Daily analysis 25.09.2014

The EUR/USD slumped and tested 1.2700 in the morning. Draghi or the housing data from the US were only a pretext for a significant slide. The RBNZ takes advantage of favorable market conditions to weaken the local currency. Polish zloty remains stable to the euro and frank but depreciated to the dollar and the pound.

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

• 14.30 CET: US durable goods orders (minus 17.1%; excluding transportation +0.8% m/m).
• 14.30 CET: Weekly jobless claims from the US (survey: 300k).

Draghi and the data. ECB. RBNZ:

In May of 2014 the EUR/USD tested 3-year highs. Today we are approaching 2-year lows. It is a result of a significant fall of the most heavily traded currency pair which only in last three months dropped 1000 pips. Such high level of the volatility may result that investors can nervously react to any economic data which can either support the current tendency or be a good reason to generate a strong correction.

Yesterday's events clearly confirmed that theory but at any measures there were not ground breaking. Mario Draghi remarks in an interview for French radio Europe 1 were dovish but the ECB chief didn't say anything new. Commenting the current economic conditions for the Lithuanian newspaper he was also benign, but no further details on future monetary policy were given.

The downside move on the EUR/USD was also supported by the US data. Annualized, seasonally adjusted reading of new home sales from the US rose to 504k which was significantly higher than projected 430k. However, we have written many times that “annualising” the data may produce volatile results. Overall the new home sales in 2014 will be probably very similar to the 2013 performance which is actually one of the concerns at the Federal Reserve).

It seems that the catalyst of the recent came from somewhere else. Such hypothesis was suggested by Citi's FX chief strategist Valentin Marinov. He told CNBC that the market is probably getting ready for the ECB October meeting. Next week Mario Draghi is scheduled to reveal the amount of liquidity which is going to be pumped into the banking system. Marinov also cited Reuters survey where market participants expect that around 300 billion euro will be committed to buy asset backed securities and covered bonds.

However, it is not enough to increase the central bank balance to 2012 levels (by 1 trillion euro). We still have, of course, the TLTRO operation but the demand for cheap loans was really muted. Even if an optimistic scenario is realized we should not expect that the offer will deliver more than 300 billion fresh money.

Adding both programs we have only 600 billion. It means we are still short of 400 billion. At that moment rumors arise. How to “produce” an additional liquidity. The only available solution at the moment seems to be a “full-blown QE”. Sovereign bond buying operation is really bearish for the euro so any credible analyze about this topic is pushing the common currency southward.

Since a long time the central bank in New Zealand (RBNZ) has been suggesting that its currency is overvalued. However, the recent US dollar appreciation and money shift from higher yield currencies (for example the NZD) pushed the monetary policy committee exploit the preferable conditions.

The RNBZ published a short report today with one chart of NZD REER which produces a clear outcome. The kiwi is at 50-year high and it is overvalued. The reasons of New Zealand dollar strength are well known, but taking into the account the current market situation and the commitment of the RBNZ we may expect that the NZD/USD pair can even slide toward 0.75 despite fairly robust growth and tightening monetary policy.

Summarizing the short-term EUR/USD pressure should start to losing steam. Besides the strong technical support of the 1.27 range we need another reason to continue to the bullishness of the greenback. The impulse will not probably come from today's macro data, and for the opportunity to test the new lows we may have to wait until the next ECB meeting.

Fairly calm

In the past when the dollar strengthened we were observing not only the USD/PLN appreciation but also the upside pressure on the EUR/PLN. These correlations are largely behind us, unless there is a strong “risk off” sentiment. Yesterday with bullish equities both the euro-zloty and franc-zloty were unchanged.

Another record-high levels were reached on the USD/PLN and we are getting closer to the 3.30 level which was our medium-term target. In line with strengthening dollar the British pound is also gaining ground to the zloty, but this move is a bit muted by some pressure one the GBP/USD pair. However, both the sterling and the greenback should set new records but the pace of appreciation will be probably less steep.

Summarizing, both EUR/PLN and CHF/PLN should be fairly stable today. Some pause is also expected on the USD/PLN which will probably not exceed the morning highs at 3.2850.

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

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