Daily analysis 18.06.2014

Risk aversion rises after the Malaysian jet crash and due to Israeli operation in the Gaza Strip. Weak US home data. Bullard remains fairly hawkish on monetary policy. Surprisingly disappointing industrial production from Poland. The EUR/PLN was traded over 4.15 level yesterday.

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

• 15.55 CET: University of Michigan/ Reuters consumer confidence index (survey 83 points).

Geopolitical issues. The data. Bullard

Measuring the global risk aversion using the conditions of US equities we had the worst session since several months. As early as during the European session the situation was fairly grim after the West imposed additional sanctions on Russian firms but later it turned into the worse. The currency market was much calmer. Besides a minor strength of the Swiss franc and yen the remaining pairs were quite stable.

Moreover, there was no reaction on the EUR/USD. The most heavily traded currency pair has “proved” many times that Ukrainian crisis has almost neutral impact for this asset. It is also worth noting that besides the Boeing 777 crash we had also the start of a land operation by Israeli forces into the Gaza Strip. Also in that case the reaction on US equities was negative, but the Euro-dollar remained stable.

Putting the tremendous tragedy of people who boarded the Malaysian jet and the pain of their families aside, we can note that the event does not have to bring only negative consequences between Russia and the West. A kind of confirmation of that hypothesis can be an opinion from James F. Collins. The former US ambassador to Russia told “Washington Post” that “It's one of those events... that can have unpredicted negative or positive consequences”. The negatives are pretty simple: more sanctions, Russian isolation, depressed local economies. On the other hand, however, the catastrophe may be a ground-breaking event which can lead to truce talks (for example during a cease-fire needed to investigate the event) and further to the peace throughout the region.

Besides the geopolitical issues we had also some disappointing data form the US. Both the building permits and housing starts dropped significantly and instead of readings above 1 million (annualized, seasonally adjusted) we had only 960k and 890k respectively. A bit of better news came from jobless claims where they dropped to 302k (consensus was around 310). Overall the housing weakness can be quite an issues and may delay a bit the monetary tightening.

James Bullard having his speech in Owensboro said that he expects the Federal Reserve will have to tighten the monetary rather sooner than later. During the meeting with reporters, the St. Louis Fed's president warned that the FOMC should communicate their moves earlier to prevent some surprises on the market and generating that way some problems. Bullard, according to “The Wall Street Journal” told the reporters that “If the Fed gets out of synch with markets, then there can be a violent reaction when the realization comes in the committee's turned in a different direction”. The market still ignores such suggestion but when they will come from Fischer or Dudley we should seen much stronger dollar appreciation.

Summarizing, the geopolitical events have had pretty limited impact on most major currencies. In result we should still focus on macro data and the central banks' approach. Today, however, the EUR/USD should be petty stable and will be probably traded within 1.3500-50 range. The beginning of the next week should also be pretty benign until Thursday when the fresh European PMIs hit the market (probably pretty grim).

Relative calm reaction on the zloty

The zloty weakened toward 4.15 per the Euro but taking into account the scale of global events and the disappointing macro data the “punishment” seems to be quite mild. However, similar muted reaction was observed on other currencies in the region so the PLN behavior wasn't unprecedented and the calmness on the zloty should be attributed to the global players.

Leaving out the geopolitical context it is worth noting a slump in the Polish production. According to the GUS, the industrial production growth dropped to 1.7% y/y while the consensus ranged from 3.5% to 4.0%. We should also worry that the manufacturing slowed to 2.1% while in the recent months we had readings topping 7%-8%. A kind of grotesque comment was published on the Ministry of Economy (MG) website. It significantly overshot the forecast yet another month in the row but claims that “Optimism comes from seasonally adjusted data where the production rose in June by 2.1%”. MG also expected that the reading in July will be around 2%.

Summarizing, the industrial production readings are another proof that the Polish economy growth is slowing (the dropping PMIs clearly predicted the trend!). That fact should have an impact on the GDP reading for Q2 but the first concrete estimates will be probably produced by economists after next week retail sales publication. Additionally, we should point out that the probability of interest rate cut may rise substantially, if the following month turns to continue the downside trend. The zloty has been slowly losing reasons to strengthen and the base case scenario is moving toward a consolidation with a slight weakness when some major geopolitical issues hit the wires. Today, however, both EUR/PLN and CHF/PLN should remain within a narrow range around 4.15 and 3.42 respectively.

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

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