Daily analysis 02.03.2015:
Another hawkish suggestions from members of Federal Reserve, have enforced the American currency, at the beginning of Monday's session. This week will be full of macro events, but it does not have to be as positive for the dollar, as the previous one. After good PMI data, zloty maintains in the areas of 4.15 per euro. Scenarios before the upcoming MPC summit.
Most important macro data (CET). Estimations of macro data are based on Bloomberg's information, unless marked otherwise.
- 14.30 CET: PCE inflation (preferred by Federal Reserve) for January (estimations: minus 0.5% m/m; +0.2% y/y); with exclusion of fuels and food (estimations: +0.1% m/m and +1.3% y/y)
- 16.00 CET: Industrial ISM from USA (estimations: 53 points)
New hawkish suggestions from Fed
Previous meeting of Fed representatives in New York, organised by Chicago Booth School of Business, and their later statements for the media, have shown that more members of Federal Reserve confirm the possibility of beginning the tightening of monetary policy already between June and September 2015. This also shows, that the statement “patience”, which suggests that interest rates will not be changed on two upcoming summits, will be removed already in March.
Additionally, William Dudley presented his viewpoint on the tempo of monetary policy's tightening, for the second time this month. President of New York department of Federal Reserve, who is considered as the representative of doveish fraction and whose views are close to Janet Yellen's, concentrated in his speech on significant decrease of future interest rates, despite the upcoming tightening of monetary policy.
Dudley thinks, that if the investors will assume the low level of future credit in long term after initiation of increases, “it will be appropriate to choose more aggressive path of monetary policy's normalisation, in comparison to the scenario, in which interest rates are clearly raising, pushing the treasury bonds' profitability clearly higher”.
The above statements will be a crucial topic of the debate, when the monetary tightening will already begin. There is a possibility, that according to some members the future low interest rates, will be an argument for slower tempo of monetary policy's normalisation. For others, e.g. Dudley, on contrary. If the viewpoint of New York Fed president would appear to be dominating, we are in for a faster appreciation of American currency, than it is currently assumed by consensus.
Strong dollar, but not necessarily this week
In short term, the market should “get used” to a big probability of removing “patience” on March summit. Thus the upcoming macro data, should become crucial matters. Friday's drop of Chicago PMI index by 13.6 points to the level of 45.8, can be an announcement of weaker readings in the upcoming days. Despite that the decrease of industry's activity in the area of Chicago down to 5 year minimums, is caused by severe winter, it is difficult to say, is the whole slowdown of weather disturbances.
Today's ISM reading can be a certain answer to this question. According to the economists, the index which describes the condition of American industry, should drop down to the level of 53 points. If however this drop would be deeper, and we would achieve a lower result than in January 2014 (51.8, also in the middle of severe winter), there could be some doubts concerning the economy's condition in the upcoming months.
If these anxieties will be confirmed by service ISM and ADP data from the labour market in the middle of the week, we can expect a clear wear off on USD, and even return to the areas of 1.1300. This of course does not ruin the mid and long term appreciations trends on the American currency. But the chance for a bigger correction supported by the weaker macro data, is quite significant.
Few words about the foreign market
Quite a big uncertainty concerning the macroeconomic data this week, can cause that in case of worse readings from the other side of the ocean, the American currency will generate a decrease correction in the upcoming days. However, the main information that the market is waiting for, are the Friday data from Labour Department. In order to observe a more serious wear off on the dollar, and the publications would influence Fed summit in March in any way, NFP reading would have to be very low (150 thousand). Also a downward review of previous months would be required, by at least 50 thousand.
A good PMI without and influence on the Council?
PMI index maintenance above the level of 55 points (55.1) is a good information for the national economy. According to data gathered by HSBC and Markit, there still should be an increase of new orders, production or hiring in the national industry. On the other hand, component of future prices of ready products has decreased again. According to Trevor Blachin, Markit's senior economist, this is “a support for cutting interest rates by NBP in the upcoming months”.
It was probably this view, which anyway can be discussed, that caused zloty not being enforced after those data. The second factor which may stop zloty's appreciation, is probably working off of recent appreciation of local currencies in relation to euro. Just before announcing those data, zloty returned above the level of 4.1500
According to us, PMI data put the perspective of deeper interest rates decrease away, and bring Council's members closer to reducing the money's value by 25 basis points. The basis scenario by cutting interest rates by “a quarter” is maintaining a relatively doveish communicate. That will leave a place for further decreases if it appeared, that the deflation will not decrease, and monthly data on retail sale or industrial production will be disappointing.
On the other hand, if it would appear that MPC will cut interest rates 25 basis points, and the communicate will be less doveish than it was in February, or the Council will not decrease interest rates at all, we should see a visible enforcement of zloty, and an attempt of taking EUR/PLN in the areas of 4.10. A more serious wear off of PLN is expected only in the scenario of 50 points cutting, and maintaining a mild rhetoric. Such solution is however least likely, if we will concider recent statements of MPC members.
Today the market should be relatively calm. EUR/PLN will probably be recorded close to the areas of 4.15, and franc will remain slightly below the limit of 3.90. USD/PLN pair has chances for ending the Monday's session below 3.70. Especially if ISM from USA will be below the limit of 52 points.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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