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Daily analysis 29.01.2014

29 Jan 2014 10:42|Marcin Lipka

A significant monetary tightening in Turkey pushed the lira higher and improved the sentiment on EM currencies. Weaker-than-expected data from the US fires the discussion on today's Federal Reserve decision. The zloty has been trading around 4.20 per the euro and is waiting for the Fed's statement.

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

  • 20.00 CET: the Federal Reserve publishes its statement after the FOMC meeeting.

Turkey, Fed and the data

Investors a bit nervously were waiting for the nightly Turkish MPC meeting yesterday. As “The Wall Street Journal” reported, to keep up with the demand an additional staff was on duty in the largest banks(JPMorgan and Deutsche Bank). Just after midnight local time it turned out that folks who were well prepared did their homework. The TCMB announced that “marginal rate” (up to yesterday the benchmark rate) increased by 425 bps to 12%. Further in the statement, however, we can read that “the Central bank liquidity will be provided primarily from one-week repo rate instead of the marginal funding rate in the forthcoming period”. The repo rate rose from 4.5% to 10%, but the difference between 10% and 7.75% is 225 bps and then we can conclude that the real rise was just 225 bps. A kind of confusing situation with the rates does not change the overall bold decision by the TCMB. The central bank chief, Erdem Basci, finally was able to make the right decision despite a strong pressure from the Prime Minister Erdogan, who was strongly against any changes in the monetary policy. In result the lira jumped around 3% just after the MPC statement was released. It is also worth to look at the USD/TRY chart where in the recent two moths the pair firstly jumped 20% and then dropped by 10%. Such high volatility does not end with one decision, so more “fun” can be on the horizon.

Today the FX should mainly focus on the evening statement form the Federal Reserve. The Committee will decide whether to continue the asset purchase reduction at $10 billion per the meeting. Some market participants expect that a minor changes can be made in the statement (EM turmoil, recent weaker data from the US and etc.). Another element which can be modified are changes in the forward guidance. The main concept will be probably left unchanged (well below 6.5% unemployment and 2.5% inflation when the rates can rise), but it is that the Fed signals some other changes in the thresholds (similar to “well below”).

It is worth to look at the Monday data from the US. The durable goods orders were really weak in December. Both headline (minus 4.3% m/m versus survey +1.6%m/m) and excluding transportation (minus 1.6% vs +0.7%) number were much weaker than estimated. Moreover, the data from previous month was revised downward. Economists cited by the “MarketWatch” claim that it can lower the GDP reading tomorrow (survey around +3% q/q annualized). If that theory turns out to be true, then it can push the dollar lower.

Summarizing, the market will be waiting for the results of the Federal Reserve meeting. Any suggestion regarding recent EM sell-off, worsening economic situation or decreasing the pace of asset purchase reduction (less likely) should push the dollar lower. On the other hand leaving the statement unchanged is suppose to bring the greenback firmer.

Close to 4.20

The zloty took advantage from a monetary policy tightening in Turkey. The EUR/PLN dropped to around 4.18 just after the decision was released. Today the move has been corrected, in line with the Turkish lira, and the zloty is traded around 4.20 per the euro. Regardless this fact, whether the TCMB move calms the situation for longer or we will have another speculative run on the TRY the PLN reactions should be much more muted then on other EM currencies. Additionally, when the EM problems ease, we should expect a fairly swift return to the recent levels on the zloty (under 4.20).

The zloty, similarly to the global markets, will mainly focus on the Federal Reserve statement. Any dovish messages from the FOMC should support the zloty. On the other hand, a repeat from the December meeting should rather push the zloty lower (in line with the EUR/USD slide). Tomorrow investors will be waiting for the GDP reports (both from Poland and the US).

Summarizing, the zloty can be pretty volatile today (still the impact of the lira and the FOMC expectations). However, most trading should be made close to 4.20 per the euro.

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

Range EUR/USD 1.3550-1.3650 1.3650-1.3750 1.3450-1.3550
Range EUR/PLN 4.1600-4.2000 4.1600-4.2000 4.1600-4.2000
Range USD/PLN 3.0600-3.0900 3.0300-3.0700 3.0800-3.1200
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 1.6450-1.6550 1.6450-1.6650 1.6350-1.6450
Range GBP/PLN 5.0100-5.0500 5.0300-5.0700 4.9900-5.0300

29 Jan 2014 10:42|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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