Afternoon analysis 10.02.2016

, author:

Piotr Lonczak

The dollar strengthened after the Fed released its semiannual report on the monetary policy. The US monetary authorities still plan to tighten the policy. The zloty was steady at the low level.

The report on the monetary policy released by the Federal Reserve did not result in a volatility spike. Although the dollar eventually rose against the euro, the move was not significant. The US monetary authorities proved that they can manage the market expectations in a smooth way to limit volatility spikes caused by incorrect communication.

In the report, Fed said it expects the economic situation to evolve in a way that will let it only raise the interest rates gradually. The stance was coherent with the Fed's previous communication. The Committee said it can adjust the monetary policy. It will depend on economic developments. The pace of interest rate hikes may be increased if the GDP growth accelerates or if inflation rises. In the opposite situation, the path may be softened.

Janet Yellen’s speech before Congress also confirmed the actual stance of the Fed. The Fed President said that the labor market is moving to full employment, although some market parameters are still not satisfying. The inflation rate remains low due to a drop in energy prices. Nevertheless, the central bank expects that the inflation rate will return to the target over the medium term.

Yellen assessed the global economic developments to be uncertain. Although there is no risk of severe slowdown in China, the drop in currency reserves may pose some difficulties for the central bank in conducting the exchange rate policy.

The latest developments in the financial markets and in the global economy have been enough to force the Fed to alter its monetary policy. In contrast, the financial markets expect no interest rate hikes this year (according to CME data). The divergence will eventually lead to an adjustment that may result in a stronger dollar.

The zloty at the low level

On Wednesday, the market sentiment improved. The rebound came after a period of uncertainty concerning the European banking system. However, the commodity market and the emerging market slowdown still remain a risk to the outlook.

The National Bank of Poland estimated the cost of credit conversion to as high as 44 billion zlotys. The NBP expects that if the program is introduced, 70 percent of the banking sector will face losses. Moreover, the NBP said the project may limit tax income for the government and will impose a negative pressure on Poland's rating.

The NBP estimates show that the project will be hard to introduce. As a result, the probability that it will be implemented in the future is rather low. If it is diluted or abandoned, the risk concerning the Polish financial sector will be limited. As a result, the zloty may be supported in the longer term.

Today the zloty remained at the low level. The Polish currency only increased against the euro. If the Fed continues its plan to tighten the monetary policy, it may negatively affect the Polish currency. However, the impact of this factor may be limited by the ECB's plan to increase stimulus in March.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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