Daily analysis 23.06.2014

Fairly good PMI readings from China, weak from France and in line with expectations from Germany. Draghi suggests keeping interest rates at low levels until the end of 2016. The zloty stabilizes around 4.16 per the Euro but the political risk still may weigh on the local currency.

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

• Already published PMI readings from France and Germany.
• 15.45 CET: US manufacturing PMI readings from the US (survey: 56.5).
• 16.00 CET: Existing home sales (survey 4.75 million, annualized, seasonally adjusted data).

PMIs and interest rates

The week began from fairly good data. Chinese PMI reading rose to the highest YTD levels and exceeded the 50 mark (50.8). While commenting on the data, Hongbin Qu, chief economist China & Co-head of Asian Economic Research at HSBC, wrote that “the improvement was broad-based with both domestic orders and external demand sub-indicies in expansionary territory". Qu also points out that “mini-stimulus are filtering through to the real economy” and “over the next few months, infrastructure investments and related sectors will continue to support the recovery”.

The optimism observed before the start of the European session quickly faded when French PMIs were published. According to the preliminary Markit readings, the situation in the second largest Euro area economy worsened both in manufacturing (from 49.6 to 47.8 points) and services (from 49.1 to 48.2). The comments from Paul Smith, senior Makit economist are also pretty dire. He claims that “the data are consistent with another disappointing GDP outturn for Q2 following stagnation in the first quarter”. Additionally, Smith expects that “the economic underperformance of France seems to persist well into H2 2014”.

The future should be much brighter in Germany. Manufacturing PMI remained close to the May's level (52.4). The services reading is slightly worse than before (54.8 vs 56) but we still remain firmly above 50 mark which separates the contraction from expansion. There is also no signs that the largest Euro Zone economy may have any trouble in the following months.

During the weekend we had quite interesting message from Mario Draghi. As Bloomberg reports, the Dutch newspaper "De Telegraaf" published interview with the ECB chief which may suggest that Euro area interest rates “will probably remain low for at least another 2 ½ years”. If we quickly compare that to the recently published FOMC projections, where the members' median forecast for interest rates level is around 2.5% at the end of 2016, we should clearly see how the rate difference will widen in the incoming quarters. In result, it should “at some moment” translate to further pressure on the Euro and support for the dollar.

Summarizing, besides fairly good readings from China the result of PMI indexes is on the softer side. The French economy has still been quite weak and there are no signs of the improvement on the horizon. Today investors may get some attention from housing data (in the recent FOMC statement real estate expansion has slowed). We should also not forget about Tuesday's German Ifo index. The reading around 110 points will be regarded as neutral.

Stabilization

After pretty high volatility recorded last week on the zloty caused by Fed's decision, “tape scandal” and Norwegian Central Bank statement, the Monday's session brings calmness and trade around 4.16 on the EUR/PLN. Some portfolio investors used the PLN weakness to enter long positions on Polish assets.

Whether the decision was successful depends on the fact if the government withstands the recent crisis. In a scenario of earlier election the zloty should weaken to 4.20 per the Euro and 3.45 on CHF/PLN which can be much better moment for some PLN purchases.

In the medium term we will return to the real economy. Recently we have had some weaker readings (production, inflation, PMI). If the softer data persists, we may expect that the MPC decides to interest rates and in result the zloty should get weaker. In that context it is worth observing retail sales reading, which will be a good indicator whether the consumers are on the stronger or softer side.

The last issues which can put pressure on the local currency is the oil issue. The Brent crude is topping 115 USD per barrel and we are getting loser to 12-month highs. Higher costs of oil may on one hand worsen the trade balance, but on the other put some pressure on the GDP (both are negative for the PLN).

Today, however, the trade should be fairly calm and most transactions will be made around 4.16 level. The similar situation will be observed on the CHF/PLN. Only significant changes in the local politics (increased pressure for the early election) may weaken the zloty markedly.

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

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