Daily analysis 24.09.2015

Is the EUR/USD trading in a risk on/off mode? Brazil on the verge of a currency crisis after real hit another record low to the US dollar. The EUR/PLN traded moves towards the 4.22 level.

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

• 14.30: Durable goods orders from the US (survey: minus 2.3% m/m excluding transportation +0.1% m/m)
• 14.30: Weekly jobless claims from the US (survey: 272k)
• 16.00: New home sales from the US (survey: 515k)
• 23.00: Janet Yellen speech on the monetary policy

Fighting for a foothold

The recent week was a real fight both on the currencies which compose the EUR/USD and on the whole pair. Firstly, the market wasn't able to decide how the euro condition is shaped by the risk on/off sentiment on the stock markets and which way the ECB was going to proceed.

Before last week’s Federal Reserve meeting, the euro strengthened, at the moment of the equities sell off, due to the perspective of unwinding carry trades. The return of capital from abroad to the eurozone was causing the appreciation of the common currency. Further, the worse than earlier anticipated condition in Asia served as a good explanation to the dollar sell off because it delayed the interest rate hike.

The situation changed on Friday and on Monday. Comments from the ECB suggesting that more economic slowdown around the world may push for further monetary loosening. In the fight between “unwinding the carry” vs “more QE” the latter won and, consequently, the euro was pushed lower.

At the same time, we also had some comments from Fed officials. Broadly they were less dovish than the message from the Federal Reserve. As a result, the dollar started to strengthen due to lower expectations that the zero interest rate policy can be continued beyond 2015.

When it appeared that the rules of the game are set, Ewald Nowotny and Mario Draghi from the ECB suggested that it is too early to expect either longer or larger QE operation because there is not enough evidence that the future inflation would be significantly below the forecasts. It helped the EUR/USD to rise towards 1.12.

Today, Janet Yellen is expected to speak on the monetary policy. The Fed's chief is not scheduled to answer questions from the audience but there is a high probability that she will be more focused on the US economy and praising its positive developments than suggesting threats from Asia. As a result, it should increase the odds for an interest rate hike in 2015 and help the USD.

In the following days, taking into account all the recent events the market should return to the idea that worse market sentiment boosts the EUR/USD because the ECB would not be keen to change its message again and the Fed's decision has already been switched due to global events.

Brazilian real in a severe downturn

No decision on budget cuts in Brazil and weak data from China are pushing the real significantly lower. Currently, the USD/BRL pair is at the 4.17 level. Taking into account that in January the dollar was worth 2.7 reals and in the summer of 2014 2.2 reals it means that the depreciation of the local currency is 35% and almost 50% respectively.

Recently only the Russian rouble from the group of developing and developed currencies slid that fast. We can conclude that the currency is in severe crisis and the perspective of the local currency will worsen because the central bank will have to keep a tight monetary policy to prevent inflation soaring. There is also no space for any fiscal stimulus because the expected budget deficit is already around 8% of the GDP.

The foreign market in a few sentences

The market should slowly return to the idea that worse sentiment on the world equity market is a positive message for the EUR/USD. Today, however, less dovish than expected Yellen's speech may push the EUR/USD lower during Thursday evening.

The zloty is weaker

Less dovish comments from the ECB and uncertainties on the capital markets combined with the strong sell off on EM currencies are negative for the PLN. The EUR/PLN was pushed above 4.22 today. Currently, however, expectations for a significant zloty depreciation are fairly low. Only in the scenario of EUR/USD climbing above 1.13 the EUR/PLN may test the 4.25 level. On the other hand, when the overall sentiment improves the EUR/PLN should return towards 4.20.

The situation on the Swiss franc also looks worse than in the previous weeks. The EUR/CHF is still fairly high and remains above 1.09, but the CHF/PLN rose above 3.85 due to weaker zloty to the euro. As a result, the franc may remain a few zloty-cents above the recent levels.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: