Daily analysis 23.12.2014

Despite that the American data was less favorable, the main currency pair remains stable. Large changes in the British current account. Profitability of the Czech two-year treasury bonds are near the level of negative 1%. The zloty remains weak, but the EUR/PLN is testing the area of 4.40.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 16.00: Sale of new houses in the USA (estimation: 575k).
• 16.00: Final reading of the University of Michigan consumer sentiment index (estimation: 98 points).

No large changes on dollar

Taking into consideration the Fed’s future monetary policy, yesterday’s readings from the USA may be interpreted as slightly negative for the dollar, even though were mixed. The PCE inflation was the most disappointing (1.4% YoY vs 1.5% YoY). Moreover, this index with exclusion of fuel and food increased by 1.6% YoY, which was 0.1% less than estimated.

The report regarding incomes of Americans were negative as well. Instead of growing 0.3% MoM, this index remained unchanged. The other readings (expenses, orders for durable goods, jobless claims and the GDP) were relatively neutral. As a result, the EUR/USD tested the level of 1.0500 yesterday afternoon. However, later on this pair returned to its previous level. This goes to show that the majority of the market participants has no appetite for deeper changes. This is consistent with what we wrote yesterday. It seems that only clearly inconsistent data may destabilize the dollar. However, that kind of data most likely will not be published until next year.

Serious revision on the British current account

This morning, the Office for National Statistics (ONS) published the data regarding the British current account (C/A). Over the past few months, we have been taking note that a significant deficit (6-7% of the GDP in some quarters) is one of the pound’s largest problems.

Today, it appeared that the previous ONS data has overestimated the deficit scale. This index was at the level of 5.5% of the GDP in the fourth quarter of 2015, instead of the previously estimated 7.0%. The deficit for the entire 2015 was decreased from 5.4% of the GDP to 4.3% of the GDP. Moreover, the C/A for the first half of this year is at the level of approximately negative 5%, instead of negative 6%.

The ONS wrote that this revision concerned mainly profits of the foreign subjects, which were related to direct investments. However, the British goods balance reached the level of 7.9% of the GDP, which is its worst result in at least twenty years. Weaker pound most likely improved the services balance (positive 5.1% of the GDP). The United Kingdom’s internal imbalance (trade, primary balance, secondary balance, which basically create the entire current account) remains significant (5.1% of the GDP). It is crucial, whether the Brits will limit their import due to the weaker pound. If not, the market will force a further overvalue of the GBP.

Czech krona

Yesterday’s announcement from the Czech National Bank (CNB) suggests that the policy of keeping the EUR/CZK above the level of 27, most likely will not be extended beyond the second quarter of 2017. This may cause serious fluctuations of the Czech currency in the second half of 2017, as well as its clear appreciation against the euro.

This is indicated by the behavior of the Czech treasury bonds. Profitability on the two-year instruments are reaching the level of negative 1%. This means that the market at least expects a 2% strengthening of the krona against the euro. In any other case, the purchase of such instrument wouldn’t make any sense. This is especially taking into consideration that the Czech interest rates are at a positive level, there is not treasury bond purchase and inflation is estimated to grow. Moreover, the market is aware that the CNB will not continue to wear-off the krona. Therefore, we may expect strong changes at the beginning of 2017.

EUR/PLN tests 4.40

The zloty wore-off yesterday afternoon. However, the demand for the Polish currency increased this morning and the EUR/PLN is getting closer to the 4.40 level. Taking into consideration the euro’s global weakness, as well as the extremely mild monetary policy from the ECB, the zloty should strengthen against the euro.

Calm situation in the emerging markets, as well as depreciation of the Polish treasury bonds, may also support the EUR/PLN decline below 4.40. This is because the foreign capital may become increasingly interested in Poland. Therefore, we expect that there is a relatively large chance for the euro to go approximately 0.02-0.03 PLN below 4.40 by the end of the year.