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Daily analysis 18.11.2014

18 Nov 2014 12:46|Marcin Lipka

Abe delays tax hike, announces snap election and suggests new fiscal stimulation. Draghi does not rule out the bond purchase. Investment banks approach toward EUR/CHF. The zloty strengthens below 4.22 per the euro.

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

  • No major economic data which may significantly impact the analyzed pairs

Abe. Draghi. Swiss Franc

In line with our recent reports, the Japanese prime minister rescheduled the sales tax hike and moved it to first half of 2017 (from October 2015). It should prevent the situation observed in the recent months when the April fiscal tightening pushed Tokio toward fourth recession since the Lehman Brother collapse.

Earlier findings on Abe snap election were also confirmed. There are, of course, questions why to dissolve parliament in mid term when the rulers enjoys majority in both houses. One of the reason is to exploit the opposition weakness. Another is a desire to get “confirmation” mandate from society (especially given that the Abenomics does not go as promised). In case of winning it may give Abe also “free hand” to push for more action. It is highly probable that the current reforms architect will secure another time majority and therefore more stimulus should be on the horizon.

Monday's quarterly speech before the European Parliament was supposed to be a non-event presentation, especially that during the last ECB conference investors received many dovish comments.

Investors, however, picked up one sentence which pushed the EUR/USD (briefly) below 1.2500 mark. During the Q&A session the ECB chief claimed (actually even not directly answering the question) that “unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds”.

It is true that the ECB chief didn't directly mention the bond purchase but clearly many times he had suggested it. An example can be even found in the most recent statement. Draghi, answering a question (“He was saying [Ben Bernanke] at an event that the euro zone would face legal and political hurdles or problems when implementing QE. Do you share his view?”), said: “On the second point: no. We think that if we act within mandate we can use a variety of instruments. And the important thing is to always stay within our mandate. We believe that if it's not monetary financing, it is in our mandate”

The immediate, fairly nervous reaction was rather quickly corrected and the EUR/USD returned above 1.2500 level. Currently the market is pretty well informed that the ECB may introduce the QE. Now investors' reaction will be correlated more with the data rather than by remarks whether QE is possible or not. As a result better readings should give some boost to the euro while grim publications may push the common currency further down.

Almost all professional investment institutions quoted by Bloomberg confirm that EUR/CHF floor at 1.20 will be maintained in the foreseeable future no matter the “gold initiative” is approved or rejected in the popular vote. Further, even if Swiss decide to keep 20% reserves in gold (odds are dropping currently), the monetary policy makers may introduce the negative deposit rates which should clearly discourage some portfolio capital to keep Swiss assets and help the SNB to maintain the floor.

By the way from trading point the EUR/CHF situation is pretty interesting. It dropped very close to the SNB floor and the intuition hints that the only possibility is an upside move. But it does not have to be the base case scenario. In 2012 for many months the EUR/CHF was very close to the floor and any upside moves were hardly observed. The situation looks also similar on EUR/CZK where the Czech Central Bank promised a year ago not to allow the pair to drop below 27 mark. The promise has been kept but the krone stays very close to the floor. Maybe the implementing of negative deposit rate can push the CHF lower but currently it is not that certain. As a result we may get used to see EUR/CHF very close to 1.20.

Summarizing, the EUR/USD tries to generate a correction but a first obstacle may be tomorrow's “minutes”. The Federal Reserve last meeting discussion will be rather more hawkish than dovish (Plosser and Fischer signed the statement). A higher chance for the USD depreciation may come from CPI on Thursday, especially given that the inflation in the US is at pretty high levels comparing to other developed nations.

Stronger in the morning

The zloty really has hard time to gain some value toward euro. After morning EUR/PLN slide in mid 4.21 most of the move was leveled off. It seems that there are many open positions against the Polish currency, which try to stabilize the situation when good data is coming to the market (MPC decision, GDP, members comments).

Negative for the region are also developments in the East. Despite the fact EU foreign ministers didn't push forward more sectoral sanctions against Russia, the situation does not look good – Kremlin is not really eager to change its policy and Kiev pushing for stronger action (scrapping the special Donbas status and cutting benefits for local inhabitants).

However, even with the mentioned problems the zloty should gradually gain some value (mainly due to rate differential) but there are low chances for EUR/PLN moving below 4.20 and CHF/PLN under 3.50.

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

Range EUR/USD 1.2450-1.2550 1.2350-1.2450 1.2550-1.2650
Range EUR/PLN 4.2000-4.2400 4.2000-4.2400 4.2000-4.2400
Range USD/PLN 3.3600-3.4000 3.3800-3.4200 3.3400-3.3800
Range CHF/PLN 3.4800-3.5200 3.4800-3.5200 3.4800-3.5200

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

Range GBP/USD 1.5950-1.6050 1.5850-1.5950 1.6050-1.6150
Range GBP/PLN 5.3700-5.4100 5.3500-5.3900 5.3900-5.4300

18 Nov 2014 12:46|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

17 Nov 2014 18:25

Afternoon analysis 17.11.2014

17 Nov 2014 12:39

Daily analysis 17.11.2014

14 Nov 2014 17:24

Afternoon analysis 14.11.2014

14 Nov 2014 12:55

Daily analysis 14.11.2014

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