Daily analysis 26.09.2014

Too strong dollar may delay the interest rate hikes in the US. Japanese currency is still weak. Focus on today's GDP. Further, slight improvement on Russian?EU relations. Both EUR/PLN and CHF/PLN remain stable.

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

• 14.30 CET: Final GDP reading from the US (survey: +4.6% q/q; annualized reading.

Dollar. Yen. The East

The recent dollar appreciation to the euro is in line with the ECB expectations. Cheaper European currency means higher profits for exporting firms and increasing the odds for achieving central bank's target on inflation. Improving trade balance and savings in local economies can be visible due to a fact that there are slim chances for commodities appreciations (even if the prices are exchanged into EUR).

The effect which is favorable on one side of the pond is negative on the other. Bullish US economy may feel the pain from strong “greenback”. The revenues of many American companies are received in foreign currencies what automatically decreases the margins in the USD.

Other consequence of rising the Dollar Index to the 4-year highs may be seen in the inflation territory. As a result it may prevent the Federal Reserve from rising the interest rate sooner than expected. Such suggestions were already presented by William Dudley (we wrote about the Bloomberg interview with him this Tuesday).

Not only Dudley may exploit the “PCE/CPI” excuse. As “The Wall Street Journal” reports the other dovish Fed's member also suggested a similar argument. Charles Evans, Chicago's Federal Reserve president said that “If the dollar ended up being very strong that would lead us to have fewer inflationary pressures in terms of our index – the implications of that would be to provide a little more accommodations in the U.S”.

Currently the low inflation issue caused by strong dollar isn't widely discussed and there many other factors which have more important impact on the prices and future monetary policy in the US. However, if we see further USD appreciation (combined also with falling commodities prices which are negatively correlated with the US currency) there is a probability that at one moment the topic may be pretty hot (especially if some remarks are put to the Federal Reserve statement).

The Japanese currency is still under a significant pressure. Some might expected that the changes in state run pension fund (more investments will be directed abroad) can be halted, but the rumors have been dismissed and the reform will be proceeded.

Additionally, due to lack of inflation pressure most economists still expected more action from the BoJ. 32% surveyed by Bloomberg claim that the central bank will increase its asset buying program this year and 23% would see the additional balance expansion until May 2015. As we have written many times the pressure on Japanese currency should not recede and the medium-term target can bes set at 120 mark on USD/JPY pair.

A good indicator of the Ukrainian situation improvement is lack of new information from the region. But it is worth noting that today the trilateral meeting concerning gas supply to Kiev begins. There are also first reports that the EU may lift some sanctions on Russia.

The Itar-tass European sources claim that it will not be possible in October but some trade restrictions may be lifted as early as in November. Additionally, the process will be probably gradual (as the restrictions were also implemented step-by-step).

Regarding the Ukrainian situation it is also worth to cite President Proshenko. He said yesterday that “I have no doubt that the main, most dangerous part of the war is over”. I have no doubt that my peace plan will work”.

Today investors should remember about the final GDP reading from the US. According to the economists it should top 4.6%, but as the “WSJ” reports we can also see the +5.0% figure which will be the strongest reading in 10 years. Such a bullish report should push the dollar higher but the odds for moving EUR/USD below the recent lows are pretty slim.

No major changes

The EUR/PLN pair is still pretty stable and moves around 4.17-4.18 level. Volatility on CHF/PLN is also quite low with average moves not exceeding 1 zloty-cent. On the other hand, the PLN is under significant pressure both from the pound and the dollar.

On both the GBP/PLN and USD/PLN we should expect new highs. The dollar strength is unquestionable currently and there are no arguments for rebound on EUR/GBP. Concerning the latter it is possible that we see more solid data from the UK which automatically increases the odds for interest rate hikes.

Today's session should be pretty calm and the market begins to position itself before next week Polish PMI and the ECB rate decision. Both events, however, should not cause a stronger move than 2 zloty-cents in either direction.

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

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