Daily analysis 18.06.2014

Higher US inflation readings may push the Fed to more hawkish stance. The FOMC meeting in focus. Floating rouble from 2015. The “Wprost” tapes still weigh on the zloty. Industrial production data will have a minor effect on the Polish currency.

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

• 14.00 CET: Industrial production from Poland (ISBnews survey: +6.4% y/y.
• 20.00 CET: FOMC statement and macroeconomic projections.
• 20.30 CET: Janet Yellen conference after the Fed's meeting.

Inflation. FOMC. Rouble

During the previous inflation data I stressed that we are observing a significant rise of the CPI which should also translate to other, preferred by the Federal Reserve, measures of the price changes – the PCE. May's reading not only confirming the hypothesis but also emphasized it. The inflation rose 0.4% m/m, whereas the expectations were at +0.2%. The acceleration of the price changes is also clearly visible on the y/y basis where we reached 2.1% level (despite that a year earlier there was also a significant jump in May, so the “basis effect” should slower the current move). Moreover, taking into the account recent CPI and PCE difference (which is around 0.3 percentage point), we may see that the publication of the Federal Reserve preferred inflation measure may rise to 1.8% (data will be available in less than two weeks) which is pretty close to the central bank target.

Tuesday's readings will not translate either to today's FOMC statement or the Committee projections (the last day to proceed the changes was June 13). It is possible that Janet Yellen may be asked about CPI. There are also some rumors on the market that monetary policy may get some “lesson” from across the pond where the UK MPC must quickly change their view on interest rates due to falling unemployment and accelerating economy. Such market expectations may push the Federal Reserve to be less dovish and give some boost to the dollar.

Yesterday the Russian Central Bank (CBR) announced that it would allow the rouble to float freely from 2015. Moreover, the current 3.1 rouble corridor will be widened to 5.1 rouble until the end of the year. The central bank intervention policy will be changed and in case of the rate breaching higher or lower bound, the CBR will sell/buy 100 million dollar instead of 200 million USD. The changes were supposed to be implemented earlier but the Ukrainian issue and the capital outflow forced the monetary authorities to postpone the action. It is also worth pointing out that the CBR has dealt with the crisis pretty well. The currency reserves dropped less than 10% since the beginning of the year and the rouble is traded only 5% lower YTD. The stable rouble should be helpful for Polish exporters. Lower RUB valuation was one of the main reasons (besides political issues and stagnation in Russia) which significantly decreased the import from Poland in the Q1 of 2014.

Summarizing, the FOMC is in focus today. Investors will be paying attention to the statements and macroeconomic projections. It is also worth listening to Janet Yellen, who may give some hints whether the FOMC is getting closer to the moment of the interest rates rise or the consensus is still set for the second half of 2015.

Calm on the zloty but political risk remains

According to the MPC message, the Committee still wants to cooperate with Marek Belka. It is also fairly clear that President Komorowski does not want the governor dismissal but no official statement has been issued yet.

It does not mean that political risk has disappeared. There is still probability that the recent events may eventually push the Prime Minister to resign and the country will have to face an early election. We also don't know whether other “Wprost” recordings would be as significant as that already published.

Summarizing, until the political situation does not calm down, the government actions will be closely monitored by investors. In result, we may experience up to 1% depreciation on the zloty if negative events unfold. However, in the upcoming hours the PLN trade should be fairly calm and major impact is expected neither from domestic industrial production nor the Fed's statement. The base case scenario for the EUR/PLN trade is 4.15, the dollar will be worth 3.05 and Swiss franc around 3.40. The GBP/PLN pair will be relatively high due to strong pound to other major currencies and slightly weaker zloty in the recent days, but we don't expect that the sterling-zloty rise over 5.20 soon.

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

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