Daily analysis 30.05.2014

Still around 1.3600 on the EUR/USD. Weak US GDP reading didn't scare the dollar bulls. A chance for a lower Swiss franc on global markets. Interesting inflation data from the States? The zloty stabilizes around 4.14 per the Euro.

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

• 14.30 CET: PCE inflation from the US (survey: +0.2% m/m).
• 15.45 CET: Chicago PMI (survey: 61 points).

1.3600. GDP. Inflation. Swiss franc

In line with JPMorgan's estimates presented two weeks ago, there was a significant revision of the US GDP. According to the Department of Commerce, the economy shrank by 1% in the Q1 on the annualized q/q seasonally adjusted basis. The “headline” reading does not, however, tell us much about the shape of the economy. If we translate the numbers to the y/y methodology, we would see an expansion at +2.0% down from 2.5% recorded in the previous quarter. Coming back to the reading which was officially published, we can see that the negative surprise came mainly from downward revision in inventories (almost 2 percentage points), trade deficit (minus 0.95 percentage points) and government spending. Most of the figures were directly related to the weather and taking into the account a pretty solid consumption and current data, we can agree with most economists that another quarter will be around 3.5%-4.0% growth on annualized basis.

Investors were clearly not tricked by the US data and reacted fairly calmly after a negative surprise from the States. The EUR/USD rose only around 10 pips and gave back all the gains after a few minutes. It is, however, possible that we may have another chance for surprising data today. In a few hours the PCE inflation is scheduled to be published. The PCE is a favorite indicator on consumer prices for the FOMC. The data in March showed a reading at 1.2%. What's interesting is that we already had the CPI for April which turned out to be pretty high (+0.3% m/m and +2.0 y/y). If we recorded the same number for the PCE (+0.3%), it will already exceed the market expectations. Additionally, it should push the y/y reading significantly above 1.5% (the statistical effect from low 2013 April data also may play a role) what will be the highest number in almost two years. As a result, it is possible that we may get some opinions that the inflation is picking up and the Fed should rise rates sooner rather than later (dollar bullish signal).

An interesting hypothesis was presented in today's “Financial Times”. The paper analyzes what may happen to the Swiss franc if the ECB lowers its deposit rate (keeping in mind that the SNB put floor on the EUR/CHF rate at 1.20). If we get a cut in the Euro area, there will be a natural capital inflow to the CHF. However, it can be useful for the Swiss central bank to mimic the ECB move and also push the deposit rate under the zero mark. As a result, the “FT” quotes UBS head of forex strategy, Mansoor Mohi-uddin who claims that “cutting its deposit rate below zero is potentially a more powerful policy for the SNB to waken its currency than for the ECB. He also adds that “Banks' excess reserves at the SNB exceed those at the ECB and are much greater share of GDP”.

Summarizing, the base case scenario is still a range trade around 1.3600 on the EUR/USD. The element which may deviate the rate from the recent mean is US inflation data. If we get a PCE reading at 1.6% and above combined with the “subject” getting some attention by the news providers, then it is possible that we may drop around 20-30 pips.

Maintaining the winning streak

The zloty held to most of its recent gains and the EUR/PLN after few hours of trading is still around 4.14. It should be a bullish signal for the local currency and a good indicator of the future appreciation. Referring to the CHF case from the previous paragraph, it is worth noting that if the scenario becomes real, we may quickly rise to 1.25 on EUR/CHF. It will quickly translate to much lower rate on CHF/PLN which should be around 3.32 or even a bit lower (depending how the EUR/PLN will be traded).

Today, however, no major moves are expected. The base case scenario on the PLN is a calm trading around 4.14 per the European currency. We should also stay below 3.40 per one Swiss franc. It is worth remembering about Monday's PMI reading from Polish economy. If the manufacturing index strongly rebounds from recent lows (52), we should see another positive argument for the local assets.

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

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