Daily analysis 24.06.2014

No reaction on the solid data from the US and weaker from Germany. The Russian rouble cut almost all YTD losses. The risk of earlier election in Poland has been diminishing and the zloty stabilizes. Interesting idea from Bank of America Merrill Lynch.

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

• 16.00 CET: New home sales from the US (survey: 441k; seasonally adjusted, annualized data).

US and Euro area data. Rouble

The EUR/USD is not really eager to retest the recent lows and has been traded around 1.3600 in the recent hours despite that incoming data increasing the odds that interest rate disparity between the Euro area and the US should widen.

Both the PMI and existing home sales were significantly above the expectations. Purchasing Managers Index published by Markit rose to 4-year high and topped 57.5 level. US companies recorded a clear increase in output and new orders combined with a slight uptick in the employment. In the data we may also observe a rise in the output and input costs, what may translate into higher PPI inflation. Commenting the data Chris Williamson, chief economist at Markit wrote that “The survey data suggest that GDP should be set to rise by at least 3.0%” in the Q2 of 2014. It is, however, worth rememberingh that investors put much more attention to the ISM than PMI index (scheduled to be published on July 1st). We got equally good data from the real estate market. Existing home sales jumped at the fastest pace since August of 2011 and the reading was the highest since 2013 with the actual number at 4.89 million (the survey was around 4.75 million).

On the other hand, we had again mediocre data from Europe. The German Ifo dropped to 110.4 points from 109.7 with Bloomberg expectations set at 110.3. According to the Institute which run the survey, the German companies are afraid of “potential impact of the crisis in the Ukraine and Iraq”. In result the expectations sub index dropped to 104.8 points which was the lowest level since 7 months. The current situation remained at high level at 114.8 points. Historically the readings are not poor, but any slowdown in the strongest Euro are economy may be a sign of concern.

People who are close to the Kremlin joint the negotiations with the separatists in the east of Ukraine. Additionally, the truce announced a few days ago seems to be working, so the odds of calming the situation should be rising. Currently, the rouble has been benefiting the most from that development. The Russian currency regained almost all the losses and it is only around 3% lower YTD. Besides some improvement regarding Ukraine, the RUB is also benefiting from tension in Iraq which pushed the crude close to a year's high and Putin's visit to Austria (“South Stream” pipeline negotiations). After levelling off the political losses, the Russian currency should be traded more on the economy conditions and central bank approach. If there is no growth or the monetary policy gets less hawkish, we may see a pause to the rouble run and consolidation around the current levels.

Summarizing, it is possible that we may again enter a period of lower volatility for longer. For tomorrow and for Thursday we have final GDP readings and PCE inflation respectively, but there is a slim chance that any of the data will produce a significant move. Today the base case scenario is a trade around 1.3600 level.

Calm trade

The President Komorowski statement on Moday showed that the Palace will not put pressure on the government to resign. The Parliamentary majority is also not eager to run an early election. As a result, there is a sense that political risks should diminish even in a scenario of new tapes.

We are returning to the trade where local data and overall global risk appetite should shape the zloty in the short run. The latter seems to be fairly strong (if we measure it with US market condition). The condition of domestic economy has been slightly slowing, and Thursday's retail sales data should give us answer whether consumers also suspend their purchases.

An interesting note was presented yesterday by Bank of America Merrill Lynch. The US bank claims (quotes from Polish Press Agency) that the MPC may put a floor on the EUR/PLN rate at 4.20 to fight the low inflation (similar action done by Czech Central Bank). The BofA ML says that it is not a base case scenario but such action may be possible in the incoming 18 months. Without discussing the merits of the idea it is interesting what kind of response would be received taking into the account the sentiment after the publication of secret tapes.

Summarizing, the zloty is getting to much calmer trade period. The factors which were supposed to strengthen it are leveled off by the political issues, a slight economic slowdown and crude oil price rise. The base case scenario for the incoming hours is a range trade close to the current levels (4.16 per the Euro).

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

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