Daily analysis 21.05.2013

EUR/USD in the correction range touched 1.2900. Some remarks from FED members. Evans on QE way out – “FED may or may not choose to sell its assets”. Markets are waiting for the Bernanke Congress hearing on Wednesday. Industrial production data from Poland.

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

• 14.00 CET: Industrial production from Poland (survey +3.0 y/y)

Close to 1.2900 on correction rebound. Evans on QE

Due to lack of economic data investors allowed EUR/USD to extend the correction and moved toward 1.2900. The market smartly used some dovish comments from Charles Evans (with voting rights) but omit remarks made by Richard Fischer at CNBC interview. Evans, during CFA Institute conference, told the audience that he is optimistic on the labor market. In his opinion the current monetary policy is appropriate. He “would like to see monthly employment growth of 200 000 or more for at least six months before judging the labor substantially improved”. If his opinion is shared by Ben Bernanke, and other doves, then we will have to wait for the QE reduction longer then some anticipated after John Williams remarks last Thursday. Evans made also some interesting comments on selling assets currently held on the FED's balance. He said that “Federal Reserve may or may not choose to sell its assets”. If it happens we can easily show that the Central Bank finances budget deficit. Treasury department issues bonds, then the FED buys it, keeps it till the maturity (in the meantime receiving coupon payments) and then receives the face value. However, being honest, the operation is not strictly done to finance the government (there has been enough demand for U.S government papers), but rather to decrease the long term rates, increase the confidence and spur some growth. On the other hand Fischer during the CNBC “Squawk Box” pointed out that in a few months the FED will be buying 100% of MBS issuance (currently more then 50%), therefore the reduction in asset purchase is a necessity.

Investors will be waiting for the Wednesday's Ben Bernanke hearing before the Congress. Any suggestions on reducing QE (either direct on indirect) can significantly strengthen the dollar. Contrary some remarks regarding “too soon withdrawal” should weaken the greenback and move EUR/USD even close to 1.3000.

Industrial production from Poland

The local market will focus on the industrial production data. It will be next-to-last economic report (on Friday retail sales) before the June MPC rate decision. Economist are expecting that the production will rise by 3% y/y, but taking into the account the whole survey there is more probability that we can see positive then the negative surprise. Only a robust data (over 5%) can change the outlook for the rate decision.

The zloty should be stable till the report is available. Better-then-expected reading can push EUR/PLN a bit lower but I don't expect it to fall under 4.15. On the other hand if the data falls short of expectations then we can move toward the 4.2000 resistance, but without breaking it.

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

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

Overall technical situation on the analyzed pairs

No changes on the technical analysis except the CHF/PLN. The target is currently 1.2800 on the EUR/USD and in extension 1.27. On Polish pairs: USD/PLN and GBP/PLN – bullish; EUR/PLN and CHF/PLN range.

Technical analysis EUR/USD: the EUR/USD reached its first target on Wednesday – 1.2800. The current rebound however should be only a correction and the further slide is expected toward 1.2700. Alternative scenario: longs above 1.3000 (low probability).

Technical analysis EUR/PLN: the base scenario is still the range trend (4.12-4.20). Alternatively the breakout above 4.20 should generate fast move toward 4.25-4.30.

Technical analysis USD/PLN: the 3.27 target is still in place with extension to 3.3300. A comeback to the sliding trend is possible after falling below 3.18 (low probability currently).

Technical analysis CHF/PLN: we moved back to the range trade (3.33-3.41). A sell signal should be generated again after sliding below 3.3300.

Technical analysis GBP/PLN: the short term target for the pair is a move toward 5.0000 and an attempt to change the mid term trend to rising. The breaking above 5.0000 should initiate the move toward 5.1000. The alternative scenario is a move under 4.85 where bears should take the lead.