Daily analysis 18.03.2014

The EUR/USD has been pretty resilient to any negative news. Chinese currency weakened again today, but the downside potential is limited. What are the main issues regarding the Fed's statement? Hausner on monetary policy. The zloty is slightly weaker, in line with the rouble, lira and forint.

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

• Already published ZEW from Germany (survey at 52 points; acutal data 46.6).
• 13.30 CET: CPI inflation from the US (survey +0.1%; range between 0.0% to 0.4%).
• 13.30 CET: US housing data (survey: permits at 960k; housing starts at 910k).

Resilience. Yuan. FOMC

On Monday we had a good indication that the EUR/USD ignores any data which can limit the upside trend. In the Euro Zone we had a second inflation reading. It turned out that prices rose less than in the preliminary data (0.7% vs 0.8%). It should bring a downside pressure on the common currency, but the reaction was hard to notice. Moreover, in the early afternoon we received eco reports from the US. Industrial production rose much more than estimated (+0.6% vs 0.3% surveyed) and the capacity utilization turned out to be at 78.8% (the second highest in 5 years), but the reaction on most heavily traded currency pair was also muted. So what can cause the downside pressure on the EUR/USD? Investors sill regard central bank actions as pretty important. The ECB already had the meeting in March but Mario Draghi during the conference was pretty clear that the rebound is in line with expectations, so the interest rate should remain at the current level. The Federal Reserve will also try not to sound too hawkish (still of course the market will closely watch the new forward guidance or the estimates when a first rate hike can arrive). It is possible that we will stay around 1.40 for some time and a significant downside pressure can come in Spring with much better economic data from the other side of Atlantic.

In the tapering scenario, market participants will be much more focused on the moment when the US interest rates increase. During the December meeting it was published that two FOMC participants see a first rate hike in 2014, twelve in 2015 and three in 2016. In today's “The Wall Street Journal” Goldman Sachs economists claim that on Wednesday only one member will see a tightening in 2014, eleven in 2015 and four in 2016. If we can set these projections as a base case scenario, any deviation for the “GS” estimates can be either viewed as bullish for the dollar (earlier hike) or bearish for the greenback (later rise).

We had another session with a weaker yuan. The USD/CNY pair is gradually approaching 6.20 mark. The level is pretty important because it puts a significant pressure on the owners of derivatives which are based on the Chinese currency. As the “WSJ” cites Morgan Stanley report if the RMB slides another 2%, financial instruments owners (mostly export companies who tried to hedge/speculate on stronger CNY) can lose around 5 billion USD (in a 10% depreciation the damage can increase to 15 billion USD). It is also quite interesting how the central bank behaves. The PBOC on one hand wants to weaken the currency to help the slowing economy, but on the other hand does not want to hurt companies too much.

Summarizing, the EUR/USD is waiting for the FOMC meeting. The overall comments on the market are pretty dovish for the dollar (there is some logic in it) – the dollar should strengthen due to continuity of tapering, a clear message that weaker eco data is a result from severe winter and the economy will grow in line with the December estimates (around 3%). Today around 12.00 CET the Russian president is scheduled to make some remarks on Crimea referendum. If he stresses the message that the peninsula is set to join Russia we can expect a downward pressure on EM assets.

Slightly weaker

After a pretty calm session on the PLN yesterday, we are beginning the morning trading with slightly weaker zloty. Investors are nervous before the Russian president statement on the Crimea vote. Investors can also evaluate any other remarks regarding the issue – sanctions or other areas that can be incorporated to the Russian Federation.

On Monday, the “WSJ” published some comments from professor Hausner. I have mentioned several times that the MPC member (neutral, quite influential) suggested that there can be a monetary policy change in the near future. It was also confirmed in the interview, where he said that “Two months ago I believed we are getting close to a point when monetary policy tightening should begin, but the situation has changed and I am willing to say that the moment to alter monetary policy was pushed further into the future". We can be pretty sure now that the monetary policy will not change probably till the end of 2014.

Summarizing, today we have a slight more risk to have some limited depreciation today, but the move should not exceed 4.24 on the EUR/PLN. In the scenario of no new negative reports we can slide toward 4.22.

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

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