Daily analysis 22.08.2014

The EUR/USD rebound despite solid US data. Jackson Hole in focus. Williams does not see a need to rise interest rates earlier. Norwegian krone continues appreciation move after solid GDP numbers. Bratkowski is another member leaning toward interest rate cut. The zloty is slightly higher due to global sentiment improvement.

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

• 16.00 CET: Janet Yellen speech at Jackson Hole conference.
• After 20.30 CET: Mario Draghi speech at Jackson Hole conference.

The rebound. Yellen. Williams. Krone

On Wednesday the US market “decided” that monetary tightening perspective caused by improving economy is not actually such a bad news and despite hawkish “minutes”, the session ended with gains. The same trend was continued on Thursday and at one moment we were only a quarter of one percent below the 2K mark on the S&P500 index.

Both EM currencies and stocks across the pond were lifted by solid US data. The PMI index reported by Markit rose to the highest level since April of 2010 (from 55.8 points to 58) and despite the fact that it does not bring as much attention as a well-recognized ISM, it is worth noting some interesting comments form the survey. According to Markit, the world's largest economy experienced the fastest employment growth since March 2013 and export jumped at highest pace for 3 years. We can also read that there is a further improvement regarding the output and new orders. Other readings were also record high. The LEI index rose to almost 4-year highs and business confidence Philadelphia Fed topped 28 points (the strongest in 3.5 years). The existing home sales and jobless claims didn't fall short of expectations and both topped the economists' estimates at 5.15 million and 298k respectively. Despite such solid message from the US the dollar appreciation has stopped.

The main reason lying behind the dollar pause were dovish expectations before the Yellen's statement. The Federal Reserve chairwoman is scheduled to speak on jobs market today at Jackson Hole conference. The majority of observers claim that her remarks will be pretty dovish. However, the Wednesday's minutes showed that not only the main indicators describing labor conditions (“payrolls”, unemployment rate) improved but the amount of long-term unemployed dropped significantly and the amount of people working part-time decreased.

What is pretty interesting is the fact that issues were recognized by John Williams. But despite a significant improvement of the jobs market conditions, the president of San Francisco Fed (non-voting, dovish, close to the FOMC consensus) told CNBC yesterday that the optimal moment to raise the interest rates is still mid 2015. Further Williams repeated a well-known phrase that the Committee moves would be data depended. Overall, Williams didn't sound more hawkish than in the previous interviews, so it could mean that the Fed's chairwoman should also remain quite dovish despite a significant improvement in the macroeconomic indicators.

The Norwegian krone continues its appreciation move (the scenario presented by us several days ago after higher-than-expected inflation seems to materialize). This time the Scandinavian currency was boosted by a solid GDP report. The economy expanded at 1.2% q/q, whereas the market expectations were around +0.6% q/q. Faster than expected CPI growth and stronger economy are lowering the probability that Norwegian central bank cuts rates at the upcoming meeting (it was widely expected after the Swedish Riksbank slashed the benchmark by 50 bps points recently). As a result the EUR/NOK dropped since the beginning of August from 8.40 to 8.15, what means that the krone gained 3%. A goal set by us at 8.00 level may be reached faster than expected.

Summarizing, taking into the account yesterday's Williams interview we will have to return to a concept that Yellen should be dovish today. As a result the dollar appreciation may be stopped and another wave of bullishness should return after more solid macroeconomic reports and comments from the FOMC. In the Jackson Hole calendar we are also having a scheduled Mario Draghi speech. However, I would not expect it should be market driven event. The ECB chief did say quite a lot during his last interest rate conference and we should not count that today he can give more clues on the future Euro area monetary policy.

A rate cut? Yes, but no sooner than in October

Such an impression should be drawn from the recent Andrzej Bratkowski comments for Reuters. The MPC member (the most dovish during the recent interest rate cut cycle, currently pretty neutral) would like to see firstly macro data from August and September to make the decision in the following month. When the MPC decides to decrease rates he would like to advocate for a drop up to 100 bps, what seems to be much more aggressive that other members in the dovish camp (mostly 50 bps).

Bratkowski probably does not want to cut the rates earlier due to the fact that just few months ago he was leaning toward a hike. Therefore, his pace of changing the view cannot be that swift. It does not change the fact that he is a fourth member (after Osiatyński, Chojna-Duch, Zielińska-Głębocka) suggesting a monetary loosening. Currently the probability of a cut significantly exceeded 50% and it is a matter of time (more weak data) that both Belka and Hausner join the dovish camp.

Summarizing, the interest rate cut is currently a base case scenario. A question mark is the scale of monetary loosening. While the consensus is around 50 bps it may be widening when another set of pessimistic data hit the wires. The recent hours were quite calm for the zloty (thanks to new all-time-highs on US markets). However, during more nervousness the zloty eagerly weakens, so the scenario to move above 4.20 per the Euro is still actual.

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

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