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Daily analysis 26.06.2014

26 Jun 2014 12:21|Marcin Lipka

Lower than expected final GDP reading from the US and weak durable goods orders are putting pressure on the dollar. PCE inflation across the pond. A slight appreciation on the zloty is levelled off by weak retail sales reading. Belka in Bloomberg interview is still far from suggesting any rate hike.

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

  • 14.30 CET: PCE inflation from the US (survey +0.3% m/m ; +1.8 y/y).
  • 14.30 CET: weekly jobless claims form the US (survey 310k).

Weak GDP. Korne. Inflation

Yesterday the US GDP reading surprised even the strongest pessimists. In the Q1 2014 the economy shrank by 2.9% (q/q, seasonally adjusted, annualized data) and it was the lowest reading since Q2 of 2009.

Final Gross Domestic Product was revised downward again (first it was +0.1%; second minus 1%; third minus 2.9%). This time, besides discussed on several occasions “the weather effect”, we got a significant revision on the health spendings. As “The Wall Street Journal” reports: “The move was partly due to the difficulty interpreting the impact on the economy of the new health-care law which began to take effect in January". The “WSJ” claims that the Commerce Department firstly reported an increase on health related services at +9.1%, but when the “hard data” was available, it dropped to minus 1.4%. In result, instead of positive contribution to the GDP at 1.01 percentage point, we got a negative one at 0.16 percentage point.

There were hardly any positive sings in the durable goods. Instead of projected gain at +0.4 m/m, we received a drop at 1% m/m. Publication excluding transportation was better and the slide was only 0.1% with a revision for last month at 0.2 percentage point.

Nordic currencies have still been under pressure. At the European opening the EUR/USE rose to new 2-year highs and we are slowly approaching 9.20 level. The weakness of the local currency is caused by zero inflation and growing probability of interest rate cut. As Bloomberg reports, citing two currency strategists (Chris Turner from ING and Richard Falkenhall from SEB), the cut during July's meeting is already priced in and the market speculates on the next one this year. It is also worth remembering that the most recent sump on Swedish krone was caused by its Norwegian counter part which reacted to much more dovish than expected statement from the central bank. Until next week Riksbank rate decision we have retail sales reading tomorrow. If it fails short of expectations and we get a cut in July combined with a dovish message, then we should expect that one Euro may cost 9.30 krone.

Summarizing, the Wednesday's GDP data was weak. However, taking into the account that the reading was clearly deviated by weather issues and health-care spendings, we should not expect a persistent dollar weakness. Additionally, the second quarter GDP growth may be around 3.5%-4.0% so the sump in the economy is not expected. Today it is worth to point the PCE inflation readings. If we get a reading above 1.8 y/y, we should expect dollar strength and a slide under 1.3600 on the EUR/USD. On the other hand, in case of lower reading (1.7% and below), the most heavily traded may remain at current level till the end of the week.

Belka and the retail sales

Bloomberg published an interview with Marek Belka yesterday. The NBP chief said that “As you've heard at our past two press conferences, up to a certain point the only option for the future was to increase interest rates. Now, we have to take into account the option to decrease them as well. Of course, we're not panning to and a rate cut is still rather improbable”.

Due to a fairly hawkish comment from Belka and government success on “vote of confidence”, the zloty has still been traded around 4.14 per the Euro despite a weak retail sales (+3.8% y/y vs Polish Press Agency survey at +6.5%).

The Central Statistical Office of Poland publication, however, casts some doubts whether the economy will be able to grow at 3.0% y/y in the second quarter. If Poland fails to report a solid GDP and the inflation remains near zero level for the next month or new macroeconomic projections show slower expansion on the horizon, we may expect more pressure on the PLN and more discussion on interest rate cuts.

Summarizing, a significant decrease of domestic political risk and overall positive global sentiment should keep the zloty near the current levels till the end of the week.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1200-4.1600 4.1200-4.1600 4.1200-4.1600
Range USD/PLN 3.0400-3.0800 3.0600-3.1000 3.0200-3.0600
Range CHF/PLN 3.3800-3.4200 3.3800-3.4200 3.3800-3.4200

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

Range GBP/USD 1.6850-1.6950 1.6950-1.7050 1.6750-1.6850
Range GBP/PLN 5.1300-5.1700 5.1500-5.1900 5.1100-5.1500

26 Jun 2014 12:21|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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