Daily analysis 24.01.2014

Bullish move on the EUR/USD after solid PMI data from Euro Zone, record high current account surplus and weaker US reports. The basket of weak EM countries is growing – Argentinian peso slumped almost 15% yesterday. The Polish zloty is also loosing some value on EM currencies issues.

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

• Besides the market consensus we are also publishing the consensus range. It gives more info how economists predict the incoming data and what kind of impact can be generated from surprising reports.
• Already published retail sales data from Poland (PAP survey estimated the growth at 6.8% whereas the actual data turned out to be +5.8%. Regarding the global EM situation the report will be ingored.

Solid data from Europe and weaker in the US. Emerging markets issues

Beginning from good information it is worth to note solid Euro Zone PMI (especially Germany). The Purchasing Mangers' Index from the largest European economy jumped to 32-month high and topped 56.3 points. It was much higher than expected (54 points) and above the previous month reading (54.3). Commenting the data, Markit economist Oliver Kolodseike wrote that: “Germany's private sector continued to hit high notes at the start of 2014, expanding at the quickest pace since June 2011. Manufacturing was a particularly bright spot, with companies reporting sharp and accelerated growth output and new orders”. PMIs from France were also better than estimated (services – 48.6, manufacturing – 48.8). Although the data exceeded the expectations we are still below the 50 level and no major economic rebound is expected from Pairs. In result the Euro Zone PMI (combining 8 largest countries) were clearly above the estimated (53.9). Markit chief economist, Chris Williamson wrote that “The eurozone's recovery gained further momentum in Januray. The upturn in the PMI puts the region on course for a 0.4-0.5% expansion of GDP in the first quarter, as a 0.6-0.7 expansion in Germany helps offset a flat-looking picture in France”.

Besides the PMIs it is worth to scrutinize the current account data. In November, according the ECB website, the Euro Zone current account surplus rose to a record 23.5 billion euro, and the cumulated figures for the last 12 months rose to 215 billion euro (2.3% GDP). In the recent year the goods surplus almost doubled (rising from +91.4 billion to +172 billion). What is more interesting the increase of traded surpluses was not mainly caused by Germany but by other countries which reduced their deficits or boosted their surpluses.

The Euro Zone data (PMI and the current account) allowed to generate around 100 pips bullish move on the EUR/USD. The rest “added” worse-then-expected PMI from the US and weaker existing home sales.

Some emerging markets have been really beaten since the beginning of the year. The list of countries with serious problems (Turkey, Ukraine, South Africa) was expanded by Argentine which joined “the club”. Buenos Aires issues have been known for months, but the government and central banks tired to avoid the major currency sell off. With rising strains in the EM, the pressure was to large on Thursday that the peso was allowed to slide quite freerly around 13% to the dollar. The currency slump put the second largest South American country to financial press headlines. Both “Financial Times” and “The Wall Street Journal” reminded readers that Argentina deals with unusually high inflation (officially less than 15; unofficially around 30), capital flow controls, and a significant difference between central bank and black market peso rate (up to 50%). Financial papers claim that a fall of currency reserves was one of the main reasons why the local currency slumped on Thursday.

There is still a tense situation on the Turkish lira. The EUR/TRY pair topped 3.15 yesterday what is a 33% increase in the last 12 months. Besides a widely known reasons (serious political crisis, record high current account), there is also a incoherent monetary policy and hard to understand government approach (trivialization remarks by a new Turkish economy ministers regarding the lira). The Thursday's lira slump would have been probably much deeper if the TCMB hadn't sold (according to Bloomberg and HSBC) around 3 billion USD of their reserves.

Summarizing, the EUR/USD did take advantage of the solid Euro Zone data. More volatility is expected next week, when the Federal Reserve publishes its statement after the FOMC meeting.

EM impact

We are observing quite significant zloty sell-off today. Despite that the Polish currency was quite resistant to the EM issues a slump of Turkish lira, Argentinian peso devaluation and riots in Ukraine pushed the zloty lower.

It is hard to assume that the base case scenario for the zloty is a significant depreciation over 4.20 per the euro. It is possible that for some time we can move above that level, but when the situation calms down we should come back relatively quick to the 4.14-4.18 band. The condition of the PLN can also be evaluated by observing other currencies from the core EM markets (Korean won and the Mexican peso). Only a significant downturn on this currencies can put a higher pressure on the zloty (low probability).

Summarizing the zloty did “recognize” serious problems of other EM. So far, however, the impact on the zloty is fairly muted and the level around 4.20 should the PLN sell-off.

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

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