Afternoon analysis 20.09.2016

, author:

Bartosz Grejner

An otherwise calm day in the market has been slightly disturbed by the pound. Weaker data from the American real estate market. The zloty is stable before the decisions from central banks.

Progressive depreciation of pound

The pound's value has decreased against the majority of currencies in the second part of the day. For the first time in one month, the GBP/USD went below 1.3 and the GBP/PLN went below 5. The British currency has been gradually losing value since the beginning of September. However, the pound was probably weakened by today's information that Poland, Hungary, Czech Republic and Slovakia suggested that they are ready to vote against the trade agreement with the United Kingdom, unless it's “balanced.”

The above mentioned “balanced” agreement is understood by these countries as obeying four rules of the EU market (free flow of products, people, capital and services). They want a free access to the British labor market and are afraid that the visa system may return.

Weaker data from USA

Today, we have also received the data regarding home-building initiations. They fell by 5.8% m/m, which is its largest decline in five months. What's worse is that initiated building of single-family houses went to its lowest level since October. Shortly after this data was published, Morgan Stanley reduced forecasts of the GDP for the third quarter for the American economy from 3.1% to 3.0% and Goldman Sachs reduced this index from 2.9% to 2.8%.

Despite that, this data is negative for the American economy, it didn't make large changes on the dollar. Investors are probably focusing on tomorrow's decisions from the central banks. They will definitely have a larger impact on the currency exchange rates.

Stable zloty

Despite the forthcoming decision from the central banks, the zloty remains stable against the majority of currencies (except for the pound, which is weakening globally). Due to the fact that the Polish currency belongs to the emerging markets, we may expect larger fluctuations (and a possible reduction of the zloty's value) when the decisions from central banks are made.

Since we don't expect the Fed and the BoJ to surprise the markets, we estimate that the USD/PLN will test the 3.8 level and the EUR/PLN will remain near 4.30 after exchange rates become stable. In the case of a less likely scenario in which the Fed increases interest rates, the zloty would begin to wear-off against the euro, as well as the dollar. This would be consistent with its long-term trend.

Tomorrow's events

Tomorrow will be the most important day in the past few weeks, as well as the most anticipated. We will know the decision from the Japanese and the American central banks regarding their monetary policies.

According to what we indicated in today's Daily analysis, the market is not sure what the BoJ will do. At least not as sure, as it is in the case of the Fed. The methods that the BoJ has implemented after its meeting in July were clearly disappointing to the markets. As a result, the yen has strengthened and the profitability of bonds has increased, which was not the Bank's intention.

Therefore, the BoJ is under pressure of investors to continue the monetary easing. The Reuters agency survey that was conducted between September 14th and 20th, indicates that about two-thirds of thirty-one economists estimated that the BoJ would increase the economy's stimulation by a decrease in interest rates below the current level of negative 0.1%.

This situation is against the consensus of a different survey (conducted by Reuters as well, but partially among different economists) regarding the long-term forecasts of the BoJ. The forecasts indicate that the bank would not decrease interest rates, nor would they increase the assets purchase before the end of the year. This shows the uncertainty regarding the BoJ decisions even clearer. Therefore, large fluctuations of the yen exchange rates are expected before, as well as after the Japanese central bank meeting.

At 16.30 (4.30 PM), between the decisions from both central banks, we will know the data regarding the supply of oil, gas and distillates from the USA. The reaction of oil's quotations was negative after last week's data. This time, we expect an increase in oil supply, which should theoretically be positive for oil rates. Meanwhile, due to Venezuelan President Nicolas Maduro, a topic of agreement between the countries that are members of OPEC and those that are not has been called, in order to stabilize the global oil supply.

We have been receiving this type of information for few weeks. This causes constant fluctuations on oil, as well as uncertainty among investors. Therefore, the oil supply data is significant for the market, because they are facts among speculations. We can expect a larger volatility of oil quotations, due to the publication of supplies from the USA. Additionally, a larger volatility of oil prices will impact the dollar's fluctuations after the BoJ decision, as well as before the Fed's decision.

At 20.00 (8.00 PM) we will know the Fed's decision regarding interest rates, as well as its macroeconomic projections. At least the market consensus will not change in this case. The market estimates rate hikes for less than 20%. What's interesting is that Primary Dealers show the largest dissonance regarding the Fed's decision.

Two out of twenty-three bond dealers (Barclay's and BNP Paribas) claim that the Fed would raise interest rates tomorrow. In their opinion, the market, as well as other dealers, were too confident in underestimating the possibility of rate hikes. Their argument is that there will never be a perfect moment for such actions, because there will always be some uncertainties included in the data. Moreover, an increase in employment may force the Fed to act now.

The above mentioned institutions are assuming that a possible decision regarding rate hikes is uncertain. However, the majority of Primary Dealers think that interest rates will remain unchanged and the Fed's message would be hawkish. This should make the way for rate hikes in December.


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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