Daily analysis 22.07.2014

Today's and next week EU leaders meeting should be crucial regarding sanctions toward Russia. Publications on strong Euro. Key inflation data in the US. The zloty remains stable despite geopolitical turmoil. Polish retail sales in focus. Second quarter GDP below 3% y/y?

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

• 14.30 CET: CPI inflation from the US (survey +0.3% m/m).
• 16.00 CET: Existing home sales from the US (survey: 4.99 million; seasonally adjusted annualized data.

Ukraine. The Euro. Inflation

A slight fall on US equities and positive start on European boards are decreasing the risk aversion, but the EUR/USD will be shaped today by inflation from the US and EU foreign ministers decisions regarding Russia.

The market sentiment benchmarked by global indexes and USD/RUB pair slightly improved. Reports that separatists delivered to Malaysian authorities black boxes from the crashed jet and speed up the body identification process resulting that the tensions eased marginally. The situation, however, is far from normalization and are waiting for the EU talks results and another move by Russia.

According to the media reports (Bloomberg TV), the kind of sanctions which will be imposed on Russia depends on Holland. The stake is whether the EU bans weapons export to Russia. If it happens, France will have to cancel its warships delivery (the first is actually already built but the contact on the second one may be canceled). Probably France is ready to foot the bill but other countries will also have to follow the case and introduce other sanctions against Kremlin. Further Moscow isolation should result in weaker ruble and stronger dollar globally.

Reuters, CNBC and the Financial Times published today analysis regarding the resilient Euro despite that we are having hostile geopolitical conditions, muted economy and accommodative monetary policy. The European currency has still been above the multi-year average. The “FT” points out that in the short term we should pay attention to US CPI data which are scheduled to be released today and Euro area PMI set on Thursday. The other articles are based on the theme that investors who put their money into peripheral bonds and European stocks are naturally supporting the EUR. Moreover, we still have current account surplus which accounts for around 2.5% of the GDP. Additionally, as CNBC notes, the central bank's dollar reserves is usually diversified by Euro holdings. The analysis also point out that for a larger EUR/USD fall we will have to wait for broader dollar strength because the downside move will not be generated by the Euro weakness.

Today the market will be focused on the US inflation data. Despite it is the CPI reading (not closely watched by Federal Reseve PCE price index) investors will be closely watching the publication because both figures move in the same direction (PCE is around 0.3 percentage point lower than the CPI). Economists estimate that we will get a reading around +0.3% m/m and 2.1% y/y. However, if the data turns to be a bit higher we should expect another 20-40 pips slide on the EUR/USD and the test of 1.3450. On the other hand, a return toward 2.0% y/y should weaken the dollar and extend the short-term uncertainty till the Euro Zone PMIs are published (Thursday).

Stable zloty. GDP for Q2 below 3.0 y/y

The EUR/PLN is still pretty stable and has been traded around 4.15 in the recent hours. There is much more action on the GBP/PLN which constantly moves to the north, trying to match our estimates set at 5.30. We are also in an interesting moment on the USD/PLN which is attempting to leave the 3.00-3.07 range. I wouldn't count too much on the technical analysis at this moment suggesting that we may be pushed toward 3.15, but a rise to 3.10 is pretty possible.

We have some interesting estimates regarding the Polish economy published by Barclays. The British bank estimates that Q2 seasonally adjusted annualized GDP reading will rise by 1.4%. It means that quarter on quarter seasonally adjusted data will be +0.35%. Taking into account previous quarters we will get 2.95% y/y. The GUS publishes not-seasonally adjusted number but the seasonality in the year on year readings almost disappears. In result, we may even get the headline reading below 3.0% y/y, what increases the discussion on the interest rate cuts and should also weaken the zloty.

Until we get the GDP data, we are having June's retail sales tomorrow. The survey published by PAP is showing that economists expect a reading around +4.4% y/y. However, only a figure below +3.0% y/y (the worst in a year) may weaken the zloty by around a quarter of one percent and increase the odds for GDP publication below 3.0% y/y.

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

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