Daily analysis 25.02.2015

Yellen took advantage of her yesterday's appearance in Congress, to describe Federal Reserve plan after resigning from “patience”. Data from China appeared to be better than expectations. Ukraine forbids commercial banks, to purchase the currencies for their customers. The discussion about March decision concerning interest rates in Poland begins. EUR/PLN in the areas of 4.16.

Most important macro data (CET). Estimations of macro data are based on Bloomberg's information, unless marked otherwise.

• 16.00 CET: Second day of Janet Yellen's appearance in Congress. Fed chairwoman will present the same statement as she did yesterday in front Senate Bank Committee. However this time the questions will be asked by the members of United States House of Representatives.

A sketch of plan does not mean a faster tightening

This was not a good Federal Reserve summit for those, who had hopes for achieving high return rates on short term movements. On the other hand, it can be judged positively when it comes to Fed chairwoman's abilities to manage market's expectations.

Janet Yellen built solid bases for the upcoming change of monetary policy. She explained precisely, that resigning from “patience”, which means that the interest rates will not increase throughout two upcoming summits, does not mean, that we have to expect tightening of monetary policy on third. The decisions will depend on the incoming macroeconomic data.

Additionally FOMC chairwoman signalised, that even if the economy will have full employment and the inflation will reach its target, “the economic condition may justify, that the interest rates will for some time remain below their normal, long term target”. This on the other hand might suggest, that Federal Reserve will raise the costs of credit slower, than they did e.g. in the period 2004-2006, when average two out of three summits were ended with increases.

Apart from the main message, which is probably March resignation from “patience” and decreasing the significance of this movement, Yellen tried to present the situation in such way, so that it would not cause unnecessary changes before next month's summit of Federal Reserve. One could find doveish (D) and hawkish (H) suggestions in series of questions, as well as answers.

Among others, Yellen noticed on low salaries' increase (D), negative effects of fast interest rates' increase (D), incomplete “curing” of labour market (D), or the dangers coming from abroad (D). It was balanced by suggestions about the temporary decrease of inflation, caused by lower prices of resources (H), visible regaining of strengths by the economy (H), or noticing the danger of bubbles on some assets' markets (H).

In general, yesterday's appearance of Yellen should be considered as neutral. March summit of Federal Reserve is becoming more and more important, despite that the chairwoman tried to slightly decrease its dimension. Erasure of “patience” from the communicate can “frighten” some of the market's participants, even if it will be soothed by relatively doveish statements.

Slightly better data from China

After Yellen's speech, which did not cause any dramatic changes on currency market, and evaluation of Greek understanding, the investors started to concentrate on other matters. First impulse were the night data from China. Industrial PMI of this country, increased to the level of 50.1 points, by the consensus on level of 49.5.

Unexpected return of the index above the limit of 50, which divides sector's development from its regress, is a positive signal for the assets dependant from risk. However, HSBC and Markit did not sound too optimistic in their comments. Honbin Qu claimed, that “today's data show a slight improvement in Chinese industry in February. However, national economic activity remains slow, and the outside demand in uncertain”.

Economic collapse in Ukraine

Ukrainian hryvnia lost a half of its value throughout recent month. This caused, that the central bank decided to block the possibility of purchasing foreign currencies by commercial banks for their customers. As if this was not enough, prosecution putted forward two criminal charges against central bank's chairwoman. They were related with the abuse of position, and not fulfilling duties. In current situation however, these actions' aim seems to be finding a “scapegoat” of current condition of hryvnia, which in consequence will lead to establishing a third chairman of central bank, since Yanukovych regime downfall.

Freezing the interbank market does not mean, that the situation will calm down. Citizens' reaction is quite the opposite. According to “Minfin” website, on which the value of currencies' purchase and sell offers in Kiev are worth 10 billion USD, transaction price for American currency contains in the division 38-40 hryvnias. That means UAH depreciation by another 10-15% throughout previous 24 hours. In this moment, we can say that the economy of our eastern neighbour is in a total collapse, and only quicker and bigger foreign help than expected, is able to return the county's activity.

Few words about foreign market

Yesterday's speech of Yellen has not caused any serious movements on the main currency pair. Currently the main catalyst of changes on EUR/USD will probably be Thursday's inflation reading from USA. According to Bloomberg's consensus, the consumer's prices in January dropped in m/m relation by 0.6%, and the annual level of CPI was minus 0.1%. The market will also pay attention to the reading, that does not include the changes on the fuels and food market. The economists estimate, that the basis inflation will remain on the level of 1.6%. The lower level of the above indexes, is a chance for USD wear off by the end of the week, and exiting of EUR/USD above 1.1400.

Stronger zloty. What will MPC do?

Yesterday zloty took a big advantage from the understanding that Euro Group established with Greece, and good sentiments on the American stock markets. Appreciation of national currency is also enforced by decreasing expectations, concerning the reduction of interest rates. It is indicated by FRA contracts, as well as economist's expectations.

According to Bloomberg agency, 12 economists foresee the cutting on the level of 25 basis points, ten of them think, that the interest rates will not change next week, and five of them expects a half percent reduction. The opinion about lack of monetary soothing is especially interesting, if we will consider, that yet after February's summit the 25 basis points reduction was not certain.

The attitude of Elżbieta Chojna-Duch is also adding uncertainty. She is one of crucial members in the upcoming summit, and her vote can be decisive next week. She also was not able to say during her interview for Bloomberg, which option is closer to her.

We think, that despite everything, the interest rates will be decreased, although the scale of cutting will be lower, than one could assume in February, and it will be 25 basis points. If this movement would be combined with relatively neutral communicate and conference, it would be a good reason to enforce the zloty, and EUR/PLN movement even in the direction of 4.10.

Today however, zloty should remain relatively stable, and the majority of yesterday's increases will probably maintained. The basis scenario for EUR/PLN is the division of records in the areas of 4.15-4.17, and franc will cost slightly over 3.85.

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

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