Daily analysis 18.02.2014

Yen weakens after the BOJ decision. Economists are divided before the March ECB meeting. BOP from the Euro Zone and the ZEW index from Germany are in focus today. Polish budget balance after the first month of 2014. The zloty is slightly weaker at the beginning of the trading day.

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

• Already published data on Euro Zone balance of payments.
• 11.00 CET: ZEW index from Germany (survey: 61.5 points).

Japan, ECB, BOP and ZEW

Much worse-than-expected reading from the Japanese economy was quickly recognized by the central bank. The BOJ extended a special low-interest rate lending program and decided to double its amount. In theory, cheap loans are supposed to stimulate the economy, but the effect can be marginal and probably fairly short-term. However, we can see quite fast a reaction on the currencies. The USD/JPY jumped 50 pips just after the decision was announced. Some investors probably feared that if the economy does not improve, the BOJ can use much stronger bazooka and increase the asset purchase program which will push the yen much lower.

Despite that there are more than two weeks to the ECB next meeting, it is worth to mention a Bloomberg survey on possible central bank decision. A half of participants (19 out of 38) answered that Mario Draghi and his colleagues will not change the monetary policy in March. The rest claims that it is possible that the ECB can lower the benchmark or stop the sterilization of the SMP program. Other options are less likely to occur. The market speculates that the Committee can offer another LTRO program, implement negative deposit interest rate, reduce the reserve requirements or start a bond buying operation. Any mentioned option will depreciate the common currency significantly. Investors expect that the final decision will be made on inflation report (published February 28th and new economy estimates prepared by the ECB staff (available to the public at the moment of Draghi's conference). We can also get some insights from preliminary PMI numbers which are scheduled to be published on Thursday.

According to the data published on the ECB website, the 2013 seasonally adjusted current account surplus was 221 billion euro (2.3% GDP). All components of the C/A look pretty healthy and show that the Euro Area economies are getting more competitive. The BOP has been recently pretty close scrutinized and the market participants are sensitive to any large changes in the C/A (as in Turkey where 8% deficit pushed the currency significantly lower).

Summarizing, the EUR/USD should be depended on the European data today. The BOP was pretty strong and the similar reading may be recorded on the ZEW index. If we get no other data, the most traded currency pair should strengthen its position around 1.37 level.

Solid budget, but the zloty weakens

Yesterday the Finance Ministry published a preliminary budget data after January 2014. The report is not only much better than in 2013, but also stronger than in 2012. Firstly, the income from excise duty and VAT rose significantly, what can be a good indicator of the economy rebounding. Secondly, the deficit was at 2.6 billion which is less than 1/3 of 2013 January shortfall and stands at similar level as in relative good 2011. The data has, however, limited impact on the currency and we need several months of improvements after any rating agency even considers a perspective upgrade.

Since the start of the day we are experiencing a limited zloty depreciation. It is caused by both profit taking and uncertainty before Hungarian (is expected to cut the benchmark by 0.1 percentage point) and Turkish central bank meetings. There is, however, a slim probability that we can move above 4.16 on EUR/PLN. The base case scenario is a trading within a small range around 4.15.

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

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