Daily analysis 24.09.2014

Weak Ifo readings increased concerns on European largest economy. Bullard still sees chances for a rate hike in the first quarter of 2015. Yen corrects the recent slide after Abe comments. The NATO confirms conflict deescalation. Polish MPC members on interest rates. The zloty giving up some of the previous gains.

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

• No macro data which may affect the analyzed pairs.

Ifo. Bullard. Yen. Ukraine

We cannot write anything positive about German Ifo published in the morning The Business climate index dropped to the lowest level since April of 2013 (104.7 points vs Bloomberg consensus at 105.8 and previous month 106.3). What is even more disappointing, the subindex describing “expectations” slowed to 99.3 level which was the weakest figure since December 2012.

Digging further into the details we can also see that the wholesalers projections dropped to 4-year lows. Overall the situation is well described by the Ifo Institute chief Hans-Werner Sinn who wrote that “German economy is no longer running smoothly".

Moving across the pond it is worth quoting recent James Bullard comments. Despite that the St. Louis Fed's President is not scheduled to vote both this and the next year his remarks bring some attention (he seems to be close to the consensus). The FOMC member said yesterday that he wasn't in favor in scrapping the “considerable time” phrase, but the calendar based forward guidance would be probably erased in October.

Regarding the monetary policy, the first interest rate hikes should begin between first and second quarter of 2015. We may conclude it from Bullard comments who said according to Bloomberg that “I think the committee will come around to my position and we will end up with something in the first half of next year” On the other hand, “The Wall Street Journal” quotes form the same conference stated that “he'd like to see the first increase in rates come near the end of the first quarter of 2015”. Overall we can see that Bullard is slightly on the hawkish side but it does not mean that yesterday's Dudley comments should be dismissed (the latter has much more significant impact on the monetary policy than St. Louis Fed's President).

Japanese prime minister finally commented the recent yen weakness. Shinzo Abe was concerned about the impact on local economies in the home currency weakness. It allowed to generate a slight correction on the bullish USD/JPY trend, but the overall tendency should not be reversed.

The Abe remarks were well commented by head of Fx strategy, Asia-Pacifict for Barcalys. Mitul Kotecha said that “Abe comments are probably aimed at trying to avoid any criticism related to the yen's weakness” He also added that “ultimately, I don't think the trend or the tone will change. It appears to me that Japanese officials would still prefer to see yen weakening as long as it's a gradual drop in the currency”. However, we should remember that the market usually does not play with the central bank/government rules and loves to strengthen the trends (as we experienced in last two weeks). As a result the most probable scenario is further weakens with periods of significant slide and target around 120 on USD/JPY.

Since almost three weeks we have been noting (after first rumours of the Minsk meeting) that the situation is heading for a gradual improvement in Ukraine (at least from a global investors' point of view). Such conclusions were also drawn from Kremlin comments sent to the Russian public and Kiev authorities stance which was gradually weakening.

A good confirmation of that fact is also yesterday's message from the NATO. The North Atlantic Treaty Organization claims that “there has been a significant pullback of Russian conventional forces from inside Ukraine”. However, we will have to wait many months until the trade situation between the UE and Russia starts to improve. There will need even more time until any economic progress can be seen in Ukraine. But in that second case we should also expect that the West may markedly increase the financial aid to Kiev which also can be beneficial for its close western-oriented members (for example Poland).

Summarizing, the German data published in late morning is a negative message for the common currency, which will even have more problems to generate any correction. Additionally, much bigger threat for the euro zone is a fact that its internal problems are going to weigh on its economy much stronger that the Russian-Ukraine issues. Even if market manages to keep the EUR/USD rate near the current levels the further downside move is significantly more probable that any visible correction.

The correction

Tuesday's session, in line with our comments, was favourable both for euro and franc buyers. Today's German data caused that we gave back some of the gains. Despite that Polish economy is strongly depended its western neighbour performance it is expected that the slow and gradual appreciation trend should be continued with short-term target at 4.16-4.1650.

The recent 24 hours brought many comments from the MPC members. The least controversial was Marek Belka who confirmed to Polish Press Agency (PAP) that the October cut is very probable and confirmed Hausner view that any policy changes will be gradual and not aimed strictly at easing (rather adjustments to the current situation).

On the other hand, Elzbieta Chojna-Duch told PAP that she would like to see a cut at lest 50 bps at the October meeting. Futther, however, she would like to see “inflation projections” and both global and local economy performance.

The comments form Andrzej Bratkowski were quite surprising. The MPC member told PAP that he supports 25 bps cut but if the majority votes 50 bps he would also back-up such a move. The dovish Committee participant is also certain that the whole easing cycle should be at least 100 bps. Bratkowski also went back to 2013 claiming that the cuts should have been much deeper. These remarks were pretty strange especially that it was better to begin the easing measures in June or July rather than returning to 2013.

Summarizing, the base case scenario is still a cut by 25 bps both in October and November. This view should be actual until Belka/Hausner change their minds. Currently the aggressive monetary easing is supported only by three members – Osiatyński, Bratkowski, Chojna-Duch. It is still not enough to put 50 bps through in October. Today the zloty should be pretty stable and both EUR/PLN and CHF/PLN will remain very close to its current levels.

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

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