Afternoon analysis 19.05.2016

, author:

Piotr Lonczak

The dollar increases its gains after the hawkish minutes from the Federal Reserve. Raw materials, as well as the emerging markets currencies, are under pressure. The zloty is steady at the low level. Comments from the Monetary Policy Council representatives are insignificant for the Polish currency's exchange rate.

The situation in the financial markets is determined by a broad strengthening of the dollar. This move was caused by a relatively hawkish announcement from the FOMC, which was published yesterday. June has been indicated as a possible moment for the hikes. That is of course, if the economic situation is sufficiently positive.

The strengthening of the American dollar started on Tuesday afternoon. The factor which pushed the American currency up, were the relatively hawkish comments from the crucial representatives of the Federal Reserve. They suggested at least two hikes this year. Moreover, the inflation data, as well as the industrial production data, were supportive for the monetary tightening scenario. This was favorable for the dollar. The FOMC announcement had intensified the previous tendency.

The perspective of the monetary tightening in the USA increased the risk aversion in the broad market. Today, we have observed depreciation in the majority of the European stock markets. The German DAX index decreased by approximately 9%, and the British FTSE index decreased more than 1%. Moreover, the signal from the American central bank intensified the pressure on hazardous assets, including the emerging markets currencies.

Investors will currently focus more on the data from the American economy. If the improvement of the business cycle in the second quarter (which was announced by the recent reports) confirms that the slowdown from the first quarter was only temporary, the chances for the hikes will increase significantly. Currently, the probability of an increase in interest rates at the next meeting is 30%.

Zloty at a low level

Grazyna Ancyparowicz, of the Monetary Policy Council, claims that the Polish economy should develop at a faster pace, by 1% (source: Newseria). However, this does not mean that the monetary authorities will abandon their basic aim, which is the concern for stability of the money. Ancyparowicz said that the current deflation in Poland does not have a disadvantageous impact on the economy. Deflation sources are a decrease in food prices, as well as in energy prices. From the point of the monetary policy, it is crucial that the profitability of production remains at a satisfying level. Moreover, depreciating prices do not show its limitation.

Today's data from the Polish economy was clearly better than expected. The industrial production increased 6% y/y, while the market consensus assumed an increase at the level of approximately 3.5%. The retail sales data was slightly weaker than expected (increase at the level of 3.2%). Yesterday's data regarding the labor market was also better than expected.

April's reports suggest that a slowdown from the first quarter was temporary. A similar situation can be observed in the case of other economies. Thus, the pessimism regarding the GDP slowdown to 3% can be exaggerated. Moreover, these reports decrease anxieties that the economic results from the entire 2016 will be so weak that they will lead to an increase in tensions regarding the public finance. This is where the recent comment from the Finch agency, regarding the GDP data from the first quarter (more details in today's Daily Analysis), becomes significant.

As far as today's data, it might support the zloty in long-term as its positive impact was not seen during today's session. The market is determined by an increase in probability of the hikes in the United States. This factor is responsible for a broad wear-off of the emerging market currencies, as well as for a depreciation of raw materials. Strengthening of the zloty remains relatively low in this situation.

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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