Daily analysis 19.12.2012

Another bullish session on U.S equities and favorable technical situation allowed EUR/USD to rally near 1.3250 levels (highest since March) and EUR/JPY to 111.70 (highest in 20 months). Today the currency market will focus mainly on IFO. The wave of global optimism significantly strengthened PLN to around 4.0700 levels. The zloty should still be depended on global risk and the outcome of IFO reading.

Macro data (CET- Central European Time):

• 10.00 CET: IFO index
• 14.00 CET: Industrial production in Poland
• 14.30 CET: Building permits (USA)
• 14.30 CET: Housing starts (USA)

Market close to price in the fiscal cliff deal. The consequences of recent QE.

Although there were no major new info regarding the so called fiscal cliff much more investors are trying to foresee the future and open long positions (in perception that the deal will be reached sooner rather then later). Positive sentiment and favorable technical situation (long range trade near on the resistance around 1.3170 without any correction) allowed EUR/USD to rally above 1.3250. Some boost to the euro dollar rise gave also the JPY effect. The sell off on EUR/JPY pair means, of course, buying EUR, and if it happens faster and then on USD/JPY it allows easy rally on EUR/USD. Another reason of recent up trend on the shared currency is the consequence of QE in the States. In the recent month I have been focusing on the issue many times and have emphasized that it had not been priced in yet. Taking into the account the technical and fundamental situation it is possible that till the year end we can try to test March highs at 1.3360-80.

In focus: IFO at 10.00 CET and nightly BOJ decision.

Coming back to the current situation the market will be mainly watching the IFO reading. The German index can positively surprise the markets especially if recall much better then expected last week's ZEW publication. There is a strong correlation between the two, and usually the ZEW is one or two months ahead of IFO. Better reading then analysts' estimates (around 102) can support the positive sentiment and will prepare markets to the Bank of Japan decision. Investors expect that BOJ will pump additional 5 to 10 trillion yen to the financial system. The decision near or above 10 trillion will boost the sentiment and riskier assets. Values under 5 trillion or no easing decision can spur a stronger correction.

Zloty much stronger. PLN the world's best carry trade currency.

The zloty took advantage of yesterday's risk on sentiment. It was also supported by favorable (similarly to EUR/USD) technical situation. The break down from support of 4.0800 resulted in fast slide to around 4.0670. Today the PLN will still be the hostage of global risk on/off mood and IFO reading from Germany. It is also worth to remember about the industrial production report which is due to at 14.00 CET. Better then expect data will extend PLN really but worse than survey reading (+0.5% y/y) does not have to mean PLN to weaken because the recent quarter is already lost (form macro point of view). It is good to take a look at best carry trade statistics. According to the Bloomberg data PLN is the world's best carry trade currency. The 12 month return on PLN when the base currency is EUR gave more then 15% profit (sum of PLN appreciation and the interest rate differences). Even better the situation look when the USD is the base currency. In that case profit is around 17.5%. The popularity of zloty can result in extend the recent move but also the future rebound will be much stronger then on other CEE currencies.

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

Technical analysis EUR/USD: EUR/USD broker an important resistance level around 1.3170-.13200. Now these levels will work for support. Till the end of the year EUR/USD can rise even to 1.3350-70. However after 8 in the row sessions of gains the market will try to provoke some kind of correction.

Technical analysis EUR/PLN: the sliding scenario is still valid. The comeback under 4.0800 spur fast move to 4.06. The target is 4.04 and strong resistance level is 4.0800.

Technical analysis USD/PLN: we did manage to fulfill the 3rd target which was signaled by the move at December 11th (lows at 3.06-3.07). The break down of this level will suggest the test of October 2011 lows around 3.00-3.02.

Technical analysis CHF/PLN: the least exciting situation is on CHF/PLN. The downside move under 3.3700 suggest the the target is around 3.3300 now.