Daily analysis 19.02.2014

Why have weaker than expected ZEW not caused euro's weakening, but the “second category” data from USA reduced the price of dollar? It looks like there is a new “hawk” in FOMC. Notes from Federal Reserve summit. Zloty is getting weaker because of the news from Ukraine. National data are rather without influence on PLN.

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

• 14.00 CET: Industrial production data from Poland (Polish Press Agency estimations: +3.5%).
• 14.30 CET: Permissions for house construction in USA (estimations 975 thousand).
• 14.30 CET: Construction of new houses in USA has begun (estimations 950 thousand).
• 20.00 CET: Protocol from Federal Reserve summit.

Higher. Loretta Mester. Minutes

Yesterday we had an interesting situation on the market. After publishing ZEW index which was worse than expected (estimations were on the level of 61.5 points; current value is 55.7), we observed a moment of hesitation in areas of 1.37 level on EUR/USD. However, the “bulls'” camp pulled itself together and did not allow clear reduction of prices on main currency pair. Plain market play was not the only thing that kept the European currency rates. It was also ZEW index construction itself. It consists of two parts – the one describing current situation (it increased clearly from the level of 41.2 points to 50 points) and the other which is quoted in media and it presents the future (in six months) condition of German economy. Index construction (find out more in the article “ZEW – simple and competent index of future business cycle” on WP .pl) concentrates on the question: will the improvement come within following six months. Thus if the current situation is improving, then it is harder to sustain the expectations, that the future will bring further progress. The afternoon increases on the other hand were generated by worse readings from USA (index describing the condition of industry in New York region and index describing the situation on real estate market were both below expectations). Despite these are not the leading indexes, the players (especially those who own dollars) got clearly anxious that another weak data can be a sign of Fed considering the exiting from quantitive easing. It was because the weather could be not the only factor responsible for this slowdown. Thus we begin today's session above the level of 1.3750 and the “long” side of the market is clearly dominating.

Today „The Wall Street Journal” gathered some informations about the new chairwoman of Cleveland's Federal Reserve. It appears that Loretta Mester (in June she will take the place of Sandra Pinalto and since then she will have a right to vote) is more “hawkish” than her predecessor. „WSJ” quotes her presentation from last year, where she stated that “in the past Federal Reserve waited much too long to raise the money rates and if it will do it again, then the value of money will have to be quickly raised, and that can be a problem for the economy”. Mester's “hawkishness” is confirmed by Michael Feroli, JPMorgan economist from New York. Quoted by Reuters, he believes that “she will be more hawkish than the median of voting members, but not as extremely as Fisher, Lacker or Plosser”. We can expect then, that since June the camp who is closer to monetary policy tightening, will have more to say.

Today, apart from the macro data from USA that should weaken the dollar (if they appear worse than the prognoses), it is also worth to pay attention to notes from January's Federal Reserve summit. The more information about possible modification of „forward guidance”, discussions about weaker data from labour market or considerations concerning the emerging markets can be found there, the bigger chance for USD continue to get weaker. On the other hand, in case of relatively positive economic picture and concentration on the weather effect we can expect a confident support for “the buck”.

Ukraine reduces price of PLN. Data to be omitted

It is hard not to relate the morning's weakening of PLN with events in Ukraine. Not only Polish zloty's price is reduced (EUR/PLN breaks through 4.16). Other currencies are Turkish lira or Hungarian forint. How significant movement it will be? It all depends on if the further escalation of conflict occur. Spreading the riots on other parts of Kiev or riots in bigger cities of Ukraine will be particularly dangerous. In this case, the pressure on weakening of national currency would be much stronger and we could quickly test the areas of 4.20. On the other hand, if any understanding took place, the moods in the region would quickly improve and we could descend to the boarders of yesterday's minimums.

However, I would not expect any bigger reactions after this afternoon's data from Poland. Economists surveyed by Polish Press Agency claim that the industrial production in Poland will increase by 3.5% r/r. Only clear variance from the consensus (at least 1.5% in one way or another) could cause bigger reaction than 0.01 PLN. Base scenario is still remaining of morning growths of EUR/PLN with the risk on the further PLN weakening in the direction of 4.17 division side (mainly because of the riots in Kiev).

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

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