Daily analysis 20.08.2014

The EUR/USD is testing 1.3300 level after bullish US data. Euro Zone current account is still solid. Another hope regarding Ukraine. Two BoE members voted a hike. The zloty remains in a narrow range. Industrial production data in focus.

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

• 14.00 CET: Polish industrial production (Ministry of Economy survey “around 2% y/y”, ISBnews +1.6% y/y; PAP +1.9% y/y.
• 20.00 CET: Fed's “minutes” from the last meeting.

Below 1.33. The Euro area. Ukraine. The pound

Morning trades are showing that the selling pressure on the EUR/USD remains in place. The main factor pushing dollar higher is housing data published yesterday. New home readings jumped to above 1 million (1.093M SAAR) which was significantly above investors' expectations (963K). Additionally, we had a visible revision from the previous month (from 893k to 945). It allowed the 5-month average to move above 1 million level which was the highest level since 2008-2009 Great Recession. It is a strong argument for the FOMC that finally the real estate may be returning to the growth path (but much more regarding the apartments than single-family houses).

Yesterday the Eurostat published Euro Zone current account report for June. Some economists claimed that seasonally adjusted data for June showed a pretty low reading (the balance dropped to 13.1 billion Euro while the survey was a few billions higher). It could have suggested that the common market is getting less competitive which may be another argument to sell the Euro. However, if we look at the report closer we should see that both balance of trade and services wasn't that much deviated from recent average (no more than 1-2 billion, still above +20 billion). The only statistic which really pushed the C/A lower was current transfer figure (mostly covering remittance of foreign workers sending money to their families in home countries) which was minus 12.2 billion. The data does not suggest that we are observing a fundamental deterioration of the current account balance and the surplus should remain unchanged in the following months (12-month cumulative around 200 billion Euro; between 2.0-2.5% of the GDP).

The recent hours were pretty calm regarding news from the East. It is possible, however, that the next week may bring some positive solutions. As “The Wall Street Journal” reports in an interesting article “Putin Meeting Leaves Kiev With Tough Choices” on Saturday Angela Merkel is scheduled to visit Kiev (a day before Ukraine independence day). Moreover on Tuesday in Minsk there is a meeting between European, Ukrainian and Russian officials (Barroso, Ashton, Poroshenko, Putin). It can mean that some kind of deal should be currently negotiated and the high-level official probably suppose to accept the conditions to end the conflict in the East. The “WSJ” also emphasis that due to recent gains of Ukrainian army, the rebels are more eager to strike a deal (two main leaders who were Russian citizens were substitute by local Ukrainians). Despite that markets pay less attention to the turmoil a longer-term deal should help the riskier assets (especially in the CEE region).

We received some interesting minutes from the Bank of England. Two MPC members voted to increase the interest rates by 25 bps. The market speculated that only one policy maker would favor a hike. Both Martin Weale and Ian Mccafferty claims that current economic situation is “sufficient to justify an immediate rise in bank rate”. However, they are also adding that even after a hike the policy should remain “extremely supportive”. Just after the message hit the wires the GBP/USD rose above 1.6650 but later the gains were moderated. Investors are currently having mixed feelings. The minutes seem to be pretty hawkish, especially if we contrast it with the most recent BoE macroeconomic report (where the wages growth was significantly cut) and recent inflation report where prices rose only 1.6% y/y. We should, however, note that the current cable rate seems to be pretty close to the “duce”, so further moves on sterling will probably highly depend on the data which determine whether we should be ready for a rate hike this year or at the beginning of 2015.

Summarizing, the pressure on the EUR/USD should remain in place, especially that incoming hours may be pretty positive for the dollar. The US currency probably gain additional value after today's minutes (Fisher clearly suggested that he didn't dissent because the Committee is heading toward his hawkish view). Additionally, we are also having preliminary PMIs from Euro area tomorrow, which are not really supposed to be a positive surprise. The EUR/USD slide, however, should not be that significant due to Friday's Yellen speech during Jackson Hole meeting (it is supposed to be pretty dovish).

The production in focus

The Polish currency started the session on the bullish side, but a slight sentiment deterioration didn't allow the EUR/PLN to drop under 4.18 level.

Market participants are probably waiting for news of the day – industrial production report. The Ministry of Economy estimates are around +2.0% y/y while private economists are more bearish with survey run by ISBnews showing +1.6 y/y and +1.9% y/y by PAP. Taking into the account the trend and disappointing PMI readings we should expect that also today's readings should not bring any improvement.

Investors are pretty aware that the slowdown will be continued in Q3 so probably only a publication with “zero” at the beginning and “something” after the coma would provoke a deeper reaction on the markets. And a move toward 4.20 per the Euro. On the other hand, if we see a reading close to Ministry of Economy estimates, the EUR/PLN should remain in a narrow range between 4.18-4.19.

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

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