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Daily analysis 29.01.2018

29 Jan 2018 12:28|Marcin Lipka

Calmer trade on the dollar before a series of macroeconomic readings this week. Speculations on the interventions regarding the franc stopped the Swiss currency from appreciation. The zloty became slightly weaker than it was in the morning but the EUR/PLN pair remained close to 4.14. The USD was 0.03-0.04 PLN above the last lows.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:30 p.m.: PCE inflation from the USA for December (estimates: 1.7% YOY and 0.1% MOM excluding fuel and food prices 1.5% YOY and 0.2% MOM).

Dollar has chances to increase?

Last week was characterised by variable but positive changes in the EUR/USD pair. The market ignored the dovish signals from the ECB (favourable for the euro) but focused on the negative reports on the dollar. Although Monday's quotations are slightly below 3-year highs at around 1.2500, the US currency remained weak. Is there a chance that this will change over the next few days?

The speculative positions of the EUR/USD continue to suggest an extremely high level of capital commitment for further increases on the main currency pair. The advantage of a "long" party over a "short" party is at almost 145k contracts (nominal value 18 billion EUR) according to CFTC data (end of Tuesday's trading) and has remained at a record high level for three weeks. On the one hand, this shows how the negative approach that the market has towards the dollar. On the other hand, there is a chance that this position may be reduced.

The capital involved against the dollar has likely achieved a high return rate in recent weeks. In the case of a slight decrease in the EUR/USD, the capital may start to drop out of its positions rapidly in order to close them with a significant profit. Acceleration of processes may reverse the negative trend on the dollar. However, for this scenario to happen, a catalyst is needed.

That being said, today's US PCE inflation data is not the catalyst. It would have to significantly exceed the 1.5% year-on-year consensus. Moreover, to some extent, PCE inflation is secondary due to its strong correlation with CPI data that was already published for December.

The dollar could be supported by Wednesday's Fed meeting. The market assumes no more than three rate hikes this year, which lets FOMC have a more hawkish statement in January and prepares investors to change macroeconomic projections at a March meeting only to suggest four increases. However, this theory has some weaknesses such as the change of the Fed President. Will the FOMC decide to modify the message in January despite changes in staff? Will the market understand a more hawkish statement?

It is also worth noting that during this week, data on the situation on the American labour market will be published. The most important publication will be on wage changes in the USA. The consensus currently points to a range of 2.6%-2.7% YOY. Only if it is clearly exceeded (0.2%), it may have a greater impact on US quotations.

In general, this week may be important for the dollar if the hawkish statement is supported by solid macroeconomic data from the US. However, since the recently observed negative sentiment that has been seen towards the USD, the signal for the US currency would have to be strong and unambiguous enough to significantly increase the chances of reversing current trends.

Franc and zloty

In the morning, the EUR/PLN pair tested the lowest levels for more than two years (almost 4.13). After the beginning of the trading session in Europe, quotations moved to 4.14-4.15. It was likely caused by a further increase in yields of the US Treasury bond and the adjustment to these changes in the debt instrument market. However, similar movements have been visible for a long time and this didn’t have any effect on the stoppage of capital inflows to emerging markets. Currently, it is not sufficient enough of an argument to support the expectations of further zloty depreciation.

The franc is a peculiar case. Since Tuesday, the EUR/CHF has been clearly under pressure. This pair depreciated by more than 1.5% and during the night tested the 1.16 boundary. The rapid rebound from this as well as speculation that the Swiss National Bank intervened in order to weaken the franc appeared. It is quite surprising that with such a good EUR/CHF sentiment, it was under pressure from sellers instead of appreciating or at least remaining unchanged. However, the SNB's intervention may signal that the EUR/CHF decrease tolerance is somewhere near 1.16, which should also hamper the hypothetical growth of the franc in relation to the zloty.

29 Jan 2018 12:28|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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