Daily analysis 17.06.2014

The EUR/USD is slightly higher after Bloomberg report on further ECB action. “WSJ” survey shows only a slight acceleration of interest rate hike projections. The pound has been close to the multi-year highs but is slightly lower after the inflation data. Subdued reaction on Polish zloty after the “Wprost” tapes.

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

• 14.30 CET: Inflation in the US (survey: +0.2% m/m excluding food and energy +0.2% m/m).
• 14.30 CET: Housing markets in the US (housing starts: 1.036 million seasonally adjusted annualized data; permits: 1.063 million.

Higher. Survey. The pound

The rise of the EUR/USD in the early afternoon was directly caused by the Bloomberg publication. The Agency citing its sources in the European Central Bank claims that the ECB will not make any further steps to loosen the monetary policy. It was, however, hard to imagine that Draghi would conduct more easing after implementing three major measures (negative interest rates, SMP sterilization pause and TLTRO) but a lower probability that the ABS or sovereign bonds purchases are imminent allowed around 30-40 pips rise on the most heavily traded currency pair. The rise does cross out the opportunity for the dollar to get stronger after the FOMC statement is released on the Wednesday's afternoon.

Further “greenback” appreciation is still a fairly possible scenario for the Wednesday's evening. Yesterday I pointed out that the Fed's two-day meeting may result in another “dot-chart” acceleration of the rate increase. However, a survey published by “The Wall Street Journal” does not paint such a hawkish picture. The paper asked several economists on their predictions regarding the further steps of the FOMC. The result showed that comparing to the survey there are no major changes. According to the survey at the end of 2015 the interest rates will be at 1.0% (vs March expectations 1.0%) and at the end of 2016 the benchmark should be at 2.5% (vs 2.25% in March). If the “WSJ” survey turns out to be true, we would probably see no dollar appreciation. But if we get some kind of surprise (like last time) and the dot-chart increase the probability of an earlier and steeper rate rise, the dollar should significantly benefit.

On Monday we briefly rose above 1.70 on the GBP/USD ( the highest levels for 5 years). The market has still been evaluating the recent Mark Carney statement on earlier than expected rate rise. That scenario was slightly deviated by lower-than-estimated CPI reading (1.7% ; Bloomberg median projection was at 1.9%). A slow price appreciation may give some more flexibility to the BoE and cause that we actually don't any policy tightening this year.

Summarizing, the EUR/USD tried to generate a slight correction. It can be extended until tomorrow's evening when we get the FOMC meeting results. Taking into the account recently obtained data, there is sill higher probability that we should end the week lower than higher on the most heavily traded currency pair.

No major impact form the “Wprost” tapes

A lower probability of the NBP governor dismissal allowed around a quarter of one percent correction of the recent EUR/PLN rise. Moreover, investors on the Polish bonds seemed to used the opportunity of the recent yield spike and opened some long positions which pushed 10-year benchmark from 3.67% to 3.55% (what is roughly the level traded on Friday before the tapes were released).

Professional investors seemed to believe that, at least from Belkaąs side, there were no remarks which could confirm allegation of central bank wrongdoing or connections with the political parties.

It does not mean that the “Wprost" tapes have no impact on the market and it is ignored (as Belka claimed on TVN 24 during “Kropka nad i” political show. In the recent days there have been at least 10 full-scale publications on “The Wall Street Journal”, Reuters, Bloomberg and “Financial Times” (yesterday). All of these articles was really fairly written and tried to give zoom in all the issues which were discussed in the leaked tapes. They also cited may investment banks' strategists who mostly claimed that it is a pretty significant blow to the central bank/government image, but due to fairly robust economy they would not change their view on their investments.

If we look on the short-term risks and some pessimistic scenarios, the Belka dismissal would bring around 0.02/0.03 PLN rise on the EUR/PLN pair. A more significant reaction would be expected if there is a government resignation, early election or much less liberal prime minister. If such hypothesis is fulfilled, we may expect the Euro-zloty rise above 4.20 and CHF/PLN around 3.45.

There is also an unexpected result of the “Wprost” magazine publication. According to Krzysztof Izdebski, a fixed-income money manager at mutual fund Union Investment TFI (cited by Bloomberg) “Potential rate cuts are now less probable, as they may be interpreted as giving a helping hand to the government”. It is quite unexpected result from the “tapes” which may give some support to the zloty.

Summarizing, if there is no Belka dismissal, and the MPC will be working in the same composition, the pressure from the “tapes” should gradually diminish. Moreover, if another recordings mentioned by “Wprost” will have a lower impact the PLN should return to its usual trading pattern. Otherwise, if we see the governor changer + government shift it should push the EUR/PLN toward 4.20 and CHF/PLN above 3.45.

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

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