Daily analysis 17.04.2014

Mixed data form the US economy didn't impact the dollar. Similar situation was experienced during Yellen's statement which can be regarded as neutral. The Polish zloty in line with other EM markets lost some ground yesterday, but 4.20 level should stop the EUR/PLN rise.

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

• 14.00 CET: industrial production from Poland (ISB news survey +6.5% y/y).

The data and Yellen

On Wednesday volatility, similarly to the previous day, was pretty low. The EUR/USD was mainly traded between 1.3810 and 1.3840 level. The lack of trend was mainly caused by mixed economic data and fairly neutral statement for the FOMC chairwoman Janet Yellen.

Firstly, we received the housing data from the US which were below the expectations. Both the “starts” and “permits” were below economists estimates (946k vs consensus 965k and 990k vs 1.01 million respectively). A slightly negative impact was quickly revised by strong industrial production. It rose 0.7% in March, whereas economists expected a reading closer to 0.4%. It is also worth to point out that the capacity utilization rose to almost 6-year high (79.2%). Such level can push companies to invest more into fixed asset what should give economy some additional boost.

Shortly after the macro data hit the wires, the market started to analyze Janet Yellen speech. The FOMC chairwoman detailed which elements she and her colleagues regard as pretty crucial concerning future monetary policy (three big questions: is there still significant slack in the labor market? Is inflation moving back toward 2 percent? What factors may push the recovery off track?). Investors, however, wanted to get a clear message about when does she expect the interest rates to rise. Some news agencies reported that it may take even two years from now to start tightening the monetary policy, quoting her remarks on period needed for employment to return to the “long-run normal unemployment rate”. However, the interest rates do not have to stay at zero until there is a full employment. Moreover, they will be probably much higher at that time so such reports are not relevant. During the Q&A part Yellen also was skeptical to an idea (also forced by some dovish FOMC members) of briefly pushing the inflation above the target. It could be regarded as a hawkish stance and another signal that after Yellen become the chairwoman she shifted from the doves camp to more neutral members. Overall, the speech was pretty neutral and didn't have a significant impact on the markets.

Summarizing, the market didn't get a clear signal from the chairwoman. Today, however, we can see an attempt to push the EUR/USD higher, above 1.3850. We can not rule out that many investors are still not believing that ECB may use unconventional policy to speed up inflation and push the Euro down. At the same time there can be a consensus that Yellen's “six months” is not valid anymore and the FOMC will stay on its previous course to hike the rates in mid 2015. If that was a case, it is still possible to test 1.40 till the end of the month.

The zloty is slightly weaker

We had an interesting data yesterday form Polish economy. The average income rose by 4.8% in March. It can both show that the economy may be shifted on a faster truck and the monetary policy can be tightened sooner than expected (with rising wages the inflation can pick up pretty soon). However, to fulfill that scenario we have to wait at least a couple of months to get a confirmation in the wages' trend.

The zloty didn't get too much from this data and actually it was under pressure from other emerging economies. There is still some nervousness regarding the Ukrainian issues. We can have also some more volatility during the Geneva meeting where all sides of the conflict will try to come closer to a solution.

Summarizing, even taking into the account the mentioned issues, we still expect that the EUR/PLN will remain below 4.20 till the end of the week.

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

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