Daily analysis 17.07.2014

New sanctions on Russia lower the sentiment on the market. Second day of Yellen's hearings brings nothing new. Evans remains dovish and Fisher hawkish. Data from USA were weaker than expected. Zloty loses on risk aversion's growth. Interest rates may remain stable until the end of 2016.

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

• 14.00 CET: Industrial production from Poland (Polish Press Agency survey: +3.4%; ISBnews +3.5%; and Ministry of Economy +4.0%).
• 14.30 CET: Real estates market in USA (survey: initiated investments: 1.026 million; building permits (1.038 million).
• 14.30 CET: Weekly applications for unemployment benefits in USA (survey: 310k).

Sanctions. Yellen. Evans and Fisher

Yesterday the American stock market once again rubbed against the historical records, however, imposing new sanctions on Russia lowered the sentiment on European opening. During the second day of her hearings in Congress, Yellen did not surprise the investors and did not allow herself to be provoked to make any comments concerning the moment of interest rates increasing. On the other hand, the production data from behind the ocean were weaker, but the monetary policy eclipsed this reading.

The United States decided to increase the sanctions on Russian Federation claiming that Kremlin is constantly supporting the separatists in eastern Ukraine. They will concern banks (including Gazprombank) and the companies from energy sector (Rosneft and Novatek). On the other hand, the European Union plans to suspend the activity of European Investment Bank in projects of Russia's public sector and also, as Bloomberg stated, it “will use its influences” to block new credits coming from European Bank for Reconstruction and Development. Unfriendly climate towards Moscow causes a relatively strong reduction of prices on the local stock market (barely 3%) and rouble's weakening. According to our suggestions from previous month, the Russian currency was quite stable within recent weeks, however, the past days brought its clearer weakening and we are coming to a level of 35.00 (increase by approximately 2%) on USD/RUB. However, we should not expect that this level will be noticeably broken and the return below 34.50 can take some time.

Second day of Yellen's hearings (this time in front of House of Representatives Financial Services Committee) was calm. The republicans tried to know the date of monetary policy's tightening initiation. However, this attempt was failed as FOMC chairwoman said that it will happen at some point in 2015 (but without specifying when). A subject of evaluating the assets on the market and changes in Federal Reserve appeared again. In general, however, on contrary to day one, yesterday's signals from Yellen were neutral for majority of assets' classes.

Yesterday we also had two statements from FOMC representatives. Richard Fisher, chief of Federal Reserve from Dallas, maintained his hawkish attitude claiming that the interest rates can be raised already in 2014 (generally with no bigger surprises). Jon Hilsenrath's interview with one of the largest doves in the Committee – Charles Evans, attracts much more attention. In his statement for “The Wall Street Journal” chief of Fed department in Chicago noticed the improvement on American labor market which really brings the moment of interest rates increase closer (hawkish signal, similar to the one given by Yellen on Tueasday). Further suggestions however, were very dovish. Evans claimed, among others, that during upcoming three years the probability of inflation's maintenance below 2% of goal is bigger than above this limit. He also said, that even if we will slightly cross this goal nothing bad will happen because for a longer time we were clearly below the level of two per cent. The representative of Chicago's Fed also sustained his view, that the best moment for monetary policy tightening will be the beginning of 2016.

Today the investors will pay attention to the data from the real estates sector from behind the ocean and weekly applications for unemployment benefits. Yesterday's readings of industrial production were worse than estimations, however, because of Yellen's speech they were barely noticed. However, if the afternoon data is disappointing again, we can expect a slight weakening on EUR/USD and reaching the level of 1.3550.

Weaker zloty. Production in the centre of attention

On Wednesday the national currency took advantage from the relatively good sentiment on the global market. However, introduction of new sanctions on Russia and clear rouble's sell-off connected with the descends on European floors cause that before noon we are testing the level of 4.14 on EUR/PLN.

Another short term threat can be the afternoon's data about the industrial production. The economists clearly review June's readings downwards and from initial +4.0% r/r predicted also by the Ministry of Economy, we have now only 3.5%. If we fall below the limit of 3.0% (and there is a relatively big chance for that), the zloty can quickly move towards 4.15. On the other hand, in case of the reading higher than 4.0%, we can expect maintenance of the rate in limits of current levels or even a slight strengthening.

In the morning Bloomberg published the statements of Andrzej Kazimierczak. MPC representative claims, that “relying on the projections, the cost of the credit should remain on a current level until 2016”. Kazimierczak consider the cutting, if currently observed slight slowdown of increase would maintain during the third quarter and would be visible in the GDP reading for this period. Thus the decision about cutting could occur not earlier than in the beginning of 2015. The statements are in general coherent with his earlier viewpoint, and also close to the general consensus of the Council.

In conclusion, the publications of industrial production will be crucial today. In case of a negative surprise we should quickly test 4.15 on EUR/PLN and 3.42 on CHF/PLN. On the other hand if the reading would be higher than 4.0%, zloty should maintain close to the current levels or slightly strengthen.

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

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