Daily analysis 17.10.2014

Bullard comments helped stocks and pushed down US currency. A series of talks in Milan concerning European Economy and situation in the east of continent. Later rate increase is also expected in the UK. The zloty stabilizes at lows levels and the risk for further slide slightly diminished. Industrial production in focus.

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

• 14.00 CET: Industrial production from Poland (survey: +2.7% y/y)
• 14.30 CET: US data from real estate market (new home sales: 1.01 million seasonally adjusted, annualized number, permits: 1.02 million
• 14.35 CET: Yellen statement
• 15.55 CET: Consumer sentiment index from University of Michigan and Reuters (survey: 84.4)

Bullard consequences. The UK. Talks

One of the major events on the market yesterday was James Bullard interview. The St. Louis Fed President said on Bloomberg TV that “inflation expectations are declining in the US. That's an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE”.

Moreover, he said that if the upcoming US data remain strong, then we will be able to finish the program in December. “But if the market is right and this is portending something more serious for the US economy, then the committee have an option of ramping up QE at that point”.

The statements were interesting concerning at least few reasons. Firstly, Bullard has been regarded recently as a supporter of earlier rather than later rate hike. He has said many times that the appropriate time for monetary tightening would be the latter part of Q1 (when the market was positioned at mid 2015).

Secondly, a strong signal was sent to investors (combined with hypothetical speculation from Williams on QE4) that the Federal Reserve is ready for action and may react pretty quickly in financial strains. Such a message may push back the doom-sayers on selling riskier assets who were damping stocks in moments of market distress between 2008 and 2014.

The other effect of Bullard comments may be a real movement of the interest rate hike moment. Even if the Federal Reserve finishes the QE operation at current meeting the FOMC should clearly recognize the changing environment in the statement (falling inflation expectations and the global growth).

Dovish comments from the US are negative for the dollar. During the European session the EUR/USD returned above 1.2800 level. The move may be continued especially that the dollar bulls may gradually decrease the long positions assuming that the recent events can significantly decrease the odds for further dollar appreciation.

Concerns over the economic prospects were also raised by the UK officials. Today the chief economist of the BoE Andrew Haldane said on ITV news that the recent data, lower wage growth and the commodities slide that pushed the expectations for first interest rate increase to mid 2015 may be “not a bad bet”.

As a result in recent days we have a clear revision regarding the future interest rate level in stronger economies (US, UK) while monetary setters in both Europe and Japan a reluctant to make any further decision. It pushed the euro and yen higher. Additionally, concerning the latter there is again a capital inflow to “safe haven”, but this effect seems to be really overestimated.

Today we have second day of Europe-Asian summit in Milan. The main topics which shaped the meetings between leaders was euro area ideas for growth and Ukrainian issues. The first case is a long discussion on Brussels budget rules. Germany traditionally wants to obey the balance budget idea while Italy and France are more keen to decrease the deficits (Paris is expected to fail again the 3% rule in 2015).

Concerning Ukraine, the main players in the conflict met in different configurations. As we suggested many time the situation is set to improve but very gradually and it is hard to expect a fast ground breaking solution. Another pretty important issues regarding the Russia/West tensions is Gazprom gas supply to Kiev (probably will be solved in a very near future) and partial pause of the trade/services sanctions on both sides. The latter will be much harder to resolve and no solution is expected an the EU meeting next week. It is possible that any decision on cross-border goods exchange may be proposed at earliest till the end of the year.

Summarizing, the dollar rally may be paused for a longer time and during the current correction may even push the EUR/USD toward 1.30. Additionally, the market will try to find negative signals from the US economy and significantly more react to worse than better data. The key to the dollar performance will be another statements form the Federal Reserve and the incoming FOMC meeting which ends on October 29th.

Stabilization

The zloty paused its short-term depreciation trend and currently most trades are made around 4.23 per the euro and 3.50 on the franc. Regarding the Swiss currency a 5-6 zloty cent move pushed the CHF/PLN rate to one-year highs. However, there is a significant probability that in a few weeks the situation should calm down and it probably returns below 3.50. Even if we see another wave of risk-off sentiment, the CHF/PLN should not significantly exceed the 3.50 level.

Today the Polish Press Agency published some Andrzej Kazimierczak statements. The hawkish MPC member is traditionally against the rate hikes mainly due to downside pressure on the zloty and lack of tools in case the situation worsens markedly. Currently, however, hawks do not have majority at the MPC to block decisions proposed by the dovish/neutral camp.

In following hours we are scheduled to receive the production data. Contrary to the previous month the auto production effect should not be that significant but still negative. The market consensus on production is around 2.5% y/y but only a half percentage point difference can generate any market reaction.

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

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