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Daily analysis 16.10.2015

16 Oct 2015 13:32|Marcin Lipka

Some more arguments for the dollar strength. An unclear message from Nowotny? Another set of data from the US. The zloty remains stable to the euro, but the franc is flirting with the 3.90 level.

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

  • 15.15: Industrial production from the US (survey: minus 0.2% for September)
  • 16.00: University of Michigan consumer confidence index
  • Monday 04.00: GDP from China (survey: +6.8% y/y)
  • Monday 04.00: Industrial production from China (survey: +6.0% y/y)
  • Monday 04.00: Retail sales from China (survey: 10.8% y/y)

Data and Dudley support monetary tightening

The market is still quite nervous regarding the US data. It is due to an intense discussion about whether it is appropriate to hike interest rates this year. Yesterday's macroeconomic publications and William Dudley’s message support the consensus to start the tightening.

Weekly jobless claims dropped to 255k, while its four moving average slid to 265k, which was the lowest level since December of 1973. Also, the number of people collecting unemployment benefits dropped to multi-year lows – 2.16 million. Currently, this leading job market indicator doesn't show any significant problems regarding the employment. Moreover, the core inflation from the States was higher than expected by 0.1 percentage points and rose to 1.9% y/y.

Some more confusion was caused by yesterday's comments from William Dudley. The New York Fed chief began by listing the negative publications from the US, which might have suggested that the Federal Reserve member is leaning towards keeping the interest rates unchanged for the rest of 2015.

However, after the discussion with John Taylor at Brookings Institution during the Q&A part Dudley clearly suggested that in his opinion the economy is still expanding slightly above trend and consumption, housing and investments are increasing. He also suggested to not draw too strong a conclusion from the most recent data because not all readings have to be precise. Also, regarding the issue about whether it is more harmful for the economy to raise interest rates prematurely or too late, he claims that both mistakes are bad. The dovish part of the Committee sees more risk regarding the latter.

As a result, we conclude that yesterday's dollar appreciation was justified. Today, there is another set of data in the calendar – industrial production, and consumer confidence. The latter figure looks currently more important as the Fed focuses on consumption. There is a high chance that the survey may beat expectations as markets rebounded in October and threats from China lessened.

The franc and Nowotny

Recently, we have focused on some overly nervous market reactions. This might be the case regarding the most recent statement from Ewald Nowotny in Warsaw. During the conference organized by the NBP the ECB member might have suggested that he could push for more QE.

In our opinion, however, it was a bad interpretation from the news agencies. Nowotny clearly mentioned the failure to fulfil the ECB inflation target both by the headline and core inflation. But monetary measures were not a part of the discussion and the phrase used by news agencies about “additional instruments” was explained in the next sentence where he listed structural measures and competitiveness improvements. The whole presentation was actually about this subject.

Mixed interpretation is of late quite common as investors expect that the ECB to set some further monetary loosening. It is probably true but, on the other hand most ECB officials claim that it is still too early to announce such a decision and more data is needed. Nowotny, three weeks ago, during an interview with Bloomberg supported the “wait and see” approach. The same message was sent by Mario Draghi during his speech at the European Parliament.

Yesterday's message from Nowotny was extensively commented on and pushed the EUR/CHF to the test at a 1.0800 level. The EUR/CHF pair is sensitive to more QE from the eurozone. However, if the next week ECB conference won't bring any changes in the monetary policy the euro-franc pair should return towards 1.0900, which should also diminish the odds from moving the CHF/PLN above 3.90.

The foreign market in a few sentences

Today there is a set of data from the US. The most important should be consumer confidence. The services sector is at the centre of Fed's focus and it would be the main factor to whether the Fed decides to hike the benchmark or not. On Monday morning there is also Chinese growth publication for Q3. Taking into account, the most recent record high trade surplus the GDP may exceed +6.8% expected by economists. If the market receives both better data from the US and China it may push the EUR/USD below 1.1300.

Stable but with risk of weakening

Theoretically the zloty is fairly stable in the recent days. However, taking into account that the Hungarian currency strengthened to the PLN by around 1% this week on better global market sentiment the zloty seems to be undervalued. It may be an effect of the incoming election as some more risk averse investors have been reducing positions on the zloty's assets.

This effect is seen on the CHF/PLN. Theoretically speculations on more QE from the ECB should be positive both for the franc for the zloty. However, taking into account the domestic political risks the EUR/PLN is stable but CHF/PLN is pushed higher. The next week and a few days after the election may look similar. If none of the major parties is able to form a stable government the EUR/PLN can even test 4.30.

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

Range EUR/USD 1.1350-1.1450 1.1450-1.1550 1.1250-1.1350
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.6900-3.7300 3.6600-3.7000 3.7300-3.7700
Range CHF/PLN 3.8800-3.9200 3.8800-3.9200 3.8800-3.9200

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5350-1.5450 1.5250-1.5350 1.5450-1.5550
Range GBP/PLN 5.7200-5.7600 5.7000-5.7400 5.7400-5.7800

16 Oct 2015 13:32|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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