Daily analysis 28.02.2014

The EUR/USD above 1.3700 complicates the shorts situation on the EUR/USD. Market reaction after the inflation data from the Euro Zone. Further deprecation on the Chinese currency. Russia takes easy its currency depreciation. Polish zloty quickly rebounded despite there are still elevated tensions on the East.

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

• 11.00 CET: Already published data from the Euro Zone (survey at +0.7 y/y; actual reading at +0.8 y/y).
• 14.30 CET: GDP from the US (another reading). Survey at +2.5% in the Q4 of 2013.
• 15.45 CET: Chicago PMI (survey 56.4 points).

Comeback. Yuan depreciation. Ruble. Euro Zone inflation

The EUR/USD investors were not able to make their mind whether to continue the slide (easy option) or generate a rebound. They chose the latter, targeting especially many short positions which were established during the week. The “short-squeeze” was pretty successful this time, even though the data wasn't especially supportive for the bulls. We had mixed economic reports from the States (durable goods orders beat the expectations, but the revision from was downward; jobless claims came several thousand below Bloomberg survey). Some can point out that the reversal on the EUR/USD came from slightly more dovish remarks from Chairwoman Yellen. She said that “what we need to do, and will be doing in the weeks ahead is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook”. Currently majority of economists claim that some dire economic reports are the effect of harsh winter, so just a fact that the FOMC will closely scrutinize the published data and try to evaluate how much of the impact comes from the weather can be considered as a dovish signal. Both short squeeze and slightly more fear that the Federal Reserve can be more accommodative (not particularly pause the taper but give more dovish message or modify more aggressively forward guidance) pushed the EUR/USD above 1.3700.

During the Asian session we had another weakness on the Chinese currency and the yuan almost touched the 1% daily range set by the PBOC. As I wrote on the CNY issue on Tuesday, companies and wealthy individuals were using an easy opportunity to make “almost risk-free profits” from constantly appreciating yen and the difference between interest rates. The Wall Street Journal reports that the Central Bank started to take part in the game and weakened the local currency. The “WSJ” also claims that derivatives based on US dollar and yuan were issued in the sum of 350 billion USD (according to Morgan Stanley findings). What is quite interesting, the leveraged products have similar payout scheme as option strategies issued to Polish companies in 2007-2008 when the PLN gained value significantly. When the local currency depreciated to the dollar, the investor receives an agreed amount of money, but on the other hand, when the trade reverses, then the losses are unlimited. Folks who like conspiracy theory can also think that not only the PBOC has some interest to slow the upside trend on the CNY (increase the competitiveness), but also some investments banks which had issues to hedge all the trade coming only in one direction.

Another interesting case is the condition of the Russian ruble. The currency lost around 10% to the dollar since the beginning of the year. It is significantly less than the Ukrainian hryvnia, but still a large slide comparing to its previous moves. The slump, however, does not come from dire macroeconomic situation in Moscow. It is true that the economy slowed significantly, but the Balance of Payments still looks pretty healthy with a surplus on the current account. The reserves are also at elevated levels and in the period between February 7th and 21st they increased from 490 billion USD to 493 billion (according to the official central bank data). The answer regarding weakening ruble can come from the policy stance, where the government seems to be pretty happy from the measured depreciation of the currency (it can boost the revenue from the Oil and other commodities export and therefore give some more breath regarding the public spending).

Just few minutes ago Euro Zone inflation data hit the wires. The reading exceeded the expectations by 0.1 percentage points. The jump of the EUR/USD can also be contributed to the fact that the real expectations were even lower after German inflation published on Thursday (below the expectations). The reading pushed the most traded currency pair significantly higher (less probability that the ECB loosen its policy on March 6th) and further squeezed the shorts on the euro-dollar pair.

Summarizing, the bulls seem to win most of the points before the next key week when the ECB decides on the monetary policy and the US data is scheduled to be published. The upside move to around 1.3800 also opens the path toward a rise toward 1.40 – a level which was pretty distant just a day ago.

Still pretty stable

The Polish currency quickly rebounded from the recent slide caused by the Ukrainian turmoil. The EUR/PLN fell even below 4.16 level at the end of Thursday's session. There is even more momentum on the USD/PLN which is getting closer to the 3.00 mark. Again, we can see that any weakness on the zloty seems to be short-lived and lower valuations are used to accumulate the local currency.

The GDP data published today by the Polish Statistical Office was neutral for the PLN. The economy grew by 2.7% in the fourth quarter (+2.2% seasonally adjusted data y/y and +0.6% on q/q also seasonally adjusted data). There was a small upgraded in the report in comparison to the first publication where the q/q reading is revised upward by 0.1 percentage point.

Summarizing, we should remain with in 4.15-4.17 level on the EUR/PLN until the end of the day. We should also observe the USD/PLN, which will probably have an opportunity to test the 3.00 (rather next week than today).

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

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