Daily analysis 14.04.2014

EUR/USD “feels the pressure” of ECB members' dovish statements. Another news from Ukraine should not have a decisive influence on the market. Bullard is becoming less hawkish. Due to the increase of tense in the East zloty looses its value, however, losses of Polish currency do not exceed half of per cent.

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

• 14.30 CET: Retail sale from USA (survey: +1.0% m/m).

ECB. Ukraine. Bullard

This weekend was full of events. On the IMF meeting in Washington, the representatives of ECB showed once again their dovish character, and the tense situation in the east of Ukraine appeared again on the headlines of financial press. Is it enough to reduce the price of euro and bring the main currency pair clearly below the current levels?

The main information that caught the attention of currency market participants were the comments of Mario Draghi. During the press conference in International Monetary Fund, when asked by Reuters journalist, ECB president stated: “I always said that the currency rate is not a goal of monetary policy, but it is important for stabilization of prices and growth. During (as a reference to Euro’s enforcement – author's note) previous few months (the Euro – author's note) was becoming more and more important for prices stabilization”. Further on Draghi continued that “currency's enforcement needs a further easing on monetary policy. If one wants to maintain adjustive monetary policy, a further enforcement of currency demands further stimulation”. Especially the second part of this statement aimed to indicate the market that ECB connects inflation's behaviour to the currency rates. Draghi wanted to suggest that the progressing Euro strengthening can be a stimulus for easing the monetary policy.

Other members of Euro Zone's central bank also spoke in the same way. ECB board of directors member, Benoit Coeure, properly summarized the words of Draghi on the following day in Bloomberg television. He claimed that “the level of Euro rate is important in creating our monetary policy. It affects the inflation and inflation is our mandate. Thus the stronger Euro gets, the bigger need for monetary stimulation”. On the other hand, another ECB member, Christian Noyer, marked in his interview for Le Figaro (quoted after Reuters) that “currently Euro is abnormally strong, considering position of Euro Zone in economic cycle and delay of growth in comparison to others (other countries – author's note), including United States”. Noyer also passed on a similar message that Draghi and Coeure claiming, that “the stronger Euro gets, the more we need adjustive monetary policy”.

Since the opening of session in Asia, another thing which negatively affects Euro, apart from statements of ECB representatives, is aggravation of situation in Ukraine. News about hypothetical intervention of Ukrainian soldiers against quasi-military forces representing separatist demands of eastern part of the country is causing the increase of threat of Russian forces' intervention. However, considering the message of Russian media (RT television) and the diplomacy, entering Ukrainian territory is very unlikely (informations concerning Crimea were presented in a totally different way). Additionally, the support for Moscow was much bigger on the peninsula, than it is in eastern Ukraine.

Today's Financial Times presented a very interesting comment from the Federal Reserve. James Bullard, Fed chairman from St. Louis (taken as neutral, although recently he is getting closer to hawks' camp), stated in his interview for “FT” that it was his dot (on the scatter plot presenting each members' interest rates forecasts) that was marked on the level “4 or 4.25” (which is one of the highest) for 2016. He also does not see the arguments for keeping the rates at the low level if the unemployment and inflation will be both close to a long-term trend. Bullard also stated, that the first increases of interest rates are predicted for the first quarter of 2015.

In conclusion, the weekend news was bad for Euro. A clear message from ECB about combining currency rates with monetary policy, can “cool down” bulls' appetite for testing the level 1.40. The upcoming hours will be very important for the main currency pair. If we will fall below 1.38 (e.g. because of better than expected data from USA), achieving new records this week, might be difficult.

The weakening

News from over the eastern boarder are reducing the price of Polish currency from the morning and are causing EUR/PLN getting closer to the level of 4.19. Dollar – rouble pair is a very good indicator of geopolitical tense. It grows by approximately 1%, however we are still by approximately 3% away from the heights recorded in the first half of March. Only crossing these historical levels can cause a higher pressure on PLN (considering the current situation it is very unlikely).

Apart from the tension in Ukraine, the zloty should also pay attention to ECB communicates. The more dovish they are and the higher chance of introducing an additional monetary stimulation is, the higher probability of Polish currency's enforcement or at least remaining in the current levels of EUR/PLN.

In conclusion, if the tension behind our eastern boarder will decrease, we should return closer to the limit of 4.17 on EUR/PLN. On the other hand, in case of conflict's escalation (without Russia's military intervention), we can maintain closer to the level of 4.20. The base case scenario for CHF/PLN is similar.

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

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