Daily analysis 24.07.2014

“FT” reveals the document regarding EU sanctions on Russia. Chinese and German PMI readings above expectations. Aussie and kiwi moving in opposite directions. The pound remains above 1.70 level to the dollar after the “minutes”, Carney speech and UK's retails sales. The zloty remains stable but a slight depreciation is looming on the PLN.

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

• 14.30 CET: Weekly jobless claims from the US (survey 310k).
• 15.45 CET: Preliminary PMI reading from the US (survey: 57.6).
• 16.00 CET: Existing home sales from the US (survey: 475k for June, seasonally adjusted, annualized data).

Sanctions. PMI. Kiwi and Aussie. The pound

Morning trading on the EUR/USD started on the downside. Rumors on possible harsh sanctions imposed on Moscow pushed the most popular currency pair below 1.3450. The situation slightly improved after the German data hit the wires, where the index of future industrial activity topped 53 points.

The “Financial Times” obtained a 10-page document that gives a broader perspective to how the EU sanctions on Russia may look like. According to “FT” the Union will “bar the Russian banks from listing new issues on European exchanges”. Additionally, the proposal bans “all Europeans from purchasing any new debt or stock issued by Russia's largest banks”. The British paper quotes the document claiming that Moscow controlled financial institutions issue between 7.5-15.8 Euro bonds yearly. However, the sanctions will not deal with government bonds (probably because EU issues much more debt than Russian Federation does). Besides financial services, the restrictions will deal with defense sector and some more sophisticated technology needed in harsh conditions oil exploration (arctic, shale, sea). “FT” also claims that sanctions “would be far more extensive than [these] imposed by US earlier this month”. We should also notice that the measures proposed by EU will have much broader “propaganda” effect, especially given that connections between Moscow and Brussels are much closer than those between the White House and Kremlin. For the Euro less restrictions means less pressure. So any proposal containing fewer sectors should be positive for the common currency.

Some bullish information came from PMI readings. The Chinese future industrial activity index prepared by HSBC and Markit topped 52 points which was the strongest publication in 18 months. It is also worth noting that the key subindexes increased their value – production, both domestic and export orders. Optimistic readings of Purchasing Managers' Indexes came also from Germany. The manufacturing reading rose to 52.9 points while its services counterpart soared to 56.6 which was the strongest number in 37 months. As usually, we had a negative surprise from France where the industry is expected to shrink at a faster pace in 7 months (47.6 points). Commenting the overall Euro area preliminary reading (from eight countries), Chris Williamson, the Markit's chief economists claims that the data are suggesting an 0.4% q/q GDP growth. Williamson also predicts that the peripherals should expand at a faster pace since 2007.

In the recent hours we had some interesting moves on Antipodes currencies. Nightly New Zealand Central Bank (RBNZ) decision signaling a pause in interest rate rising (the RBNZ was supposed to finish the hikes after 125 bps rise, whereas the benchmark rose only 100 bps) and clear suggestion that the NZD is overvalued. In result the Kiwi dropped by more than one percent, significantly moving below the all-time-highs. On the other hand, the AUD is pretty strong. The Aussie due to a relative high inflation data and solid Chinese readings gained around 1% to the dollar in the last three days. It is worth noing that the dovish RBNZ message may cause that the appreciation trend on the NZD can be in trouble if the future data (inflation, GDP growth, real estate market) fail to push RBNZ toward further tightening.

The pound seems to be under pressure. Some expected that at least one BoE member would vote for the rate tightening but according to the minutes all MPC member wanted to leave interest rate unchanged. Additionally, Mark Carney in his speech suggested that he is not really keen to rise the benchmark really quickly (it may push the consumption lower) and future decision will depend on the incoming data. The readings released before the noon are showing some slowdown. Retail sales was only +0.1% m/m while expectations were set at +0.3%. In result the GBP/USD has been under pressure and we are close to 1.7000 level. Possibly we may drop below that level pretty soon. In the longer run the appreciation trend should be preserved.

Summarizing, due to strong PMI reading we are moving further from the recent lows on the EUR/USD. Today, the single currency will be quite depended on Brussels decision. If “FT's” report turns out to be true we should expect a retest of 1.3450 level. In that case we should also see a further rise of USD/RUB, probably significantly above 35.00 mark.

Debt auction. Sanctions. Euro area data

The zloty remains fairly stable. We have had a pretty bullish government debt auction which generated quite a demand for Polish bonds. It is not the effect of Polish economy improving, but rather a side effect of weak data. Low retail sales increased the odds for the rate cut, what pushed the yields lower (increased the current prices and gave hope for further appreciations). Because the supply of state-issued debt is pretty low this year and government secured all the borrowing needs for 2014 investors showed a heavy demand for Polish papers. It also gave some support to the currency. The effect is, however, short-lived and more weak data will bring us closer to the interest rate cut what should push the PLN lower.

After recent weak retail sales we had two comments from MPC members. According to the Polish Press Agency, Jerzy Osiatynski (one of two supporters for interest rate cut) said that “he would like to believe that the slowdown is short-lived”. However, Andrzej Kazimierczak remains calm until he sees more evidences that the recent subdued data is persistent. In both cases we can assume that key for further decision should be July and August data which will heavily weigh for the October MPC decision. Currently we assume that chances for a cut are pretty low (mainly due to the hawkish members, not the data), around 20-25% despite that the FRA market shows a 50bps cut in Fall with a high level of probability.

Summarizing, the zloty should remain pretty stable despite that its medium-term perspective worsened in the recent weeks. In the short time we should expect that if “FT” reported sanctions are implemented the EUR/PLN may move toward 4.15 and USD/PLN will probably top 3.08.

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

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