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Daily analysis 30.06.2014

30 Jun 2014 12:12|Marcin Lipka

An attempt to push the EUR/USD above 1.3650. Another interview with Bullard on Fox News TV. Czech Central bank extended its promise to keep EUR/CZK above 27.00 level. Euro area inflation. The zloty slightly weaker than the Euro. Polish manufacturing PMI on Tuesday.

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

  • 15.45 CET: Chicago PMI index (survey: 64 points).

An attempt. Bullard. CNB. Inflation

Since the early morning, the EUR/USD has been trying to breach 1.3650 level. There was no concrete news which pushed the pair higher. It was rather quite opposite. During the weekend we had yet another hawkish remarks from James Bullard and German retail sales fell short of expectations. Some bulls are probably trying to make a case from weak GDP reading from the US and claim that it may push the FOMC to raise interest rates later but such a reasoning can be really short-lived when investors realize that hikes are rather sooner than later.

It can be also confirmed by James Bullard comments. The St. Louis Federal Reserve president repeated on Sunday during an interview on Fox News TV that he expects a first interest rate hike at the end of Q1 2015. He also added that PCE inflation may reach 2% at the end of 2014. Bullard also claims that “both financial markets and public at large maybe be does not realize how close we are to normal”. There is a question how we are to the Bullard scenario. But if his remarks turn out to be true, the biggest beneficiary to that situation will be US dollar.

During last week meeting, the Czech Central Bank (CNB) decided to extend the floor on EUR/CZK at 27 level till the end of Q2 of 2015. It also left the doors open to lengthen that period later. The CNB lowered its benchmark rate to zero more than one and half year ago to fight the subdued inflation. At the end of 2013 it also weakened its currency by 5% to spur the price rise and export. The central bank statement is still very dovish and we should expect that the reference rate will probably remain at current level till the end of 2015. Further we should also note that EUR/CZK will stay around 27.5 for another few quarters.

After German inflation data published on Friday (+1.0 y/y vs survey at +0.7 y/y) we could expect that the Euro Zone HICP should exceed the expectations set at 0.5% y/y. It wasn't the case this time. The single currency prices rose in June by just a half percent on y/y basis which confirms that ECB should be still ultra-dovish during its Thursday meeting and any discussions on rising rates will not be held at least for several quarters.

Summarizing, the market clearly ignores the negative signs and “tries” to scare short positions on the most heavily traded currency pair. That attempt may be successful on a short-term but if we get solid reports from the US this week, then we should expect stronger dollar, what in result can push the EUR/USD significantly lower.

On the weaker side

The zloty begins its trading around a quarter percentage point lower than on Friday closing. Investors are not eager to buy Polish currency before the MPC meeting where we can get much more dovish statements and downward revision both on inflation and GDP growth. However, it does not have to translate in any rate cuts. Currently the Committee is pretty certain to keep the benchmark unchanged therefore we should expect some rebound on the PLN after the Wednesday's conference ends.

It is also possible that some investors are “afraid” before tomorrow's PMI readings (9.00 CET). The market expectations are set around 51 level (in May it was 50.8), but taking into the account the pace of slide experienced by that index in the recent months, it is not ruled out that HSBC Purchasing Manager's Index can slump below 50 mark. It would be a real blow to the economy if the PMI predicts manufacturing to shrink in the following months. On the other hand, we should not rule out that the Manager's Index rebound significantly (above 52), especially given that the situation in the East is gradually turning for better and it was a main reason why companies expressed some doubts regarding their future business.

Summarizing, the zloty may remain under pressure today, but on Tuesday we should regain the value (PMI will be rather above than below consensus). More strength is expected after Wednesday's MPC meeting when both statement and conference will be probably less dovish than expected.

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

Range EUR/USD 1.3550-1.3650 1.3450-1.3550 1.3650-1.3750
Range EUR/PLN 4.1200-4.1600 4.1200-4.1600 4.1200-4.1600
Range USD/PLN 3.0400-3.0800 3.0600-3.1000 3.0200-3.0600
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 1.6850-1.6950 1.6950-1.7050 1.6750-1.6850
Range GBP/PLN 5.1300-5.1700 5.1500-5.1900 5.1100-5.1500

30 Jun 2014 12:12|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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