Afternoon analysis 09.09.2014:
The Bank of England provided support for the pound. The euro hits new lows. Rumors about the Fed increasing interest rates sooner than expected and dovish statement from the Polish MPC pushed the zloty lower.
The euro extended losses against the dollar. The shared currency touched today 1.28587 – the lowest level since 10 July 2013.
Information that the French deficit will probably exceed government goal negatively affected the euro. The deficit thorough the year until July was 84.1 billion euro compared with 80.8 billion euro in the corresponding period of previous year. Government revenue shrank 3.6 percent and government spending was reduced only 0.8 percent.
The key issue is that France saved 1.7 billion euro due to a drop of public debt servicing cost. It was caused by the record high bond prices. The amount corresponds to overall savings made by the French government. Thus, there was no cuts in other public spending. So France is heading for higher than expected budged deficit above 4 percent of GDP that was pledged by the government.
Without the drop of bond yields due to the European Central Bank policy, France wouldn't have introduced any savings. The lack of will to start reforms may bring negative consequences to the French sovereign rating, despite of the ECB actions.
BOE helped the pound
The Bank of England President Mark Carney suggested spring as the possible moment for interest rate increase in United Kingdom. The speech supported the pound and helped to stop the decline of the currency after the increase of support for Scottish independence.
Earlier this week the pound was battered by the survey that showed the Scottish independence supporters gained a lead for the first time this year. Looming referendum poses a variety of risk – for example there is no plan for division of public debt and tax revenues or the use of the British currency.
In the morning the pound had touched the lowest level since November 2013, but the currency rose after the BOE President speech. At the meeting of trade unions Mark Carney reiterated that the monetary authorities will determine whether to increase interest rate based on economic growth and labor market developments. In addition, Carney said that one should prepare to the BOE increase interest rates because inaction would pose risk to its goals.
Given the Carney's speech one can expect the BOE to increase interest rates as the firs major central bank despite of the result of Scottish independence vote. That is supportive for the pound.
Strength of the dollar
The Federal Reserve in San Francisco published report concerning market expectations for interest rate hikes in United States. The report stated that market participants underestimate the outlook for interest rate increase compared to Fed's projections. Analysis was based on survey of primary dealers and derivatives market developments.
The report has been interpreted as the signal that the stance of the Fed is more hawkish than market participants previously thought. In addition, given the way of the ECB communication by the speech of its president at the symposium in Jackson Hole, today's report is considered as way of providing signal that the Fed will pursuit the plan to close QE and rise interest rate. As a result, the dollar rose against its major pair.
The outlook for closing QE and risking interest rates in the U.S. is signal for investors to sell high-yielding assets. Thus, one can observe sharp declines among emerging market currencies, including the zloty.
In addition, the zloty was weakened by the Jerzy Osiatyński from the Polish Monetary Policy Council. Member of the MPC said that monetary authorities should provide the answer to the ECB actions to safeguard competitiveness of exports, according to Reuters. In addition, Osiatyński said that the cut is almost certain in October.
The Central Statistical Office said that the exports rose 5.5 percent from the previous year and the import gained 4.4 percent thorough the year until July. The surplus was 171.3 million euro. The figures showed that exports to Russia dropped more than 10 percent, but it didn't affect overall performance of the Polish trade significantly.
Investors are leaving high-yielding currencies due to more hawkish stance of the Fed, what hurts the zloty. The Polish currency didn't have the opportunity to exploit the lessening of the Ukrainian crisis. So the scenario for stronger zloty probably won't be realized due to increase of risk-taking.
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