Daily analysis 14.02.2014

EUR/USD bullish data – weak from the US and fairly solid from the Euro Zone – pushed the most heavily traded currency pair toward 1.3700. Changes in the Italian government seem to be neutral for the markets. 8% current account deficit in Turkey. The zloty is stronger, but softer than estimated GDP reading can limit the PLN appreciation.

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

• 15.15 CET: Industrial production from the US (survey: +0.3% m/m; consensus range between 0.0% and +0.6%).

The States, Eurozone, and Turkey

On Thursday morning the EUR/USD rose over 1.365 level. The positive sentiment was supported by the weaker US retail sales. Both the headline and core readings were disappointing – minus 0.4% and minus 0.2%. Moreover, the December report was revised downward – the overall fell from +0.3% to minus 0.1% and the data excluding gasoline and cars dropped from +0.6% to +0.1%). In result, the US economy reported a negative retails two months in the row and the y/y reading was just slightly above 2% (the worst result since the beginning of 2010). It brings pretty quickly a question whether the Federal Reserve having such reports available in December would have decided to start the tapering? If not then the dollar should be under pressure due to rising probability of pausing the asset purchase reduction on the March meeting.

We started the session from quite positive Euro Area data. The numbers are not breaking through, but both German and French GDP growth beat market expectations by 0.1% in the 4th quarter of 2013. The common currency is particularly sensitive to the GDP or inflation data due to possible changes in the monetary policy. Any better-than-expected reading discourages the ECB to implement a rate cut or other accommodative measures.

For couple hours now, there is a wide discussion on possible changes in the Italian government. Investors, however, are pretty relaxed regarding the issue. Firstly, the change will be made within the same party (current Prime Minister Enrico Letta will resign and the new one – Matteo Renzi – is supposed to be nominated). Secondly, there will be no election which usually brings a significant level of uncertainty. If we look at a new candidate, the feelings can be mixed. On the hand he seems to be pretty committed to take Italy out of recession. “The Wall Street Journal” reports that the new government chief wants to cut both CIT and PIT and made the job market more flexible. It translates to more fiscal stimulation which requires to pause some spending limits. On the other hand, Renzi - who run a medium size and wealthy town of Florence -can have a limited experience to successfully manage the whole country.

The “Financial Times” publishes an article on Turkish current account. Tim Ash, emerging markets research chief for Standard Bank, commented on the data for the “FT”: 8% deficit was a “truly horrible” number. If we go deeper to the data, we can see that the trade deficit widened by 15 billion USD in 2013 and topped 80 billion USD. Looking at the whole balance of payments, it is visible that if Turkey didn't borrow additional billions in 2013 (the long term bank drawings almost doubled) then the foreign reserves would shrink. Overall, the data is really dire and if Turkey does not balance its economy more problems for the lira will be on the horizon.

Summarizing, the current situation is helping the EUR/USD. The most heavily traded currency pair is keen to rise further. A good reason to continue the upside trend can be the industrial production from the US. If the data turns to be as bad as the Thursday's retail sales, we can expect the EUR/USD to be traded above 1.37 for longer.

Around 4.15

The zloty began another day with higher value. The morning data from the Euro Zone, EUR/USD rally and Fitch's rating confirmation are boosting the PLN. However, a slightly below expectations GDP reading (+2.7% y/y vs +2.9% y/y) can trim the gains later. In the last three months of 2013 the Polish economy expanded by 0.5% q/q on the seasonally adjusted data which was the weakest reading since the first quarter of 2013.

Summarizing, if the EUR/USD stays at current levels, we should not see a further appreciation on the zloty. The level around 4.15 on the EUR/PLN will be a base case scenario in the following hours.

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

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