Afternoon analysis 16.05.2016:
Rising oil price helped the commodity currencies. The zloty posted broad gains after Moody's decision. The IMF's statement did not affect the Polish currency.
On Monday the oil price increased to the highest level in six months. Recently, the supply factors have helped to lift the oil price. Strikes in Kuwait, wildfire in Canad and currently the situation in Nigeria have been supportive for the commodity price.
During today's session the factor that supported the oil price was the weakness of the dollar. Dollar's poor performance was somewhat surprising as the Friday's data on retail sales was very good. Moreover, comments from the Federal Reserve were rather hawkish and supported the two interest rate hikes scenario. Today the New York Empire State index missed the forecast as the gauge dropped to negative 9 from positive 9.6 in the prior month. Usually, the report has no significant impact on the dollar.
In addition, the information regarding China support the commodity market. During the weekend the People's Bank of China said given the streak of poor report it will continue to support the economic growth with the monetary policy. This factor supported the oil price and other major commodities. As a result, the commodity currencies gained. The Canadian dollar and the Norwegian crown increased. Moreover, the Russian rubble posted gains.
The zloty increased after the decision of Moody's agency, which left the rating unchanged. However, the agency lowered the grade's outlook to negative. All in all, given the basis scenario which assumed one notch cut the Friday's decision was better than expected.
As the uncertainty associated with the Moody's decision was removed, the political risk has been limited. In the near future the probability of rating cut will be rather limited (more on the issue in the prior commentary). As a result, a more important factor will be the economic developments. Given the weakness of March reports, the coming data will be very important. If the data continue to disappoint, the discussion about more cuts will resume.
On Monday the International Monetary Fund released the report on Poland. The IMF showed somewhat a positive view on the economic developments and said the GDP growth may increase to 4 percent in 2017.
Among potential risk factors the IMF cited the weakness of emerging markets and slowdown in the eurozone. In the case of domestic factors, the IMF cited the institutional risk and loosening fiscal stance. As a result, the deficit to GDP ratio may exceed the 3 percent level in 2017. The Fund negatively assessed the government proposal to reverse the pension system reform. In addition, the plan of franc loans conversion poses a risk to the financial system stability.
The IMF's statement stressed risks associated with the public finance sustainability in the context of government's plans. However, this factor did not limit the zloty's gains. As a result, the Polish currency exceeded gains in the second part of the session. Whether the move continue will depend on the economic reports in the coming days.
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