Daily analysis 18.08.2014

Friday's turmoil caused by “incursion” of Russian forces into the Ukrainian territory. Bullard and Kocherlakota confirmed their stance toward future monetary policy. Jobs market is a main topic for the Jackson Hole conference. The zloty remains close to 4.20 per Euro after a significant sell-off during the holiday's session. Kazimierczak, Osiatynski and Chojna-Duch on interest rates.

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

• No macro data which should significantly affect the analyzed pairs.

Ukraine again. The FOMC. Jackson Hole

The last session was again dominated by news from the East. The ground breaking moment for the markets was confirmation from the NATO secretary general that “incursion” of Russian forces was observed on the Ukrainian border. The similar reports were also presented both by reporters on the ground and Kiev led government. Markets' reaction could have been calmer if the humanitarian aid wasn't presented as an opportunity for Moscow to start the full-scale invasion. Investors quickly connected the both issues and we observed a significant sell-off on all risk assets.

The situation calmed down a bit when foreign ministers from four countries (Ukraine, Russia, France and Germany) scheduled a meeting in Berlin to discuss the cease-fire conditions on Sunday. There were also reports that the Red Cross is closer to take control of the “White Trucks” and will probably deliver the aid to inhabitants in Lugansk and Donietsk. Today in the morning we learned that high-level talks in German capital fell short of expectations and probably more meetings will have to be scheduled until a solution is reached.

From interview with James Bullard cited by Bloomberg on satellite Sirius XM radio we should conclude that St. Louis Federal Reserve president sees market being too dovish comparing to the FOMC. He also claims that after the recent data interest rates hikes at the end of Q1 of 2015 are possible (investors see tightening in mid 2015). A contrary scenario is presented by Narayana Kcherlakota. The most dovish FOMC member claims that inflation should not exceed 2% target till 2018 and the jobs market still shows a significant amount of slack (for example the share of people working in the age between 25-54 is 76.7% while in 2007 it was 80.3%). In the context of recent FOMC members opinions it will be interesting to see whether if there's any shift toward more hawkish side n the “minutes” (it could be positive for the dollar in the short term).

However, the current week does not have to be that great for the US currency due to Jackson Hole conference. The central bankers' meeting would focus on employment this year and Janet Yellen is also scheduled to speak regarding that topic. It is pretty possible that she will speak more broadly on her “dash board” where besides improving unemployment and solid NFP we have other issues supporting accommodative monetary policy – low participation rate, high long-term unemployment, many part-time workers, etc. The Fed's chairwoman may also stress the low wage growth (but the strong reaction similar to that after BOE inflation report is not expected). Overall, Yellen should be rather bearish for the dollar.

Summarizing, the threat of an open conflict between Russia and Ukraine still can scare the markets (especially emerging ones). The EUR/USD seems to be resistant to the Eastern news and chose a range trade. However, the longer we stay near the current levels, the higher the probability that we can experience a stronger move (probably a rebound toward 1.3450-13500).

Risk appetite vanished

Positive mood from the recent GDP report vanished pretty quickly after reports from the East where the threat of broader conflict hit the markets on Friday. Despite the fact that the situation has slightly calmed in Ukraine (rises on European equities), the zloty has some problems to return toward Thursday's levels (4.18).

Besides geopolitical events we should also focus on MPC members comments. Professor Osiatyński suggested on TVN BiS that he is heading toward rate cut on the incoming meetings saying that “there is no macroeconomic justification for such high interest rates”. Similar view is presented by Elzbieta Chojna-Duch who told Polish Press Agency (PAP) that she would try to convince other MPC members to cut the rates on September meeting. But the market knows view of the two members so to major reaction was observed after their comments.

No surprise came also from Andrzej Kazimierczak interview with TV Trwam. According to the hawkish MPC member, the rates should remain at current level, but the argument to keep restrictive monetary policy does not really seem to be valid – he wants to secure zloty from weakening and prevent the capital to flee from government bonds).

The situation in the East will still shape the condition of the PLN. The market should also focus on comments from more neutral MPC members (Belka, Hausner, Bratkowski, Zielińska-Głębocka). If they shift toward monetary loosening we should expect further weakness. The base case scenario for the zloty is to remain near the 4.20 level with slight zloty appreciation due to global sentiment improvement.

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

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