Daily analysis 24.12.2012

Downside pressure from equities pushed EUR/USD under 1.3200 level on Friday. The PLN was not able to resist eurodollar slide and is trading around 4.0800 per EUR on Monday morning. In today's analysis I would like to emphasis how the new Japanese Prime Minister deals with BOJ, fiscal cliff scenarios, and Polish path to join Eurozone.

Macro data (CET- Central European Time):

Thursday:

• Jobless claims (USA)
• Conference Board (USA)
• New home sales (USA)

Friday:

• Chicago PMI (USA)
• Pending home sales (m/m) in the States

Downside risk expected on EUR/USD. Strong pressure on BOJ.

The cancellation consequences of Thursday's voting put pressure on currencies at the end of last week. The overall risk aversion dominated on markets but the U.S session didn't end with panic sales. Some investors tried to buy stocks on dips in anticipation of the Cliff resolution. However, looking at the case objectively, recent days failed to expectation regarding the budget issue and can produce some severe outcome at the beginning of the year (more about it in the next paragraph). In Japan the situation has been progressing quite interesting. The newly appointed Prime Minister Shinzo Abe clearly put pressure on the BOJ to increase its inflation target at the next meeting. Unless the central bank acts in the Abe's way, he will change the law which regulates the monetary council. After the message hit the wires JPY lost several pips to USD (84.35). Besides monetary policy Abe will probably try to proceed expansionary fiscal policy. Overall Japanese yen will suppose to be under pressure in the medium and long term. It can also loose its “safe haven status” currency.

Reuters' cliff scenarios.

Friday brought up the new fears regarding the U.S budget situation. Analysts and commentators are much more concerned about the issues now, then at the beginning of the week. Reuters made an interesting analysis regarding the Cliff over the weekend. The information agency set some possible scenarios and tried to predict the outcom.

• The deal on Democrats conditions (tax rises over 250k income). Boehner allows to vote the Obama's proposal. He counts on support of at least part of Republicans. I think this solution is not really possible. It will end the political career of Bohner as one of GOP leadr
• The economy falls of the cliff but market's reaction is muted. In consequences politicians don't feel pressure and play “cat and mouse” game. In my opinion this outcome is also not possible. The markets will significantly depreciate in value (maybe similarly to 2H of 2011)
• No solution before January 1st and some minor solution which allows to “buy” few weeks time”. Reuters stresses that at the beginning of the year it is possible to proceed voting which extends tax cuts for two more months. It does not suppose to cause much trouble, because it should satisfy both sides in short run. I think that this scenario is quite possible. However I think it will put significant pressure on the markets, risk aversion (EUR/USD slide and PLN depreciation). In the end the cliff will be averted last minute (probably 2nd half of February)

PLN weaker. Poland closer to join EMU?

Friday's PLN depreciation will probably be continued till the end of the year on the fiscal cliff fears. I want also to emphasize that we can expect much higher volatility before the New Year's Eve due to low volume and rapid changes of the sentiment. In the negative scenario Polish currency can lose more than 1% to EUR. Getting to the local news on Friday undersecretary of state Jacek Dominik briefed about Polish path to the Eurozone. My attention was focused on one issue. Dominik claims (according to Bloomberg) that “cost of pension reform will narrow budget deficit by 0.5% to 2.9%.”. It clearly means that Poland will be able to join ERM2 in the coming month because all the convergence criteria are suppose to be met soon:
- inflation is almost in target and in the following months can only be lower,
- budget deficit will be under 3% (according to Dominik),
- Debt to GDP ratio is under 60% according to Eurozone data,
- +/- 15% currency exchange rate is quite certain in the coming years. Even now the volatility on EUR/PLN is pretty low. State run bank BGK and National Bank of Poland are quite experienced how to effectively intervene on PLN,
- Long term interest rates: actually this criterion can be met in a few weeks. 10 years yeilds are sliding extremely fast (more than 2% last year).

Overall it means that the only issues regarding joining EMU are minor changes in constitution and society approval. Both case are purely political and they are only a matter of several hundred TV debates. In my opinion the decision has already been made...

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

Technical analysis EUR/USD: staying above 1.3150 is quite bullish. If EUR/USD is able to move over 1.3250 it can significantly increase odds for new highs. On the other side slide under 1.3150 can spur fast move to 1.3000 mark.

Technical analysis EUR/PLN: the correction move is in progress. EUR/PLN is still in downtrend move until it breaks 4.1000. The target for following days is around 4.02-4.04. Breakout above 4.1000 can fuel the move to 4.1500 level.

Technical analysis USD/PLN: still in the downside move. Only breakout above 3.1300 can spur move to around 3.2000. The base scenario is bearish with target around 3.02-3.04.

Technical analysis CHF/PLN: the comeback to 3.37-3.39 will result in domination of range trade. Breakout above 3.39-3.40 can mean move even to 3.4600. The comeback under 3.37 increase odds for 3.3300 test.