Daily analysis 21.10.2014

Chinese real estate market in focus. Political shift in Japan may threaten the Abe stimulus plan. Record high fines for banks accused for manipulating currencies. Russian rouble with no further band move. Wednesday's inflation readings are key for the dollar. The zloty remains stable before Wednesday's US CPI and Thursday's retail sales.

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

• 16.00 CET: Existing home sales from the US (survey 5.1 million, seasonally adjusted annualized numbers.

China, Japan. Fines. Ruble. Inflation

The first part of the week is pretty empty concerning the economic calendar so the Chinese data brought a significant level of attention. The major indicators didn't surprise market participants. The GDP was marginally above the estimates (7.3% y/y vs 7.2% y/y), while retails sales and industrial production were broadly in line with expectations.

Currently the Chinese GDP growth is not the main problem for Beijing but the falling houses sales. Today's “The Wall Street Journal” reported citing China Real Time that the real estate activity in the first three quarters slumped by 10.8%. Despite the dire numbers we can observe some improvement in recent months if we compare the yearly data on August and September when the drop was minus 13.7% y/y and 10.3% y/y respectively. It is the second month in the row when the slight rebound was observed.

We had a slight turmoil on the Japanese market caused by departure of two ministers. The dismissal inside government wasn't nothing extraordinary but it could jeopardize the ultra loose monetary and fiscal policies conducted by the prime minister Shinzo Abe.

Allegations of financial impropriety may damage the Abe but “if it ends there (with two ministers) there may not be too much impact on Abe although his support levels will probably fall” told Bloomberg Tomaki Iwai, a professor of politics at Nihon University in Tokio. The news caused a significant sell-off on Tokio stock market and supported the yen (on rumors that futher stimulus may be harder to implement).

It's been almost one-and-half years since Bloomberg firstly reported on currency fixing rate manipulation. Today Citigroup claims that fines which can hit some investments institutions may total around 41 billion USD. The final amount will be probably lower due to banks' cooperation with investigators. Overall, the case can hit the banks' income statement with similar magnitude as the Libor and sanctions' violations issues did.

Today is a first day since October 2nd when the Russian Central Bank (CBR) didn't move the dollar + euro basket band (indication the RUB didn't depreciate beyond the limit). In the last three weeks the CBR sold around $13 billion of its reserves to stabilize the exchange rate. It does not meant that the Russian currency has finished its sliding trend, but in case of some sentiment improvement toward the region (gas deal, talks on sanctions pause; oil price rebound) we can see a significant correction on the RUB.

The recent hours on the EUR/USD were fairly calm with a slight appreciation tendency. The rebound was, however, halted by Reuters reports that the ECB is considering to start the corporate bond purchase on the secondary market. It is unclear how the issue may develop and whether the new idea is confirmed by the central bank officials. In a scenario when the report is dismissed, we will still have to wait for the US inflation report which is due on Wednesday.

No major changes

There are still not enough signals from the global economy which may significant push the zloty in either direction. The data from Poland is also fairly neutral for the MPC and it is hard to judge whether the 25 bps interest rate cut is more probable than another surprise scenario – the 50 bps benchmark drop.

Regarding the macroeconomic data investors should focus on Wednesday's inflation reading from the US. It may give a hint whether the zero-interest-rate policy can be continued for longer. It can be a case when the CPI drops below 1.5% y/y what should also push the Fed's preferred inflation benchmark toward 1.3/1.2%. On Thursday we are expecting the retail sales data from Poland. The reading, however, will have to deviate significantly from the 2.4% y/y consensus to generate any move on the PLN.

Summarizing the zloty should be stable with a slightly higher probability that it can appreciate a bit towards the end of the week, especially if the US inflation data falls short of expectations and Polish retail sales surprises on the “plus side”. The hypothetical move will still be limited and should not exceed 1 to 1.5 zloty cent on both 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: