Daily analysis 15.09.2014

Weaker data from China cooled sentiment at the beginning of the European session. The Fed will be probably more hawkish at Wednesday's meeting. No clear hints from opinion polls regarding Scottish voting. The rouble is losing value. Polish currency close to 4.20 per the euro before the inflation data.

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

• 14.00 CET: Consumer inflation (CPI) from Poland. ISB news survey (minus 0.3% y/y.
• 15.15 CET: Industrial production from the US (survey +0.3 m/m).

Data. The Fed. Scotland. The rouble

Due to grim data from China we started the week from some sell off on risk related assets. Beijing announced that industrial production dropped to 6.9% y/y while economists asked by Bloomberg expected almost 2 percentage points higher reading. Moreover, that data was the lowest since the global financial meltdown. The retail sales was much closer to expectations but it failed to change the perception that China may be heading toward some slowdown in the Q4. A direct casualty of the Beijing publication was Australian dollar which dropped below 90 US cents first time in 6 months. The “Aussie” is also affected by a perspective of sooner-than-expected rate rise in the US.

Not only the Australian currency is predicting more hawkish results from the incoming Federal Reserve meeting. We also experienced a steep sell off on bonds (yields rises) around the world. US 10-year treasuries rose to 2.60% while at the beginning of September we were testing 2.30%.

This time investors may be well positioning before Wednesday's Federal Reserve meeting. The recent macro data (except payrolls) clearly supporting a view that the US economy is expanding faster than the FOMC expected and both full employment and inflation goals are close to be fulfilled. Some “softer” signals also suggest that the Fed, after years of dovish policy, is preparing markets for a first rate hike.

One of the “preparedness” element may be today's Jon Hilsenrath article in “The Wall Street Journal”. Often called the “Fed's spokesman” the WSJ journalist claims that Janet Yellen “has been gauging colleagues' views and seeking common ground among them rather than strong-arming them to agree with her, according to interviews with nearly 20 officials who have worked closely with her”. The “WSJ” also analysis Fed's chairwoman calendar and found out that for the first six months she “spent more than 55 hours on phone calls and private meetings with the Fed governors and the 12 regional-bank presidents.

Changes in the monetary policy were also suggested in July's minutes where it was clearly noted that interest rate hikes may be started sooner-than-expected if the data continue to surprise positively. Due to a pretty hawkish statement Richard Fisher (widely viewed as a hawk) signed the document while he had planned to dissent.

As a result we should assume that “considerable time” phrase (indicated that we will have to wait between 6 and 12 months after the QE ends to see the interest rate hikes) will be scrapped and the Fed would probably put much more emphasis on data dependency decision process.

Besides expected changes in the statement on Wednesday we will also receive new FOMC projections including first estimates for interest rate levels in 2017 (here we may get a dovish surprise when the Fed reduces its long-term federal fund target rate to 3.5%). This message, however will not change the overall hawkish outcome and it should push the EUR/USD below 1.2900 level (it may even get there earlier when the market realizes that the hawkish view may be presented by the Committee).

Markets are still closely following the news from Scotland. During last weekend several opinion polls were published but the overview hasn't changed much – still the “no” voters are slightly ahead of independence supporters. An interest opinion about separation was published by Deutsche Bank. The DB claims (according to Reuters) that “a vote for independence would be a mistake akin to Winston Churchill's decision to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the U.S. banks, decisions that helped bring on the Great Depression”. On one hand, such reports may scare Scots to vote “yes” and therefore pushing back the idea of independence, but on the other hand if the separation takes place the move on the pound can be really severe (many economists see the drop toward 1.50-1.55 on the GBP/USD).

In recent hours the situation on rouble deteriorated pretty quickly. The Russian currency is not only under pressure from new EU and US sanctions but also from grim central bank outlook (CRB). The CRB after the Friday's meeting emphasized low industrial production activity, weak business sentiment and problems regarding both short and longer term financing. According to the central bank the economy will contract in Q3 by 0.2% on y/y basis while it may end 2014 with only 0.4% gain. The CRB statement combined with some violations of ceasefire in the East are pushing the USD/RUB toward 38 level. Partly some contribution to the soaring USD/RUB comes from dollar strength (taking into account the dollar and euro basket to the rouble is still around 2% above the lows) but the short-term situation on the Russian currency is pretty grim (another significant issue is Russian sovereign rating which is at the lowest possible investment grade).

Summarizing, the dollar should continue its appreciation move both to the yen and the euro. The pound should be still highly depended on opinion polls and final independence decision. Despite the fact that the FOMC outcome is the main event this week we may slide below 1.2900 before the actual statement hits the wires (only on expectations).

Still fairly calm on the zloty

The EUR/PLN has been fairly stable despite weak data from China, rumors on sooner-than-expected rate hikes by the Fed and issues with ceasefire in Ukraine. As a result most transactions are processed around 4.20 per the euro.

Investors will be waiting for inflation data from Poland. Economist surveyed by ISBnews predict the CPI to be minus 0.3% y/y. However, it is worth paying attention whether the drop will be only a result from lower food & gasoline prices. If we see other sectors also with negative inflation (like recently, clothing), we may expect further pressure on the MPC to cut the rates and push the zloty slightly lower.

Summarizing, the base case scenario for the zloty is a range trade around 4.20 level per the euro. A slightly higher volatility may be observed during the data publications but it should not exceed a quarter of one percent in either way.

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

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