Daily analysis 19.12.2013

The Federal Reserved announced $10 bn taper on Wednesday. “Soft” forward guidance modification. The new market story – too low inflation? When will the QE really end? The Polish zloty was stable during the Federal Reserve conference and begins the day around 4.1700 per the euro.

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

• Besides the market consensus we are also publishing the consensus range. It gives more info how economists predict the incoming data and what kind of impact can be generated from surprising reports.
• 14.30 CET: US weekly jobless claims for the US. Consensus at 337k with the range between 323k and 360k.
• 16.00 CET: Existing home sales from the US: market consensus at 5.02 million; range between 4.95 million and 5.25 million.

10 bn cut. Forward Gudiacne. QE ends in Q4 2014

It is hard to say that the market were surprised by the 10 bn asset purchase cut. The taper expectations were evenly divided by the December meeting and the beginning of 2014. At bit puzzled were probably equity investors. The market for many months rumored that the QE reduction will push the stocks lower. However, investors quickly picked up another explanation: the Federal Reserve reduced its asset purchase program because it sees the economy to rebound stronger in the future while inflation is still low and the monetary policy loose, therefore the message should be overall positive for stocks (kind of win-win situation). There was even more confusion on FI and FX markets. The participants were not able to properly evaluate whether the tapering + “soft” modification of forward guidance and balanced Bernanke conference is buy or sell for the dollar. Finally the dollar bulls won and the 'greenback” gained some value. But will it be a sustainable move?

Investors who were “long” on the dollar should be satisfied with the Wednesday's outcome. The taper is clearly a buy signal for the US currency. However, other messages from the Federal Reserve don't have to be as positive as the tapering and don't have to be bullish for the greenback. First of all the pace of winding down the QE is pretty slow – 10 bn. Bernanke also suggested that the same amount will be reduced at each meeting. If this is the case, than the Fed will buy around 500 bn more treasuries and MBS until the operation ends (probably in October 2014). He also claimed that the taper can be paused on one or two meeting if the data falls short of expectations. It would probably extend the operation till December 2014.

Another element which can slow the dollar strength is forward guidance changes. The Fed decided to strengthen the unemployment threshold by adding that “near-zero range for the federal funds rate target likely will remain appropriate “well past” the time that the unemployment rate declines below 6-1/2 percent”. We can conclude than that the unemployment will have to drop to at least 6.0% until the Federal Reserve considers any rate hikes.

The next issue is still too low inflation. According to the Bureau of Economic Analysis the PCE inflation run at 0.7% y/y in October and it is well below the Committee target at 2.0%. Additionally the FOMC members estimates show that the interests rates are supposed to be at 0.75% at the end of 2015 (in previous economic projections there were at 1% at the end of 2015). So we have actually two years of “zero interest rate policy”.

Summarizing, despite that the Wednesday's decision was bullish to the dollar, the pace of asset purchase reduction, modified forward guidance and more putting more emphasis on the “too low inflation” can still be a burden for the dollar and can keep the EUR/USD from falling.

No major changes on the zloty

Published yesterday data on the industrial production were above analysts' estimates. The output rose by 2.9% y/y, what is actually not an impressive result, but if we take the seasonally adjusted data (in November 2013 there were two working days less than a year earlier) the production rose by 4.4% which can be an indicator of a stronger growth.

The Polish currency was fairly calm during the Fed's announcement. The zloty despite the tapering did even gain some value (on the rise of “risk on” sentiment), but today we came back to around 4.17 per the euro. The similar situation was on Swiss franc which fell to 3.40 PLN. On the other hand the USD/PLN rose (on the global dollar bulishness) and topped 3.05 PLN. The most interesting situation was on GBP/PLN which jumped to the zloty by more than one percent. It was, however, not caused by the Federal Reserve, but much better than expected jobs report from the UK (the unemployment dropped to 7.4% and were are getting closer to the 7.0% threshold which can be a trigger to rise the interest rates).

Summarizing the zloty should be pretty stable till the end of the year and should begin the 2014 between 4.16-4.20 per the euro.

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

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