February 2013 recap

February was characterized by EUR/USD slump. The month started with concerns regarding political situation in Italy and Spain and fairly dovish statements from ECB. Another impulses came from G7/G20 and later from quite hawkish FED, and Italian election results. The Polish zloty was very stable, and despite a high volatility on EUR/USD, it stayed most of the time between 4.15-4.19.

The whole month under bears' pressure.

Last month the EUR/USD lost around 600 pips and ended 6-month rising streak. Bears attacked from the first days of February. At the beginning they used political problems in Italy (polls showing increasing popularity of Berlusconi) and Spanish issues regarding Prime Minister party financing. The next element which gave a reason to sell the euro was Mario Draghi's conference. The ECB president pointed out that diminishing inflation pressure is partly due to EUR strengths. It was a suggestion that the Central Bank can lower the rates in the future and therefore decrease value of the common currency. Another uncertainty moments were G7 and G20 statements regarding exchange rates but their impact was rather timid and didn't cause a major move on EUR/USD. At the end of the month two elements tip the scales. The first one was FED “Minutes” which suggested that the asset purchase can be reduced or ended even before the unemployment drops to 6.5%. Some FOMC members also were concerned about the risk regarding QE. In my opinion it was a news of the month. It changed the perception of investors about withdrawing from the easing policy (moved it to 2nd -3rd quarter from the end of 4th quarter). It was also the day when EUR/USD broke down key support levels around 1.3300. The second issue was Italian election outcome. The austerity coalition received much less votes then expected and therefore EUR/USD dived to lows of the month (around 1.3020).

Technical Analysis: It looks that till February 20th the slide could had ended with a slight downside move without breaking the key support levels. However, slump under 1.3300 (23.6% Fibonacci retracement level, 50 DMA and medium term rising trend line) initiated strong selling signals and after three days we were moving around 1.3000. If 1.3000 fails then we can expect a fast slide toward 1.2870-1.2840 (200 DMA, 50 DMA, head and shoulder target). On the other hand the comeback over 1.3300 (low probability) increase the chances to move toward recent highs.

Extremely calm on EUR/PLN.

Looking at the monthly chart of EUR/PLN we can easy imagine that in can be a daily graph. Each day of February closed between 4.15-4.19 levels and intraday bounces above or below that range were short lived. The zloty was resilient to any pressure form the global events, and was focusing mainly on the local issues. At the beginning of the month we had quite hawkish MPC statement. Later the zloty was supported by better then expected manufacturing output and retail sales. At the end we got also an outlook upgrade from Fitch rating agency. However none of the mentioned elements was able to move EUR/USD out of the 4.15-4.19 range.

Technical analysis: the base scenario is still range trade between 4.15-4.19. It is worth to note, however, that if the breakout occurs it can result in a strong move either north or south. The move under 4.1500 can give a signal to move toward 4.08-4.12. On the other and rise over 4.19 can iresult in 4.23-4.25 rise.

View of the next month. What is the Polish MPC going to do?

Besides focusing on regular monthly data the market will focus on two issues – political decisions in Italy (government or possible another election), and the March FED meeting. Forming a coalition in Italy should result in some relief on EUR/USD. In a few days speculators will also try to evaluate how dovish/hawkish FOMC is going to be and if the Bernanke team (Tuesday's and Wednesday's speeches before the Congress can give some hope to EUR/USD bulls) is able to outvote the more hawkish part of the Committee.

The next week Polish MPC meeting can be a key event for the PLN pairs. The first question mark is the decision. The next are both statement and the conference. Firstly I will focus on the decision and analyze the recent speeches, interviews, and voting results of RPP members.

• Sure votes which will favor the cut (3): A. Bratkowski, E. Chojna-Duch, A. Zielińska-Głębocka
• Sure votes which will support leaving the rates unchanged (2): J. Winiecki, A. Glapiński
• Probably will vote against the cut (3): A. Rzońca, Z. Gilowska, A. Kazimierczaka
• Question marks (2): NBP governor Marek Belka (with evenly split votes his is vital), J. Hausner

From the group “Probably will vote against” it is hard to find any recent statements. Andrzej Rzońca and Zyta Gilowska are rarely talk to reporters and Kazmierczak's last interview was in TV Trwam on January 17th where arguments against and in favor the cut were split. However taking into account the historical approach of the “probably group” it is much more possible that all will vote against then only one in favor. At that moment we have 3 YES and 5 NO. Let's then focus on two key members: Marek Belka and Jerzy Huanser. From many MPC chief statements it is really hard to predict what will Belka do during the March meeting. The similar situation is with Jerzy Haunser. In the most recent interview with Reuters he was really careful not to give any hint to his decision. In the last press release Members suggested that the rate decision “in the following months will depend on the assessment of the incoming data on economic developments and inflationary pressure, including the results of the March NBP macroeconomic projection”. The macro data in recent weeks was better-then-expected but mainly due to statistical factors (more working days). Analyzing the recent inflation projections we can see that the CPI is going to fall to 1.2% at the end of 2014. If the current NBP macroeconomic forecast shows that inflation will fall under 1% at the and of 2014 and the average CPI is less then 1.5% next year than it gives a strong argument to the “question marks” to vote in favor the cut. If Belka and Hausner decide to cut the rates than we have 5:5 and the rate decrease will be valid due to the NBP governor vote. Summarizing I think there is 60% chances that RPP will lower the benchmark mainly due to March CPI projection, but it will be the last cut and the MPC will move toward wait-and-see mode. The zloty should be stable till the decision is announced. Then if we get the cut it can weaken a bit but will be waiting for the conference and statement (that should be much more hawkish, so in result it can gain some value on Wednesday afternoon. On the other hand if RPP leaves the rates unchanged then the PLN can appreciate significantly (between 0.02-0.05 PLN). It is possible that until the decision is announced we will also get the voting results from January (Court and Economic Monitor) meeting, so it can give some hint regarding the undecided members.