Afternoon analysis 26.04.2016

, Autor:

Piotr Lonczak

The dollar dropped after poor report on durable goods orders. Weak data may compel the Fed to loosen its stance further. The zloty rebounded against all its major pairs.

The March report on durable goods orders missed the forecast. Orders increased only 0.8 percent on a monthly basis. The report excluding transportation equipment showed a 0.2 percent drop. The forecasts were for 1.9 percent and 0.6 percent increase, respectively.

Today's data suggest deterioration on investment activity. The companies are reluctant to invest as households are not spending money. In spite of very good situation in the labor market the data on retail sales and household spending do not show rising demand. Moreover, the external demand is also weak due to strong dollar and deterioration in the emerging market economies.

All in all, the latest reports from the US economy have been rather weak. Given the situation, one can expect the GDP growth was flat in the firs quarter. As a result, the Fed may decide to soften its stance further. Especially, as the inflation data suggest that the recent rebound was not sustainable.

The futures market suggests the probability for interest rate hikes in June is only around 20 percent. In the meantime, the Fed is talking about two hikes this year. Given the situation, the Fed may be forced to adjust its stance to the data. The central bank will publish its monetary policy decision on Wednesday. If the report suggests more dovish stance, the dollar may decline further.

The dollar dropped when the euro stabilized. The ECB said that it is not willing to adjust policy in the short term as it is waiting for the outcome of actions that have been just implemented. As a result, the probability of additional actions in the eurozone is rather small. Investors expected the ECB will increase stimulus in September, but given the latest comments from the central bank it is not very likely.

As a result, the EUR/USD gained. It exceeded 1.13 against 1.12 on Monday.

The zloty recouped losses

On Thursday the zloty recouped the losses incurred recently. Recently the zloty has been under pressure due to heightened political risk. In this context the major issue is high probability that the Moody's agency will cut the nation's rating. Moreover, the Polish assets are not very attractive given the yield to risk ratio. And finally, the data on budget showed that deficit is higher than the schedule. This factor may increase pressure on the zloty in longer term (more on the issue in the previous commentary).

The Hungarian Central Bank cut interest rates by 15 basis points to 1.05 percent. The decision was expected. Loosening of the monetary policy in Hungary may support the zloty's performance in the region. However, given the risk factors, the zloty's appreciation may be limited.

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