will weaken by more than 1.5% during one session (this rule has been introduced in December).

The decision of Mexico's central bank, should not be taken as an act of desperation, as it has been in case of e.g. Russia or Ukraine. Mexico has 200 billion USD of currency reserves, and 70 billion USD of elastic credit line with IMF. The monetary authority want to rather prevent the increase of imported inflation or market's loosening, caused by capital's outflow. In longer term the economy of USA southern neighbour, should be a beneficiary of a faster development in United States. The base case scenario assumes the rate of USD/MXN to deflect from current levels in the upcoming weeks.

Few words about foreign market

Today at 13.30, the first important data of the week will hit the market. The market will probably concentrate on publication of retail sale, which is supposed to weaken by +0.3% m/m after two weaker months. If those data would cross the expectations, we can expect another decrease impulse on EUR/USD, and going below 1.06. On the other hand, if the consumers let down again and the reading would be negative, the weakening of the main currency pair can move in the areas of 1.07.

Stable on EUR and CHF. The dollar close to 3.90

Significant mixes on the global currencies related with the dollar, have a small influence on euro or franc in their relation to zloty. Throughout recent hours EUR/PLN maintains in the areas of 4.12-4.13, and CHF/PLN is recorded in the areas of 3.87-3.88. This situation should not change significantly until the end of today's session.

The biggest variety is expected on the American dollar. The movements in limits of 200 pips on EUR/USD convert on approximately 0.08 PLN of USD/PLN change. Today, we do not expect such strong turns, but if the data about retail sale on the other side of the ocean will be weak (negative in m/m relation), the dollar can go down, even in the areas of 3.85. On the other hand, in the scenario of strong reading from USA, new multiple records can appear on “the buck” and the approach by 3.94-3.95 is not excluded.

In the perspective of few upcoming weeks, we should still assume that USD/PLN will test 4.00. Especially that EUR/USD coming down in the areas of 1.02-1.03, is becoming a basis scenario. It will occur even in case of EUR/PLN drop in the areas of 4.10, which is also expected by us in the nearest moments.

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

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