Daily analysis 12.12.2012

EUR/USD is waiting for the FED decision and trades in the range of 1.3000. PLN ia stronger on the wave of rising euro dollar and positive sentiment on equity markets. The Polish zloty ignores slight clashes between the government, and MPC.

Macro data:

• 18.30 CET: FOMC statement (also the info regarding expanding QE3 will be released)
• 20.00 CET: FOMC Economic Projections
• 20.15 CET: FOMC Press Conference

FED and the improving sentiment.

There has been only few days since market got serious that the additional easing scenario is possible. In my opinion investors were too much focused on the Eurozone issues, and they missed the importance of the FED decision. The other case is the technical details of the operation. Expiring at the end of the year Operation Twist didn't widen the Central Bank's balance sheet, because the FED was buying securities with longer maturities and selling short term notes. Today's FOMC decision can cause that total QE3 will be around 85 billion a month (40 billion MBS purchase, and 45 billion new bond buying). If that policy continues till the end of 1Q 2014 (median expectation in Bloomberg survey), it will mean that total easing will be doubled in value (1.2 trillion USD) comparing to QE2 (600 billion USD). I don't think that phrase “buy rumors, sell facts” is valid in that case. Firstly due to underestimate of the news, and secondly because of its at least medium term consequences (weak USD through at least 1H of 2013) Additional interesting feature of today's Federal Reserve meeting can be setting numerical thresholds for unemployment and inflation rate that would give some clues of withdrawing form ultra dovish monetary policy. The market speculates that the rate of unemployment will have to fall under 6.5% and CPI cannot exceed 2.5%. Setting the limits will further weaken the USD especially that even if the values are reached (not possible in the near term regarding employment) it does not mean the immediate withdrawal of the easing.

Yesterday's rise on EUR/USD, except of the FED meeting, was the result of short squeeze (those who were shorts on Italy's issues). The gains were supported also by ZEW index reading (sentiment of economists in Germany). We had also quite bullish session on the Italian debt (10-year yield dropped by 15 bps). The recent situation on the currencies sensitive to the sentiment is pretty bullish. The mood can worsen only if the FED does not fulfill market expectations of additional easing. It will surely disappoint the bulls who bet on more QE3.

Polish zloty stronger on the risk on mood and ignores slight clashes between government and MPC.

PLN appreciated to all of the major currencies. It was the result of improving sentiment and opening positions before the FED decision. The zloty ignored some disagreement between the Ministry of Finance and MPC. Rostowski blamed the weak 3Q GDP reading on the Committee's lack of action regarding lowering interest rate (already fixed according to the same statement). The response from Belka (chairmen of the MPC) was quite fast. He said that slow growth is also cause by quite restrictive fiscal policy. However, I don't think that this issue will cause any move on the PLN or on the debt market.

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

Technical analysis EUR/USD: after closing above 1.3000 the pair has a chance to test 1.3150 level (recent highs). The strong support is still 1.2920-1.2900 (23.6% Fibonacci retracement level and 50 DMA), which if successfully test will spur the move towards 1.2740-80.

Technical analysis EUR/PLN: yesterday we reached the first target around 4.0800 level. The next are 4.06 and 4.04. Now the strong resistance is the range of 4.1000.

Technical analysis USD/PLN: the first yesterday mentioned target has already been reached. The long bearish candle breaking 3.1500 support is much in favor of shorts. The analysis suggests that next target are 3.1200 and 3.1000 in the range of few days. The rebound should be stopped by resistance around 3.1500.

Technical analysis CHF/PLN: we are in half way of the reaching target around 3.3500. Long red candle which breached 3.4000 support suggests that the move can be even stronger with the target around 3.3300.