Daily analysis 20.10.2014

Calming down on the currency market. Rosengren and Williams do not share Bullard's opinion about increasing QE. The Russian rating lowering did not influenced the rouble. The official understanding about gas delivery to Ukraine, will probably be announced tomorrow. Zloty remains in the limits of 4.22 per euro and 3.50 per franc, with a chance for slight enforcement.

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

• No macro data which may affect the analyzed pairs.

Another signals from Fed. Rating. Ukraine

After last week's currencies disturbance, the market keeps on waiting for another signals and stabilizes within the limits of 1.2750 on EUR/USD. For now the investors have not found enough reasons to increase the growth correction on the main currency pair. Friday's data from the other side of the ocean were positive (real estates sector was neutral; consumers' sentiments were best since 2007). In result, there were no additional reasons to await for increase of quantitive easing.

One could come to similar conclusions after reading two interviews with Fed representatives, published in “The Wall Street Journal”. Both John Williams (close to consensus, without the right to vote) and Eric Rosengred (doveish, without the right to vote this year), are willing to end QE already in October.

Their statements were interesting, because of at least few reasons. First of all, Bullard was recently considered as a supporter of rather sooner than later increase of money rates and often claimed, that the end of first quarter of 2015 (whilst majority of the market suggested the middle of next year), would be a good moment to tighten the monetary policy.

Also both of them do not see any reasons, to decrease the prognoses of economic growth, inflation or unemployment, due to the recent data from world economy, or the reactions of stock/debt market.

On the other hand, the members of FOMC still may prolong the period of the zero interes rates, as well as return to quantitive easing (which would actually mean activating QE4). According to Rosengren, if the inflation perspectives will decrease and this problem will be constant (not in just one, but in many quarters), one should think, “what is the best tool to prevent this problem and QE is one tool, that I would consider” - says chief of Boston's Fed to “WSJ”.

Williams also concentrates on the inflation and defines his conditions, that could cause the return to QE. If “the inflation will descend below its current level and, even more important, deflect (downwards) more from our goal in case of using forward guidance”, then “in such conditions we would have to seriously think on what kind of assets purchase should we activate”.

Although the above statements are hypothetical, they may not allow the dollar for its quick return to appreciation trend. First of all, if the global situation will deteriorate, USA will also suffer from it. If we additionally consider the fact that Fed acts quite skilfully, the slowdown in the world will mainly reduce the value of USD. On the other hand, if the situation in euro zone would improve in the upcoming months, the pressure on QE in Europe will disappear (partly it is already included in the prices). That would be a positive signal for euro, what should support EUR/USD. Thus the “optimum” scenario for main currency pair's evaluation, will be stagnation in Europe and good business cycle on the other side of the ocean, that will enclose Fed to the increase of money rates.

Getting back to the matters closer to local sides, it is worth noting that Moody's lowered the Russia's rating. However, it was not the reduction, that Kremlin feared the most, because according to Moody's credibility of Moscow is still on the investment level. Thus the investors will keep on waiting for the S&P move. According to this agency, Russia is just one rank above speculative level.

Another step in the direction of stabilizing the situation in the east of Europe and understanding about gas delivery, has been made. TASS agency informs, citing Saturday's interview with Poroshenko for Ukrainian First National TV, that Ukrainian president said, that “our proposition along with European Union assumed the price of 325 USD in summer and 385 USD in winter” adding, that the price for winter was the one negotiated, and “Russia agreed”.

The final understanding about paying the debt to Gazprom (it will probably be by at least a billion USD less than 5 billion, for which the Russian energetic company applied) and gas deliveries in the upcoming months, will be most probably announced on the meeting of Kiev, Moscow and EU representatives. It will be held tomorrow (October 21st) in Brussels.

In conclusion, today's session should be relatively calm on the main currency pairs. Additionally, the Monday's macro calendar is empty, so it is difficult to also expect a bigger diversity from the economic data. More signals should appear in the night, when we will know the data from China. They will concern GDP (estimations +7.2% y/y) and industrial production and retails sale. Readings that will be better than expectations, should slightly support the dollar (especially in relation to yen).

Stabilization

The domestic currency is stabilizing on relatively low levels – 4.22 per euro and 3.50 per franc. This morning in “Rzeczpospolita” journal, the hawkish member of Monetary Policy Council, Andrzej Rzońca, published 10 reasons for not cutting the interest rates. Rzońca's main argument against the decreases is the economy's condition, which is not worse than in 2013, when the previous cutting cycle was finished. Additionally, Rzońca claims that hypothetical decreases will not solve the external problems (the weakness of the euro zone, Ukraine), that is why it is not worth conducting them. Lower value of the money may also cause the capital to flow out from Poland, and cause disproportions inside of the country (bad use of the capital).

However, the market barely reacts on the arguments of the Hawkish part of the Council, because the supremacy is on the doveish/neutral representatives side now. Data about industrial production published on Friday, decrease slightly the risk of cutting by more than 25 base points in November. However, the reduction by half of per cent is still not excluded.

In conclusion, zloty should remain stable today. However, if we would receive some good data from China and gas understanding will be signed on Tuesday in Brussels, we can expect a fall by approximately 0.01 PLN, both on EUR/PLN and CHF/PLN.

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

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