Daily analysis 20.08.2013

The EUR/USD has still been traded above 1.3300. Monthly Bundesbank report helped the euro. More sell-off on selected EM markets. FX rates more related to the local economy conditions than overall risk appetite? Polish zloty is slightly weaker again. The EUR/PLN 4.26 test possible.

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

• 14.00 CET: Polish industrial output (survey: +5.3 y/y)

Buba comments. EM issues. Different approach to the FX

On Monday we had another day with weak global sentiment (equities fell, government bond yield rose), but the EUR/USD remained quite strong. The most traded currency pair has been recently fairly resistant to the “risk off” trade, but yesterday there was another reason which pushed the euro higher – Bundesbank comments on future monetary policy. During the July's meeting Mario Draghi announced forward guidance claiming that the interest rates will remain at current or lower level for an extended period of time (bearish for the euro). On Monday, however, “Buba” in its monthly report written that the ECB view “is not an imperative statement, and it doesn't represent a change” in the monetary policy” and “Froward guidance doesn't rule out an increase in the benchmark rate if greater inflation pressure emerges”. The news helped to push the EUR/USD toward 1.3370, but it didn't hold till the end of the day. In the long term the German Central Bank approach should support the common currency. This issue will also be probably further discussed during the next ECB conference.

There is still a hefty sell-off on the selected EM markets. Yesterday the Indian and Indonesian rupee , South African rand and Brazilian real slided again. Quite straight forward explanation of the situation was presented by “The Wall Street Journal” in the article “Fear of Fed Retreat Roils India”. A fear of US QE tapering results in capital outflow. It weakens the currency and therefore imported prices rise (especially oil and electronics). Higher prices boost the inflation and additionally increases the government spending (for example on gasoline subsidies) what in consequence widens the deficit. To finance the budget gap the government needs to lure the capital, so the interest rates need to remain at elevated level, but the restrictive monetary policy slows the economy and the vicious cycle closes. Economists, however, as “WSJ” reports do not expect the late 90s scenario claiming that “governments and companies have much lower external debt burdens than back then, and nations have ample stocks of foreign currency reserves”.

Bloomberg presented quite interesting opinions form investments banks regarding the change in approach toward FX. Strategists claim that “currencies are becoming progressively more driven by relative economic differentials rather than global policy and politics. For example BNP Paribas says that “NZD is increasingly driven by domestic fundamentals instead of global fundamentals”. Moreover, Morgan Stanley sees a “stronger FX sensitivity to relative fundamentals rather than global risk appetite”. Additionally, HSBC strategist David Bloom writes that “Local economic, political developments may be more important in driving FX rates than they have been in recent years”.

The base case scenario for the EUR/USD is a fairly stable trading around 1.3350. The market, however, will be preparing to the next days – Fed's minutes and Eurozone flash PMIs

The zloty is slightly weaker again

The Polish currency slided around 0.5% to the euro yesterday. We are closely approaching the 4.26 level. In line with FX moves we had also a rise in 10-year government bond yields which revisit the recent highs at around 4.5%. There were few reasons behind the move – global bond sell-off, expected economy improvement (higher future inflation), and some risk off trade and capital outflow (but much less then in Asia). It was also interesting that Polish benchmark 10-year yields rose first time in one and a half years above the Spanish counterparts.

Today at 14.00 CET we have industrial output data form Poland. It will be interesting how the zloty reacts to the better/worse reading. We can also observe whether the theory from previous paragraph is valid for the Polish currency. However, in case of worse-than-expected report we can try to move above 4.26 what can be quite significant EUR/PLN buy signal regarding the technical analysis.

Expected levels of PLN according to the EUR/USD rate

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

The EUR/USD is still bullish. All Polish pairs are in bearish trends but some of them are getting closer to generate a buy signal..

Technical analysis EUR/USD: the EUR/USD failed to move over 1.34 level. Currently we bounced back from the resistance, but the shorts will be preferred when we slide under 1.32 mark.

Technical analysis EUR/PLN: the trend is bearish until we break above 4.26 level. According to AT the current value should be used to open short positions with the target around 4.17 and in extension 4.10. On the other had if we rise above 4.26, the buy signal will be generated with the target around 4.35.

Technical analysis USD/PLN: the trend is still bearish until we rise above 3.22. The current level should be used to open short positions. On the other hand if we move above 3.22 the buy signal should be generated with the target around 3.39.

Technical analysis CHF/PLN: the trading around 3.40-3.,45 should be fairly neutral for the pair. If we slide under 3.40 the sell signal should be generated. Contrary if the pair rises over 3.45 the buy signal is generated with a target around 3.52.

Technical analysis GBP/PLN: we are getting closer to generate the buy signal (after breaking 5.00) with the target around 5.10. Staying under 5.00 still prefers the short positions.