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Daily analysis 23.07.2014

23 Jul 2014 12:34|Marcin Lipka

Geopolitics is taken aside and the sentiments are improving thanks to the new records on the American stock market. Inflation in USA near to the expectations. Central Bank of Hungary is done with easing of monetary policy. The zloty maintains yesterday's growths, despite very weak data about the industrial production.

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

  • No macro data that could significantly influence the analysed currency pairs.

Sentiments. Inflation. Hungary

Yesterday's behaviour of foreign stock markets (especially west European and American) definitely improved the sentiments on the markets from which mainly emerging markets benefited. Better sentiment however, did not help EUR/USD which fell to the lowest levels this year, despite relatively neutral data on inflation from USA.

The market players quite quickly forgot about the anxieties related to the catastrophe of Malaysian airplane and the situation in Gaza Strip (perhaps the analyses made by the trade press – including “The Wall Stret Journal” - were helpful by indicating that in case of similar, single events the trends were not usually breaking) and started to buy the shares again, which allowed S&P 500 index to reach the new historical records. Currencies of emerging markets also took advantage on sentiments' improvement, but on the other hand, EUR/USD did not take the chance to stop the downward pressure, despite the neutral data on inflation from USA.

The prices of consumption goods (CPI behind the ocean increased by 2.1% r/r, which was accordant with the economists' consensus. However, CPI was clearly “pushed” upwards by the prices of fuel, electricity and gas (these components increased by over 4% r/r). As a result, the reading with exclusion of fuel and food prices was +1.9%, while market's estimations indicated maintenance in limits of 2.0%. This of course decreases a chance for earlier increase of interest rates (although does not exclude it at the moment) and gives a good argument for the doves from Federal Reserve, who want to raise the interest rates not earlier than in mid 2015.

So the question is, why has the dollar not gained on its value yesterday, despite that the data were more in favour of its sale than purchase? One of the reasons can be a fact that some used the reading to sell EUR/USD “feeling', that the general attitude towards this pair is negative and this might be the last chance to close the higher positions. The Euro-dollar weakness could be also caused by increased activity on this pair. As reported by Reuters, “some traders noticed big orders of purchase on USD/CHF pair, coming from the investment funds, which helped the dollar to enforce itself in relation to Euro, breaking the strong technical support in limits of 1.3475-1.3510”. When talking about Reuters report, it is worthy to add, that the direct transfer of USD/CHF changes on EUR/USD is caused by Swiss Central Bank maintaining the EUR/CHF rate above 1.2000.

Yesterday Central Bank of Hungary (MNB) decided that they are done with two years long cycle of monetary policy's easing. The monetary authorities decreased the main interest rate by 490 basis points and by that taking it to the level of 2.1%. Chief of MNB said that he will maintain the rates on the current level until the end of 2015, unless the three-per cent inflation goal of the bank will be at risk (the chance for this scenario is very small, because Budapest publishes a negative prices growth in relation year-by-year, third month in a row). After this information hit the wires the forint strengthened in relation to main currencies (also taking advantage from the improving global sentiment), because, as marked by Gabor Nemeth from Budapest's department of Aegon quoted by Bloomberg, the market even speculated about the possibility of money rates' descend below 2.0%.

In conclusion, EUR/USD still remains under pressure, despite the inflation reading from USA accordant to expectations. Tomorrowąs data from Europe are worth observing. The sentiments before Thursday's PMI from Euro Zone are minor. However, if consensus will be fulfilled (approximately 52 points from the industry for Euro Zone, as well as for Germany), then the downward trend should be stopped in a short time.

Zloty is stronger, but the sale is very weak

Zloty gained approximately PLN 0.01 in relation to Euro since yesterday's afternoon. The elements that helped the national currency were mainly the improvement of sentiments on global capital market (S&P 500 records), calming of the situation with Malaysian Boeing (separatists giving away the black boxes and efficient transport of the victims) and ending the interest rates' fall cycle in Hungary.

However, weak macro data are once again to the PLN disadvantage. Retail sale instead of growing by approximately 4% r/r, resulted only in 1.7% r/r. Annual sales dynamics fell actually in practically all categories and the sales of furnitures and RTV equipment, fell in year-by-year relation. Though national currency's weakening was symbolic after Central Statistical Office publication, the increasing probability of GDP reading for second quarter below 3.0% and the threat concerning the business cycle in the upcoming months can increase the amount of members willing to cut the monetary policy in Autumn. This fact should decrease the appetite for zloty and in the periods of risk aversions' increase seriously weaken it.

In conclusion, zloty quite “luckily” gained on its value thanks to the geopolitical situation's improvement, however, weak economic activity of the country (if it will not turn) will slowly increase the chance for cutting of interest rates, which in result should be negative for PLN. Today, on the other hand, the quotations should be relatively stable and most of the transactions will be made in the limits of 4.13-4.14 on EUR/PLN and 3.40 on CHF/PLN.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1200-4.1600 4.1200-4.1600 4.1200-4.1600
Range USD/PLN 3.0400-3.0800 3.0600-3.1000 3.0200-3.0600
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Range GBP/USD 1.7050-1.7150 1.7150-1.7250 1.6950-1.7050
Range GBP/PLN 5.2100-5.2500 5.2300-5.2700 5.1900-5.2300

23 Jul 2014 12:34|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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