Afternoon analysis 27.10.2015

, Autor:

Marcin Lipka

The dollar gained before the Federal Open Market Committee's decision on the interest rates. The zloty remained weak as the political risk prevails.

Today's data from the US were disappointing. Industrial orders missed the forecast as it dropped 1.2 percent. Also the core orders data was weaker than it was projected. In addition, the Conference Board consumer sentiment index was below the expectations. The housing market reading was in line with the forecast. The S&P/Case-Shiller index increased 5.1 percent on a yearly basis. It confirmed a steady expansion in the housing market.

However, the readings will not alter the FOMC's decision. The US central bank is expected to leave rates unchanged at record low. The statement will likely leave doors open to increase rates in December. In general, majority of central bank members, including Fed Chair Janet Yellen, support a similar scenario. In addition, improvement in the US reports, calming of anxiety concerning the Chinese situation and the prospect that the European Central Bank will expand its stimulus, all support the tightening in the US.

If the FOMC's statement is quite hawkish, it will support the dollar. As a result, the emerging market currencies will be additionally pressured. Given the situation, the zloty may drop even more, as the currency has been negatively affected by the political risk.

Weak zloty

National Bank of Poland President Marek Belka calmed the situation down. The President of the NBP said, that the promises made during election campaign will likely be forgotten. In his view, there is no way to force the NBP to "print money" as it is forbidden by the Polish constitution.

Marek Belka criticized the project of financing credits to small business using the central bank. His opinion is that in Poland there is a problem with credit demand, but not with supply. The NBP Chief criticized the proposal to increase taxes in the banking sector and converse franc-denominated credits. It will undermine banking system's ability to finance the economic growth.

Henryk Kowalczyk, who is responsible for economic program in the PiS party, currently sees no need to use central bank to support the credit action. Earlier he announced the plan to spend as much as 350 billion PLN using the central bank. However, Kowalczyk considers the proposal to converse franc credits as reasonable. He also supports the plan to support families with more than two kids, which may cost as much as 20 billion P.

Moody's Investors Service considered the voting outcome as a threat to Poland's credit rating. The agency cited the major PiS proposals as negative to public finance. It also criticized the proposal to use the central bank to stimulate the economy. However, Moody's is not expecting that the budget deficit will be higher that 3 percent.

The post-election turmoil is hurting the zloty. The Polish currency did not manage to tame losses. However, the rebound potential of the zloty will be limited by the outlook for tightening in the US.

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