Daily analysis 31.10.2014

Double bazooka from Japan – the central bank unexpectedly increased the asset purchase programme and the government pension fund announced asset shift. Gas agreement reached in Brussels. Russian central bank decision. The zloty takes advantage of improving sentiment and tests 4.20 per euro.

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

• 13.30 CET: PCE inflation from the US (survey: +0.1% m/m).
• 14.45 CET: Chicago PMI from the US (survey 60.5 points).

Fed. Rouble. Gas

Japanese officials surprised the market today and moved the discussion to the other side of the Pacific. Firstly, the BoJ announced the increase of QE from current 60-70 trillion yen per year to 80 trillion. Actually nobody on the market predicted such a move as the expectations were set for the first half of 2015.

The USD/JPY soared immediately after the announcement and quickly moved above the recent highs around 110 level. The next element which pushed the Tokio stock exchange higher by 5% and Japanese currency lower by more than 200 pips was the government pension fund (GPIF) announcement of changes in its strategy. Speculations regarding that issue were all around the market for months but Japanese official deliberately scheduled the GPIF changes for the BoJ's meeting day to increase the potential effect.

The GIPF is supposed to invest much more assets in both local and foreign stocks (25% vs 16% and 17% respectively). The Japanese pensions will be also more dependent on the global debt market situation as the exposition was raised to 15% (from 11%). The mentioned shift will be at cost of local bonds which is suppose to share only 35% of the portfolio (from almost 60% - the gap will be filled by more JGB purchases from the BoJ).

From the cumulated effect of the both BoJ and GPIF action most stocks market rose significantly. The contract for S&P 500 moved to all-time-high. Similarly positive reaction was observed on the European debt market where the yields on 10 year Italian or Spanish bonds dropped by 10 bps. The Japanese yen's weakness to the dollar did translate into some turmoil on the EUR/USD, but the European currency will not take advantage of the JPY's slump and should be traded below 1.3600 level.

In line with yesterday's comments, Russia and Ukraine singed an agreement on natural gas supply. It is, however, not really clear who is going to pay the bill and who issued guarantees for the Gazprom. From the Brussels conference we may conclude that the Kiev will pay for the commodity using the IMF funds, but according to the previous agreement, Ukraine was supposed to scrap the subsidies on the gas rather than paying for the gas with emergency loans.

Markets didn't react to the gas deal because the announcement was broadly anticipated and the later stage of negotiations was rather interpreted as a political tool for all sides of the conflict than a real issue.

It is hard to run away from the rouble topic. On Thursday the Russian currency firstly dropped to the lowest level in history and later it strengthened at a faster pace for more than 10 years. What is even more interesting, the come back move could have been initiated by rumours reported by UNIAN agency on possible deal between Putin and Poroshenko regarding Crimera status. The central bank also sold almost 3 billion USD yesterday bringing 5 day reserve decrease to 13 billion USD.

Today, on the other hand, the CBR hiked interest rate by 150 basis points to 9.5% while most economists expected only a 50 bps rise. The central bank, however, didn't change its intervention policy what can mean that after the initial support for the rouble we may see further RUB slump as speculative funds probably didn't say the last word.

In the following hours it is hard to expect more volatility than we saw during the Asian session. At the beginning of the US session we have the PCE reading, but concerning the recent fairly stable CPI it is hard to expect a groundbreaking news from that field.

In the medium term we should consider more yen weakness and our estimates on USD/JPY (around the level of 120) may be fulfilled much earlier than previously anticipated (possibly even this year).

Taking advantage

The zloty was able to take advantage of the situation on the market. There were few factors that pushed the PLN higher (solid US equities, gas deal and the Japanese unprecedented action). However, the odds for falling below 4.20 are pretty low and we will have to wait either for pretty solid PMIs on Monday (much higher than 50) or the interest rate reduction pause (alternatively 25 bps cut with clear signal of short cycle end) to see the PLN further appreciation.

Summarizing, the base case scenario for the EUR/PLN is a move around 4.20-4.21 and 3.48-3.49 on CHF/PLN. Also the pound and the dollar should not significantly deviate form the current rates.

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

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