Daily analysis 29.05.2014

Slightly below 1.3600 on the EUR/USD. Certain expectations before the ECB meeting. Interesting reading on US GDP. The zloty is significantly stronger due to capital inflow toward emerging economies.

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

• 14.30 CET: Second GDP reading form the first quarter (survey is minus 0.5%q/q; seasonally adjusted, annualized data).
• 14.30 CET: weekly jobless claims from the US (survey 317k).

Below 1.3600. Certain expectations. US GDP

Trading on Wednesday was characterized by gradual sliding on the EUR/USD. As a result, we ended the day slightly below 1.3600 level. Weaker European currency was both a result of expectations before the next week ECB meeting and some data from the economy. The German employment data was slightly worse than expected (nothing dire however) and still subdued credit situation for private sector (households around zero and companies minus 2.8% y/y) weighted on the Euro.

Lack of credit flow is one of the arguments for the ECB to loosen the monetary policy and push the tools which may ease some restrictions set by banks in the peripheral countries. Before that ECB, however, would like to finish its “Comprehensive Assessment”. Vitor Constancio, ECB vice president, who was interviewed by Bloomberg yesterday, said “We can say with confidence that Comprehensive Assessment will complete the repair of banks “balance sheets”. Credit supply restrictions will be eliminated in Europe”. It is, however, possible that as early as in June the central bank will be able to present a cohesive plan how to help SMEs. When we combine it with both negative deposit rate and the benchmark cut, we have a fairly clear picture of how the next decision will look like. From the market point of view it is quite probable that most of this info is already priced in (400-pips slide should confirm it). As a result, despite a fairly negative technical situation (breaking down the 200 SMA) we should not slide much further.

A slight relief for the EUR/USD may be today's GDP reading from the US. Two weeks ago I presented a revised estimates by JPMorgan. The investment bank claimed that the economy would shrink by minus 0.8% q/q (annualized, seasonally adjusted). Currently the Bloomberg survey shows contraction at 0.5%. Today's “Journal” explains what might have caused the revision. Firstly, the previous Commerce Department estimates on foreign traded were updated (deficit is larger). Secondly, there will be lager than in a “flash” reading inventory drop It is also worth noting that the GDP headline number is presented in quite an awkward way. In contrary to the Polish or European readings where we have year on year publications, across the pond the data is presented on q/q seasonally annualized basis with annualized feature. Therefore if we get a reading at minus 0.2% in the first quarter the headline number will be minus 0.8% which is quite significant news.

Summarizing, the following days should be fairly calm on the EUR/USD. We will probably remain near 1.3600 level with slightly more downward than upward pressure. It is also worth observing the market reaction on the US readings. It is one of the few elements which may deviate the EUR/USD from the current path until the European inflation and ECB's statement is published.

Zloty's appreciation

Some bullish signs on the zloty were visible as early as last week. The appreciation move was, however, paused by dire news from Ukraine on Monday and Tuesday. The risk appetite came back to EM yesterday afternoon when we managed to drop form 4.17 to 4.15 on the EUR/PLN. Today we added another half of one percent and as a result the Euro is hovering around 4.13. The yield hungry capital is also visible on the debt market. Polish bonds rose to almost one-year high and YTM dropped to 3.6%.

There is a high probability that the move will be continued and after falling below 4.13, the next target can be set at 4.10. A similar scenario can be implemented to the CHF/PLN, where the first target is 3.38 and the second 3.35. The lowest chance for a downward move has USD/PLN which is not supposed to fell below 3.00 during the current trend.

Today, however, there is a slim chance that the PLN can gain more value. The base case scenario is a consolidation around 4.14 on the EUR/PLN and 3.39 PLN per the Swiss franc.

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

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