Daily analysis 15.05.2014

Weak GDP readings from the Euro area are pushing the common currency further to the south. Carney lowering expectations for earlier rate rise. A broader consensus has been forming regarding the June ECB decision. Slightly negative PLN sentiment after the inflation reading has been revised by solid GDP growth from Poland.

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

• Already published euro area GDP readings (+0.2% q/q vs 0.4% q/q expected).
• Already published GDP readings from Poland (+3.3% y/y vs +3.1 y/y expected.
• Already published inflation from the euro area (+0.7% y/y vs +0.7% y/y expected).
• 14.30 CET: CPI from the US (April expectations at +0.3% m/m; excluding food and energy +0.1%.
• 15.15 CET: industrial production form the US (April expectations: 0/0% m/m; capacity utilization: 79.2%.

GDP, BoE, ECB

We began the morning part of European session form GDP readings. First, the French numbers hit the wires. Paris failed to meet the expectations and in the Q1 the economy stagnated (estimates were at +0.2% q/q SA). The market situation improved marginally after Germany published its numbers (+0.8% q/q vs consensus at +0.7% q/q). At that moment the EUR/USD was still above 1.3700 level. Later, however, the readings were only first. Italy recorded a minus 0.1% q/q and Netherlands fell of the cliff with 1.4% q/q slide. Between economy publications some comments from ECB vice chairman Vitor Constancio appeared in headlines who didn't rule out more stimulus for the central bank (nothing new but combining grim data pushed the common currency down). At the Euro area GDP was only +0.2% q/q vs expectations at +0.4% q/q and we easily fell under 1.3700 on the EUR/USD.

The pound bulls were pretty disappointed after yesterday's session. They not only failed to generate another upside run, but also were not able to hold into the recent gains. Despite that the BoE inflation report was pretty good (expected growth still above 3% and lower employment than in the previous estimates) the Bank of England does not see any pressure on the price growth and Mark Carney stayed pretty dovish saying many times that it is just a beginning of the recovery and no pressure from inflation/employment/wages is seen. In result, the market didn't get the additional fuel from earlier rate rises and the GBP/USD fell under 1.3800 level. The “cable” valuation in the near future still should be closely related to the macro news and interest rates expectations.

The recent ECB members' statements and some analysis from major investments banks has begun to paint a picture of what the European Central Bank might do at June's meeting. There is a high probability that we will see both the reference and the deposit rate cut (the latter still has not been fully priced in). Due to some signals about Mario Draghi and his colleagues wanting “a package solution”, we should also expect some other liquidity plans for banks (kind of another LTRO) and more credit solutions for SME (especially helpful for the companies in the peripheries. On the other hand, despite some recent rumors, there is a low probability that we will see any kind of QE (either purchases of private or government debt) in the coming future. Mainly due to some possible reservations from ECB members and possible much lower efficacy (possible low impact for the real economy, limited depth of the ABS market).

Summarizing, the today's Euro Zone data is bringing the EBC closer to act at the incoming meeting and naturally weakening the European currency. It is possible that we may slide under 1.3650 level (but rather not falling below 1.3600). It is also worth to point out the US data (due afternoon), which may either speed up the dive (in case of positive surprises) or slightly limit the bearish appetite.

Inflation and the GDP

The MPC member Chojna-Duch comments suggesting (under many conditions) a possible rate cut didn't bring too much attention but much lower than expected inflation reading (+0.3% y/y vs +0.6% y/y) did push the EUR/PLN slightly higher and we tested 4.19 level. Low price growth undoubtedly should extend the period with unchanged monetary policy at Q2 or even until the second half of 2015. It will rather not push the MPC to cut the benchmark because such a move will be clearly pro-cyclical (governor Belka many times has claimed not to act that way).

After negative news for the PLN we get some relief from GDP reading. The data which hit the wires in late morning was pretty solid. The Polish economy grew 3.3% y/y not seasonally adjusted (vs expectations at 3.1%) and 1.1% q/q seasonally adjusted which was the best result since Q3 of 2011. The data was probably better than consensus due to high traded surplus which we indicated after the Statistical Office published the report a few days ago.

Summarizing, the positive surprise from the GDP growth “saved” the zloty from further depreciation and there is still a base case scenario to remain around 4.18 on the EUR/PLN and under 3.43 on the Swiss franc. There is, however, a high probability that we may move north on the USD/PLN with the target at 3.10.

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

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