Daily analysis 20.06.2014

Dovish Fed is pushing the dollar lower. Yellen does not see the inflation threat. Deepest slump on the Norwegian currency since a year after the Norges Bank meeting. Has the zloty weakened due to early election threat or Norwegian central bank decisions?

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

• 14.00 CET: Minutes from the recent Polish MPC meeting.

Fed. Yellen. Krone

Those who had expected some changes in the Fed's statement were disappointed. The FOMC only slightly upgraded its view on the unemployment and got a bit more concerned on the housing. Regarding the tapering, the Committee reduced its asset purchase program by 10 billion USD and repeated its stance that the further action would depend on from the incoming data. A few more changes were observed concerning the forecasts. The GDP projection for 2014 was downgraded significantly (due to fist quarter slump). We did also see some minor upgrade to the inflation for this year and visible improvement on the employment both for 2014 and 2015 (by 0.2 percentage points in the projection range). It could have been quite hawkish message which should give some boost to the dollar but the actual move was opposite.

The dollar depreciated during the conference which was directly caused by Janet Yellen comments. At the beginning of the Q&A part Steve Liesman from CNBC asked Fed's chairwoman whether she is concerned “that the PCE inflation rate, which is followed by the Fed, looks likely to exceed your 2016 consensus forecast next week? Does this suggests that the Federal Reserve is behind the curve on inflation?”. Yellen answered: “I think recent readings on, for example the CPI index have been a bit on the high side, but I think it is that the data we're seeing is noisy”. It was a really dovish comment which quickly translated into a broad based risk rally and the higher dollar. Additionally, following Yellen comments Steve Liesman said later on CNBC that he talk to many economists who rather see the rise of inflation broad based and not, as Yellen pointed out, noisy.

We had a really surprising statement from the Norwegian MCP, which was kind of shadowed by the FOMC meeting. The Norgest Bank, in line with expectations, didn't change the interest rates, but lowered both GDP and CPI for the following quarters. Moreover, it wrote that “a further weakening of the outlook for the Norwegian economy may warrant a reduction in the key policy rate”. The central bank comment was broadened by its chief Oystein Olsen who, according to Reuters, said that “I'm quite certain that those who look closely at the rate path will conclude that it holds a probability of close to 25 percent (for the rate cut), or perhaps a bit more”. In result, the Norwegian krone slump around 2% that day which was the largest depreciation move since a year. The slide was also followed by its Swedish counterpart which topped today 9.15 mark for the Euro, which is the highest level since two years.

Summarizing the dovish stance for the Fed may decrease the dollar's appreciation appetite. However, the base case scenario remains in place and the EUR/USD should return to the downside trend, but the slide may be more gradual and stopped by stronger corrections than it was expected before the Yellen comments.

Krone or tapes?

The zloty's behavior has been quite surprising in the recent 48hrs. Firstly, we had a significant appreciation of the Polish currency due to dovish comments form the Fed. Later, however, the move revised and from Thursday's late morning the PLN has been loosing value quite quickly. An easy explanation is impact from the prime minister Tusk conference and his remarks on possibility of early election. But as we look at the time of the Tusk statement (between 8.00 and 9.00 CET), the PLN didn't lose value but rather appreciated.

Analyzing, however, the rate of Swedish or Norwegian krone we can see that the PLN depreciation may have more in common with the Nordic currencies move than Tusk's remarks. It is possible that some investors concluded that if the Norges Bank may cut the rates due to lower inflation and growth, the same move can be proceed by Polish MPC, especially that the most recent readings – PMI, CPI or industrial production were on the soft side. In result, it may be a good time to be on the sideline or sell the zloty.

This interest correlation does not have to last for a long time, especially if Marek Belka and the Committee announce that we are still quite distant from any cut. We may get some clue regarding that issue from today's minutes which are scheduled to be published at 14.00 CET.

Summarizing, the zloty will remain under pressure both from local and external issues. It is possible that we may test 4.16 on the EUR/PLN and 3.42 for Swiss franc today. The next week may be also pretty tough for the Polish currency but 4.20 level for the Euro should not be quickly reached.

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

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