Daily analysis 28.10.2014

Investors are waiting for the Federal Reserve meeting outcome. Another day with the rouble slump. The Swedish central bank unexpectedly lowers the interest rates to zero, pushing the krone significantly lower. The zloty has slightly slided, but the narrow range consolidation remains the base case scenario.

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

• 13.30 CET: Durable goods from the US (survey: +0.5% m/m ; excluding transportation also +0.5% m/m).
• 15.00 CET: Conference Board consumer confidence index (survey 86.8 points).

The FOMC. Rouble. Krone

The recent hours haven't brought much changes on the EUR/USD and the rate did move around 1.27 level. The US currency may be a bit affected by the durable goods and consumer confidence readings but most participants will be waiting for the Wednesday's FOMC results.

The discussions before tomorrow's Fed's decisions are focused on two unknowns. Firstly, there is a question about whether or not the monetary policy makers finish asset purchase program. The game is, however, not about a mere 15 billion purchases per month but about the overall approach of FOMC members to the current market situation. If they really decide to extend the QE (very low probability) then it would mean that the monetary policy may remain accommodative for much longer than currently anticipated.

Another issue which can bring more attention is a well-known phrase “considerable time”. It is still unclear how many months will we have to wait after the QE ends to see the rate hike. Investors put some weight on the phrase and scrapping it can mean that the “cheap money policy” is approaching to the end and first tightening is set for mid 2015.

There is, however, a small chance that Janet Yellen and her colleagues are going to send more hawkish signals to the markets, especially given that in the recent “minutes” they were concerned with too strong dollar, disinflation threats and global slowdown.

The highest probability is that Fed finishes its asset purchase program and either leaves the “considerable time” unchanged or delete it and adds at the same time a dovish element (lower inflation and global low growth threat).

Situation on the Russian currency is getting more and more severe. The ruble didn't get boost from S&P which left the investment rating unchanged and didn't benefit from fairly neutral outcome of the Ukrainian election. Since the beginning of the weak the RUB slumped to dollar+euro basket by almost two percentage points. It also means that the central bank sold at least 20 billion USD of reserves in October.

It is hard to say what was the real reason behind the sell-off. The Brent oil has been fairly stable in the recent days and heavily discussed issue of Russian loans repayment at the end of the year (30 billion USD in December) is a well known case. Many institutions have already secured the required funds.

An interesting solution to the topic was presented today by Tom Levison. The chief foreign exchange and interest rate strategist at Sberbank CIB in Moscow said (quotes from Bloomberg) that intervention policy ąis failing to halt the rouble's decline but is also feeding currency weakness by rising concern over the pace at which foreign-currency reserves are being erodedą. He also added that ąprice action is being increasingly dirven by the fear that the central bank could scrap entirely its defense of the rouble, allowing it to freely float and find a natural level'.

Even more surprising than the quickening rouble slide was today's MPC decision in Sweden. The Riksbank decided that it would lower the interest rates to 0.00% while market expectations were set at 0.15 bps cut to 0.1%. The central bank decreased its CPI projections to only 0.4% for 2015 while in September it was 1.3%.

Summarizing, the volatility on the most heavily traded currency pairs should be subdued till the Fed's decision on Wednesday and most trades will be done around 1.27 level.

Stable but on the weaker side

The morning session started around mid 4.22 levels on the EUR/PLN but as the day was approaching a slight depreciation was observed toward 4.23 level. Beside the mediocre situation on EUR/USD the Riksbank decision also was negative for the PLN. Theoretically it should have helped the zloty on the portfolio reshuffle.

But this time the situation might be different. A significant downward revision of future inflation in Sweden may also result in similar move by the Polish NBP. As a result the MPC will be more eager for deeper rate cuts what is actually negative for the PLN/EUR cross.

Summarizing the zloty should remain within the 4.21-4.23 range but there is a probability that me can slightly breach that range. The similar situation is observed on the CHF/PLN where the range may be moved toward 3.50-3.52.

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

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