Daily analysis 17.02.2014

Weaker-than-estimated reports from the US are increasing the odds for a taper pause. Japanese GDP below estimates. Coeure again on the ECB policy. Polish MPC members claims that the 2014 growth can exceed 3.5%.

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

• No data which can affect the analyzed pairs .
• No session in the US. The Presidents' day.

The US, Japan and the Euro Zone

We are beginning the European morning around 1.3700 on the EUR/USD. Positive sentiment on the most heavily traded currency pair is mainly due to weaker-than-expected data across the ocean. On Friday afternoon it turned out that the US industrial production dropped by 0.3% m/m, whereas the estimates were at +0.3% and the consensus range was between 0.0% m/m and +0.6%. The production joined a group of disappointing eco reports this month – retail sales and the payrolls. The latest “figures” can be clearly used as an argument for the Federal Reserve to pause the tapering. However, if we look at the Fed's calendar, assume that any pause will take two meetings and evaluate the current pace of asset purchase reduction, we can conclude that the additional easing can be estimated at $150 billion USD. If it happens, then firstly, the following months will enjoy larger easing than currently anticipated and secondly the QE will last at least until the end of the year. What is the probability for a such resolution? It is for sure less than 50% now. As most economists indicate, the data is disturbed mostly by the severe weather conditions across the States. Additionally, they (Paul Dales from Capital Economics, Maury Harris from the UBS and Jim O'Sullivan from High Frequency Economics) also point out in “The Wall Street Journal” findings, that the data for February also can be weak due to cold winter. If FOMC sees the softer data only due to weather related issuesm then it will not pause the taper. This message, however, will be available on March 19th. Until the next Federal Reserve meeting the “threat” for longer QE can still weigh on the EUR/USD.

During the Asian session, we received the GDP data from Japan. The figure was much below the market consensus. The economy expanded only by 1.0 q/q on annualized base, whereas the estimates were around 2.8% (Bloomberg survey). Contrary to the Abenomics hopes, both the investments and consumption fell short of expectations. Moreover, despite the weaker yen, the trade gap winded whereas it was supposed to shrink. Worse than expected reports increase the odds that the central bank can add more stimulus to the economy. If such scenario is more broadly discussed then we can expect additional downside pressure on the yen.

During last weekend, yet another interview with the ECB board member Benoit Coeure was published. This time the central bank member made some comments on the Slovenian economy. In the meantime, he was also asked about the Euro Zone inflation. He claims that “we are very vigilant regarding risks to our baseline scenario, which envisages inflation slowly going back to 2% over the medium term. This is our primary mandate and we take it very seriously”. The comments were not as radical as previously, but they still can suggest that the ECB are pretty close to loose the monetary policy when the future forecasts show inflation reluctance to back to the target.

Summarizing, in the following hours investors should be pretty calm on the EUR/USD and most trades will be probably made around 1.3700 level. The consolidation scenario will be also supported by a bank holiday in the US. In the medium term the US data will be key for the dollar valuation (especially regarding the probability of possible pause in the asset purchase program).

The MPC members' estimates

Friday's GDP report from Poland brought a series of MPC members comments on the future growth. Starting with professor Zielińska-Głębocka and her interview with TVN BiS (quotes from PAP), she said that “the 2014 growth can be above 3.5%”. On the other hand Jan Winiecki told TVN BiS (quotes from PAP) said that “it will be above 3.0%. How much above it is not certain, but closer to 3.0 than to 4.0. The most bullish on the 2014 GDP expansion was professor Elzbieta Chojna-Duch who told TVN BiS (quotes also from PAP) that we can “even think about a reading above 3.5 and closer to that magical 4.0% growth which can have a positive effect on employment. I think it will be 3.5% plus”. None of the MPC member referred to the current monetary policy so we still have to wait for the March meeting and the new central bank estimates for growth and inflation.

The fundamental situation in Poland still supports the scenario for further zloty appreciation. To speed up that trend, however, we need a clear sign for future monetary tightening. The recent figures for inflation does not show any acceleration in the price speed appreciation. Today the EUR/PLN should be close to the 4.15 mark and the volatility will be very limited (no macro data, no session in the US).

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

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