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Daily analysis 27.06.2014

27 Jun 2014 12:20|Marcin Lipka

Some more volatility after Bullard comments and MNI reports on the ECB. New record lows on the Swedish krone. Interesting week. The zloty lost some value on a slight risk aversion rise. Range trade is expected on the EUR/PLN on Friday.

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

  • 14.00 CET: HICP inflation from Germany (survey: +0.7% y/y).

Bullard. ECB. Sweden. July

Thursday was dominated by some buzz after Bullard comments on possible interest rate hike in the US at the end of Q1 of 2015 and citing its own sources MNI news agency that further monetary easing by the ECB is not ruled out.

Let's start, however, from the US inflation reading. The PCE price index (preferred by the Fed inflation measure) rose to 1.8% y/y. It is probably around 0.2 percentage points more than the Federal Reserve expected during its June meeting (the estimates were closed before the May's CPI publication which showed +2.1% y/y). In result, we have the highest inflation since 2012, expanding economy (besides Q1) and unemployment returning to the central bank target.

This topic was exactly a subject of yesterday's James Bullard comments on FOX Business TV. The St. Louis Federal Reserve President (previously dovish, currently leaning toward hawks, non voting) noted that the US economy is both close to full employment and to the inflation target set at 2.0% y/y. At the same time the monetary policy is ultra loose. In result, we will have to tighten it earlier than market participants (mid 2015) expect. The world “earlier” was developed after conference at Council on Foreign Relations. According to “The Wall Street Journal”, he said that he expects first interest rate hikes at the end of Q1 of 2015.

Bullard comments somewhat worsened sentiment on equities and pushed the dollar higher. The EUR/USD pair was also slightly under pressure from MNI news agency reports which, citing some unnamed sources at the ECB, claimed that minus 0.1% deposit rate does not have to be an end cutting and we may drop to as low as minus 0.25%. Investors, however, quickly dismissed such comments because after the last ECB meeting the central bank needs at least several months to evaluate recently implemented measures.

Today, after a slight correction on Thursday, we rose to new 2-year highs on EUR/SEK. The Swedish krone drop was directly caused by much weaker-than-expected retail sales and significantly lower trade surplus. The data is putting more pressure not only to cut rates next week but also combine the decision with more dovish statement. The krone should still remain weak and on volatile, crowded with speculators market we can be quite certain that more uncertainty is on the horizon.

The incoming week should be really interesting. On Monday we have preliminary inflation reading from the Euro area (today Germany), on Tuesday manufacturing ISM and on Thursday a real culmination – Non-farm payrolls, services ISM from the US and ECB meeting with Mario Draghi conference. Until next Thursday we may expect pretty range trade on the EUR/USD.

Slightly lower

The US session on Thursday started on the downside what was pretty quickly included in the zloty and caused EUR/PLN to rise above 4.15 and CHF/PLN to exceed 3.40 level. The slide across the pond, however, wasn't that large and the reaction on the Polish currency was relatively significant what may be a result of weaker economic data and still some fears regarding the political issues.

Similarly to the global schedule, the next week on the domestic market should also be pretty interesting. The key will be Wednesday when Polish MPC finishes its two-day meeting. Depending on how much the statement will be changed (more dovish?) and how the macroeconomic projections are updated (inflation for sure will be lowered), we should evaluate the interest rate cut probability in the coming month. More dovish stance should push the zloty around a half percentage point lower.

Today we should move around 4.15 on the EUR/PLN and slightly above 3.40 on CHF/PLN. The volatility on the USD and GBP should also be pretty limited.

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

27 Jun 2014 12:20|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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