Daily analysis 23.05.2014

Fairly good US data and weak Ifo readings from German economy pushed the EUR/USD below 1.3650 mark. Higher valuations of EM currencies. Elections in EU and Ukraine. The zloty significantly stronger both to the Euro and franc. “Stance swap” in the Polish MPC after Glapinski and Bratkowski comments.

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

• 16.00 CET: new home sales in the US for April (survey 420k; seasonally adjusted, annualized data.

US and German data. Emerging markets. Elections

The EUR/USD in the recent hours was hovering around 1.3650 levels – the bottom line of the range set by short term lows. Despite that bulls did mange to prevent a further slide from weak European data the Euro-dollar was gradually sliding to the support level after solid US data (both manufacturing PMI and existing home sales). The market, however, was clearly waiting for today's Ifo reading.

The German confidence index was below economists' consensus (110.4 vs survey at 110.9). Just after the data hit the wires we dropped by around 30 pips to 1.3620. The market didn't rebound even after some encouraging statements from Hans-Werner Sinn, Ifo institute president, who was a Bloomberg TV guest minutes later. He said that the index drop was caused by specific time when the survey was collected (“at the peak of nervousness” regarding the situation in Ukraine) and as he claimed “the worst is over” in the East we may expect that further readings can be higher. It seems that investors were more concerned about another argument for the ECB to “act” in June then a real impact of the reading. In result we may even the 1.3600 level.

The situation on emerging markets is getting more interesting. Investors seem to be much less concerned about geopolitical tensions and US monetary policy tightening. Their optimism was translated into some heavy buying yesterday. It looks like market participants are try to buy assets before the Ukrainian election is over in anticipation that polls leader Petro Poroshenko may win the voting in first round. It would also give him quite a substantial mandate to deal both with east part of the country and with Russia. At the first sight such investors behavior may be counterintuitive but if we look further, there is a high probability it may succeed. Some polls actually suggest that Poroshenko may win in the first round. Additionally, Russian media seem to be fairly while neutral commenting his actions. Finally, if Ukrainian election goes relatively smooth, we should expect more risk on sentiment and currencies which strongly appreciate this week (rouble around 1.5, lira by 1% and both PLN and HUF by 0.5%) can gain even more.

Summarizing, the EUR/USD situation is getting worse and it is possible that we may test levels below 1.3600 today (after strong US data). A deeper Euro depreciation is much less probable until the ECB June's meeting is held. Some media reported European election can have some threat for the markets. However, most changes in the Parliament will take place between right and left leaning parties and the risks from “Eurosceptic” moves are still fairly low (or even lower than polls are showing as we may see after already finished Netherlands' voting).

Taking advantage on the sentiment. Interesting comments from MPC members

Thursday's afternoon was pretty successful for the zloty. Both EUR/PLN and CHF/PLN dropped by around 0.5%. A similar situation was experienced on other emerging markets, what was mainly the effect to front run the global positive messages (resolution in the East, more monetary accommodation from Europe). If the trend keeps going (quite probable) we should expect another few Polish cents appreciation on mentioned pairs.

We had some interesting comments from MPC members in the recent hours. Adam Glapinski (used to be pretty hawkish, later leaned to neutral stance, and now getting quite dovish) told Reuters that “It is likely that rates may stay unchanged until the end of 2015 and highly likely that this will be the case in the first half of 2015”. He is another MPC member (after Osiatynski) who sees that the first hike can be in 2016.

On the other hand, in a long Polish Press Agency interview with Andrzej Bratkowski (previously considered as a one of the strongest dove), the MPC member claimed that he would see a first hike in Q1 of 2015. Bratkowski also added that forward guidance should not be extended further in July's meeting. What is even more interesting, he seems to be more concerned with risk of stronger CPI than low inflation saying that “in my opinion currently the risks regarding lower inflation readings are less significant than with fast appreciation of CPI after a period of subdued inflation caused by transitory factors. All Bratkowski's comments were really hawkish and will probably change his “dovish profile”. Concerning the zloty, both opinions were ignored as there is still to early for any policy changes and during strong foreign capital flows most news are simply ignored.

Summarizing, the capital flow into EM assets should further boost the zloty. This week will be probably finished around the current levels, but if the Ukrainian election is fairly calm, we should expect that both euro and franc should gain another 0.5% in the following days.

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

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