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Daily analysis 17.09.2014

17 Sept 2014 12:45|Marcin Lipka

Some turmoil with erasing “considerable time” from the Federal Reserve statement. Monetary loosing in China improved sentiment globally. Another opinion polls before Scottish voting confirming a slight “no” lead. The zloty takes advantage from “risk on” trade and strengthened around 0.25%.

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

  • 14.30 CET: Industrial production from Poland (economist surveyed by PAP +0.5% y/y; ISBnews minus 0.2% y/y; Ministry of Economy +2.6% y/y, estimates made just after the last reading.
  • 20.00 CET: Interest rate decision in the US. Statement and new economic projections are scheduled to be released.
  • 20.30 CET: Fed's chairwoman conference after the FOMC meeting.

The Federal Reserve. China. Scotland

We could have seen yesterday in the early afternoon exactly how specific “creature” is the currency market. Since many months “The Wall Street Journal” runs an online video interview with Jon Hilsenrath. A famous “WSJ” reporter, sometimes called “Fed's spokesman” is often cited in or analysis.

On Tuesday his remarks brought really wide attention. Hilsenrath claimed that the Federal Reserve would not erase “considerable time” phrase from its statement which describe the time between last month of taper and the first rate hike. The message was both different from the consensus and slightly contradictory to his earlier comments where he suggested that Yellen is looking for consensus in the FOMC rather than force her (dovish) view.

The consensus could be “considerable time” drop from the statement and putting more emphasis that the future decisions would be rather data than time dependent (this also both fits doves and hawks). The resignation from controversial phrase is also supported by July's pretty hawkish minutes and Yellen's Jackson Hole speech.

What is even more interesting the Hisenrath opinion was around all business oriented media (Bloomberg, Financial Times, Reuters) and even pushed the dollar slightly lower. A change in investment decisions based on “WSJ” reporter analysis by large market players is quite surprising.

Some even rumored that there was a leak from the Fed and it caused the contrarian view to spread around. It was probably the main reason why Hilsenrath wrote a separate article where he explained his reasoning and ended it with a sentence “Will the fed take these steps? Only the people in the room know that. The rest of us will see Wednesday afternoon”.

Unexpected turmoil on the market was also caused by Chinese Central Bank (PBOC) liquidity injection worth around $80 billion. Analysts from Goldman Sachs, Bank of America and Barclays cited by Bloomberg claim that it can be compared with 50 bps reserve requirements cut.

Investors for many months rumored that if China starts to fell short of expectations monetary or fiscal (or both) expansion would be introduced. A quick reaction after disappointing production data released last weekend assured investors that even if the slowdown is more persistent more stimulus is on the way.

A day before Scottish referendum we have to mention the new opinion polls. This time, however, there are no surprises. All surveys (ICM, Survation, Opinium) showed that unionists lead the independence camp by 4 percentage points. A slight lead of “no” voters is in line with market view so the data didn't spur any market reaction.

Hilsenrath remarks and Chinese monetary easing allowed the EUR/USD to rebound above 1.2950. The bullish lead on the EUR/USD will be rather hard to sustain event taking into the account that the “Fed's spokesman” is close to the truth. However, if the Fed really keeps the “considerable time” a short-term rebound significantly exceeding 1.3000 level might occur. It is also worth noting that the Federal Reserve will publish a new macroeconomic projections and half hour later Q&A session with Yellen begins. On the other hand if the “considerable time” is scrapped the market should be really disappointed and a fall toward 1.28XX is within bearish distance.

The zloty takes advantage

The Polish zloty gained around one-zloty cent to most foreign counterparts. It was caused by three reasons. Firstly, the monetary stimulation from China increased the risk appetite and pushed sentiment higher on sentiment sensible assets. Secondly, the Hilsenrath remarks pressured the dollar and gave hope that the Fed may be more dovish. Thirdly, we had also voting in the Ukrainian parliament where Minsk resolution was agreed.

Leaving the fact that Kiev authorities agreement to give Donbas much more sovereignty, allow running early election and introduce the amnesty to separatists undermine the effectiveness of Ukrainian policy it is a positive signal for assets in our region which has been under pressure for months due to the conflict in the East.

Today it is worth taking a look at industrial production data. It will not have a direct impact on the market (due to the Fed) but the expectations on the reading are really wide. According to the Ministry of Economy the production should increase by 2.6% y/y while the PAP consensus shows only +0.5 y/y growth and the ISBnews survey predicts negative 0.2% reading. Investors know that the reading may be deviated by the car production but it can be a good argument for the MPC to consider not only 25bps cut but also think about a steeper easing.

Summarizing, the zloty will be mainly affected by Fed's decisions today. If the “considerable time” really remains in the statement we should see the PLN appreciation toward 4.18 per the euro and even 3.20 on the dollar. However, in the scenario of more hawkish Fed we should return to 4.20 per the European currency and even around 3.25 on the greenback.

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

Range EUR/USD 1.2950-1.3050 1.2850-1.2950 1.3050-1.3150
Range EUR/PLN 4.1800-4.2200 4.1800-4.2200 4.1800-4.2200
Range USD/PLN 3.2200-3.2600 3.2400-3.2800 3.2000-3.2400
Range CHF/PLN 3.4400-3.4800 3.4400-3.4800 3.4400-3.4800

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

Range GBP/USD 1.6050-1.6150 1.5950-1.6050 1.6150-1.6250
Range GBP/PLN 5.1900-5.2300 5.1700-5.2100 5.2100-5.2500

17 Sept 2014 12:45|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:

16 Sept 2014 17:06

Afternoon analysis 16.09.2014

16 Sept 2014 12:28

Daily analysis 16.09.2014

15 Sept 2014 17:34

Afternoon analysis 15.09.2014

15 Sept 2014 12:33

Daily analysis 15.09.2014

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