Daily analysis 22.09.2014

Market sentiment after important events – Fed depended on data, and the ECB is closer to more stimulus. The yen in focus. William Dudely and Mario Draghi are scheduled to speak. Hausner prefers slow easing while Osiatynski sees deeper cuts.

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

• 15.00 CET: Mario Draghi speech in the European Parliament.
• 16.05 CET: William Dudley conference (third most important person at the Fed).

Fed. EBC. Yen

A mixed message from the latest Fed's meeting (dovish statement, hawkish future interest rates projections) caused some confusion on the market so we had to wait few days until investors managed to build a common “sentiment”.

Currently a leading view is as follows: future Fed's decision are almost fully depended on the incoming data. After the recent Janet Yellen explanations on “considerable time” we should assume that the phrase's strength has diminished significantly and it would be erased either in October or December. Deleting the “calendar based approach” should cause any economic reading having an impact on the monetary policy to be scrutinized. Later, after the first hike hit the wires, investors will most likely focus on the pace of monetary tightening which may have even a grater impact on markets than the first increase.

Better readings from the US should extend the dollar appreciation trend to almost all currencies (maybe besides the pound). On the other hand, a set of weaker data does not have to mean that we should expect a significant “greenback” depreciation. The market is aware that the US monetary is poised to tightening, and some deviations in that trend can only generate a correction but not a trend shift.

Fairly muted interest in the TLTRO (cheap ECB loans to the banking sector target at SME's and consumers) increased the probability that the ECB may be more eager to buy ABS aggressively (for example purchase securities that with lower ratings) and increases the odds for a full-QE (however, not earlier that in 2015). Mario Draghi would like to increase the central bank balance sheet to the 2012 size (3 trillion euro; currently it is only 2 trillion). So more easing is almost inevitable.

There are still very few arguments that may support the European currency (besides a significant current account surplus). As a result, further euro weakness is expected but the pace of the slide should be much more benign than that observed in previous months.

In recent days we spent a considerable amount of time on the Japanese currency. Updating previous information it is worth adding remarks from former BoJ vice chairman. Kazumasa Iwata told Bloomberg that “Japan is in danger of falling into a recession as the yen's decline reduces the purchasing power of households and squeezes corporate profits”. Iwata also added that “the current yen weakness is slightly excessive”.

Incoming months should be pretty interesting for the yen. It is possible that market participants would like to test the weaknesses of the local economy. We are clearly observing that the “Abenomics” policy is bringing more and more damage to Japanese performance. If such attempt occurs, further significant losses on yen are to come. It could also be followed some debt sell-off (initiated by higher inflation and lower growth and worries about the future economy performance). Both impulses may push the yen toward 120 mark for the dollar.

Today the macro calendar is pretty empty but it is worth paying attention to central bankers' speeches. The ECB chief is scheduled to speak at the European Parliament while Fed's William Dudley (third the most important person at the Committee; dovish) is supposed to take part in conversation at conference in New York (rather should be more dovish than hawkish). In a scenario when we get no additional monetary data, the market should start positioning itself before tomorrow's euro area PMIs.

Osiatynski and Hausner

Run by National Bank of Poland portal "the Financial Observer” published today two Polish Press Agency interviews with the MPC members. In the first one Osiatynski would like to see a 50 bps cut in October. The dovish member sees further cuts in the future but the pace of easing seems to be depended on the data and the inflation projections. Osiatynski's comments are in line with Chojna-Duch but their camp will probably not be able to convince the majority during the October meeting.

Hausner is much closer to the consensus. The neutral MPC member, whose view is often similar to the governor Belka, claims that he would rather adjust the policy (to the current revised downward inflation and GDP growth – author's note) then to ease it. We should assume that Hausner should vote for a 25 bps cut both in October and November. However, there is still quite high probability that we experience more weakness in the economy and during the November meeting we will see steeper cut or a promise to continue the easing further. As a result we claim that the odds for 75bps rate decrease till the end of the year is pretty high.

Both interviews were in line with market expectations (Osiatynski dovish, Hausner neutral), so no market reaction was observed. Following hours should also be pretty calm on both EUR/PLN and CHF/PLN and only a slight pick up in the volatility is predicted tomorrow morning (PMIs from the euro area and retail sales from Poland).

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

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