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Daily analysis 23.09.2014

23 Sept 2014 12:26|Marcin Lipka

Chinese manufacturing higher than expected but signals from the European economies are mixed. Draghi is ready to fight low inflation but no new easing measures are revealed. Dudley remains pretty dovish and concerned about stronger dollar. Gradual situation improvement in Eastern Ukraine. The zloty takes advantage from “risk on” sentiment.

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

  • No macro data which may affect the analyzed pairs.

China. Euro zone. Draghi. Dudely

Recent fears concerning economic conditions of major European and Asian countries caused that expectations before today's data were pretty low. A slightly better or neutral readings improved sentiment what was directly translated into higher EUR/USD (close to 1.29 mark).

However, when we look at the PMI picture closer the future doesn't look that bright like market presented it. Chinese Purchasing Managers' Index remained above 50 mark but according to the chief HSBC economist Hongbin Qu the Beijing economy is mixed. He claims that “new orders and new export orders registering some improvement”, while “the employment index declined further and disinflationary pressure intensified”. Qu also points out (similarly to previous reports) that the “property downturn remains the biggest downside risk to growth”.

We can see some interesting findings in both German and French PMI readings. According to Markit, the industrial activity of the second largest European economy rose markedly (from 46.9 to 48.8) but at the same time the services benchmark dropped to 49.4 from 50.3 points. Simply adding two figures we may assume that the situation improved but comments from senior Markit economic dismisses such approach. Jack Kennedy claims that “French economic performance weakened in September, as a return to contraction of the service sector outweighed an easing rate of decline in manufacturing”.

In Germany the situation was opposite. Services were increasing the growth momentum (from 53.7 to 54.0) while the manufacturing fell short of expectations and the industrial PMI dropped to 15-month lows (from 51.4 to 50.3). In case of our western neighbor whose economy is oriented on export the manufacturing is much more important than services. Commenting the composite euro area readings Chris Williamson points out that “the survey data suggest GDP is on course to grow by 0.3% at best In the third quarter, buoyed by a 0.4% expansion in Germany”. Summarizing the PMI readings it is worth noting that the “headline” reading was better than the details revealed and after a short-term excitement the sentiment may worsen again.

Monday's Mario Draghi speech at the European Parliament didn't bring any unexpected market moving information. The ECB chief still keeps the door open to more monetary stimulus in case on further downside inflation pressure. Moreover, he also urged the European leaders again to focus on structural reforms due to limited impact from the monetary policy. The only slight surprise was Draghi's comments on TLTRO demand which was “within the range take-up values we had expected”.

Much more interesting were comments from William Dudley. During the Bloomberg interview with the New York Feds chief he confirmed his dovish stance and recommended “patience” regarding the first interest rate hike, and he even suggested to push the unemployment rate below the full employment to push the inflation higher.

Dudley for a long time presented very similar view as both current and former Federal Reserve chiefs. He has also had a significant impact on the FOMC decision (always with the voting rights). The market will have to decide whether if he is still as influential as before or due to the attempt to build broader consensus Yellen will decide to represent much hawkish stance than Dudley does. Listening to the NY Fed chief and recalling the dots from the SEP projections we may even assume that he is in three-member camp who predicts that we will get only one interest rate hike in the whole 2015.

William Dudley also pointed another interesting fact. The increasing value of the US dollar may have a downward effect on inflation. As a result it can also have a negative impact on growth. Both issues are the arguments to leave interest rate at record low levels for longer. It may be used as a good reason to generate a correction on the dollar especially if other FOMC members also see it as a threat.

Summarizing the morning PMI reading, contrary to the initial reactions, weren't that bullish for the European economies. If it was the impulse which boosted the EUR/USD it may fade really quickly. Much better “excuse” for the dollar depreciation were Dudley remarks. If the market focuses more on following issues we may see a stronger rebound on the most heavily traded currency pair.

The zloty takes advantage

The Polish currency strengthened on global sentiment improvement and slightly better retail sales (+1.7 y/y vs 1.6% estimates). The EUR/PLN pair dropped below 4.18 level. The sales components were pretty mixed – car sales dropped significantly but other durable goods rebounded markedly. Regarding the monetary policy the data didn't change anything and the base case scenario is still 25 bps cut in October.

The zloty also takes advantage from improving situation in Ukraine. Both sides try to fulfill the Minsk agreement. Additionally, according to the Itar-Tass on September 26th another set of talks will be held in Berlin regarding the gas supply from Russia to Ukraine. The Kremlin is also pretending to calm the situation. Putin spoke yesterday with United Nations Secretary General Ban Ki-moon and according to the presidential website “both sides gave a positive assessment of the agreements reached at the meeting of the Minsk group”.

Summarizing a slight sentiment improvement, neutral Polish data and more positive readings from the East may give some appreciation impulse to the zloty and we may see a move toward 4.16-4.17 levels on the EUR/PLN. The CHF/PLN should also benefit with a slide below 3.45.

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

Range EUR/USD 1.2950-1.3050 1.2850-1.2950 1.3050-1.3150
Range EUR/PLN 4.1800-4.2200 4.1800-4.2200 4.1800-4.2200
Range USD/PLN 3.2200-3.2600 3.2400-3.2800 3.2000-3.2400
Range CHF/PLN 3.4400-3.4800 3.4400-3.4800 3.4400-3.4800

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

Range GBP/USD 1.6250-1.6350 1.6150-1.6250 1.6350-1.6450
Range GBP/PLN 5.2700-5.3100 5.2500-5.2900 5.2900-5.3400

23 Sept 2014 12:26|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.

See also:

22 Sept 2014 18:27

Afternoon analysis 22.09.2014

22 Sept 2014 12:51

Daily analysis 22.09.2014

19 Sept 2014 17:26

Afternoon analysis 19.09.2014

19 Sept 2014 12:22

Daily analysis 19.09.2014

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