Daily analysis 16.06.2014

The EUR/USD has been traded around 1.35 level. Fed will be rather more hawkish than dovish during the upcoming meeting. South African rating cut. The zloty's perspective after “Wprost” weekly magazine tape publication with central bank governor Marek Belka.

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

• 15.00 CET: Tusk's press conference on “Wprost” recordings.
• 15.15 CET: Industrial production from the US (survey: +0.5% m/m; capacity utilization: 78.9% .

Close to 1.35. Federal Reserve. Rating cut

The EUR/USD is staying around 1.3500 level. If there is no “front running” action before the Fed's meeting, we should remain near the current range till the Wednesday's evening. There should be also no impact from the incoming data (US industrial production today and German ZEW tomorrow). Investors would rather wait for the FOMC statement and economic projections than enter large positions before.

The market seems to pay attention to the current Euro-dollar levels. Bloomberg made some effort and prepared a short analysis as for why the 1.35 range may be quite vital. As Shahab Jalinoos, currency strategist at UBS, claims that: “the lows for the year roughly speaking come in just below 1.35. A break of that low would be meaningful because we're making new lows for the year”. The same level is pointed out by Marc Chandler, the chief currency strategist at Brown Brothers Harriman & Co., claiming that “$1.35 is the obvious level, that's the low we saw in the immediate reaction to the ECB. It'd be serious if we fell through there”. On the other hand, ING analysts put the weight more to the technical aspects saying 1.35 level is 61.8% Fibonacci retracement level from the move stared in July last year. If we fell below that level, we should expect more downside pressure but, on the other hand, if the EUR/USD rebounds, the common currency may return above 1.40.

The incoming Fed's meeting should give answer to some questions. Firstly, the one of how the FOMC sees future GDP growth, inflation level and the interest rate perspectives. Probably, due to weak first quarter, the estimates for the whole year will be revised downwards. The other elements of the projections, however, should be dollar bullish. The unemployment did drop faster than expected and the inflation seems to be getting faster to the target than previously estimated. In result it is possible that the “dot chart” with interest rate projections should point out again an earlier rate hike. That would be bearish signal for the EUR/USD even if Janet Yellen sounds fairly neutral.

On Friday we reported some rumors that South Africa's rating would be downgraded. The information was not far from truth and Standard & Poor's cut Pretoria's creditworthiness to BBB minus, just one notch above the junk level. The Agency claims that “The fiscal stance over the next few years may become exposed to lower-than-expected economic growth, pressures from a new round of public-sector wage negotiations, and increased public spending”. In consequence, the rand weakened around 0.7%, but due to some strength on Friday, we still need around 2.5% weakness to meet the Barclays target set at 11.00 level.

Summarizing, the EUR/USD probably will stay close to the recent levels and more volatility should be expected during FOMC decision announcement. If the Fed's decision turns to be solid for the dollar, we may expect the test of the recent lows at 1.3480.

“Wprost” tapes

Polish weekly magazine “Wpost” published recordings of some key government officials and central bank governor Marek Belka during the weekend. Due to the publication, the zloty lost around 0.75% both to the Euro and to the Swiss franc.

We can not rule out that the weakness will be longer than some might have expected. Investors have probably not priced in the possible resignation of Marek Belka. As Bloomberg reports, quoting “Gazeta Wyborcza”, the NBP governor Marek Belka “will ask for the presidents' assessment of the situation before deciding whether he should resign or not” (sources of the information were not revealed). It is also hard to imagine how the MPC will be able to proceed after some comments heard on the tape.

There will be even more turbulence if the issues forces the government to resign. It will result in new election. Currently, it is not the base case scenario but the “Wprost” magazine has other tapes and if more members of the cabinet are found in the “uncomfortable situation”, the scenario would not be ruled out. A hypothetical victory of the opposition or more trouble to formulate the government would extend the period which pushes the zloty far from fundamental valuation for longer.

In the medium term, if the situation improves, the zloty should come back to the previous level. The process can be, however, much longer if the turmoil in the government or in the central bank is persistent. It can make much longer to meet our longer term goal at 4.00 per EUR/PLN.

Summarizing, if the governor Belka resigns, we may see another 0.02/0.03 PLN weakness on the zloty. In the scenario of government dismissal, it would be possible to reach 4.20 for the Euro and 3.10 per the dollar. In the short term, the key will be Prime Minister conference which is scheduled at 15.00 CET.

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

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