Afternoon analysis 22.09.2016

, author:

Bartosz Grejner

The Reserve Bank of New Zealand has given a dovish message for the market. The minutes from the Monetary Policy Council meeting in September, appeared to be more dovish than statements from chairman Adam Glapiński. Weekly jobless claims from the USA appeared to be better than expected.

No changes in New Zealand’s interest rates

The Reserve Bank of New Zealand (RBNZ) left interest rates unchanged. This was consistent with the market’s expectations. However, the way in which the decision was announced was definitively dovish. The bank emphasized that a weak condition of the global economy, as well as a low level of interest rates worldwide is causing an appreciation pressure on the New Zealand’s dollar.

Since September 2015, the New Zealand’s currency gained more than 17% against the American dollar, with a clearly progressive appreciation trend. Moreover, the currency gained slightly more than 49% against the dollar since March 2009. This period also contains a clear appreciation trend with an exchange rate correction between July 2014 and September 2015.

The RBNZ doesn’t want such a strong currency. The current exchange rate is even larger than the Bank has assumed in its statement from August. This has a negative impact on export, as well as the sectors that compete with import. This is because a stronger local currency means that export is less profitable. Moreover, prices of imported goods and services are more competitive.

Combined with a weak global inflation, this takes inflation of the trading goods sector to a negative level. As a result, general inflation in New Zealand is below the RBNZ’s target (2%, including possible +/- 1% fluctuations in the mid-term). Moreover, the Fed’s decision from yesterday (especially a relatively dovish message) and a milder path of monetary tightening are causing an additional appreciation pressure on the New Zealand dollar.

No wonder that the RBNZ stated that a weaker currency is required to make inflation return to the range of its target. The Bank’s next meeting will be held in November. Taking into consideration a dovish message, as well as a further need of soothing the monetary policy, it would probably end with a decrease in interest rates below the current 2%. Let’s keep in mind that the Fed will have its meeting in December and there’s a large chance for rate hikes. Combination of two above effects should result in New Zealand’s dollar wear-off.

MPC is more dovish

The MPC chairman, as well as the NBP president, Adam Glapiński was relatively hawkish recently. He even suggested rate hikes at the end of 2017. The minutes that have been published today, suggest that keeping interest rates unchanged remains a dominating view within the MPC. Moreover, there is a visible group of the Council members with a relatively dovish attitude.

Some of the Council’s members admit that there are dangers, such as a slowdown of economic growth, extended deflation and its negative results, which could determine a decrease in interest rates in the next quarters, if they appear.

The minutes did not wear-off the zloty, despite that they were more dovish than the MPC chairman’s statements. Investors continue to discuss the Fed’s decision that has been favorable for the zloty. The USD/PLN is near its lowest level in one month, as well as is slowly reaching the 3.80 level, which would probably be tested in case if appreciation trend of the Polish currency is sustained.

Positive data from American labor market

Jobless claims in the USA have been gradually improving since the middle of this year. Today’s reading (252k) was by 10k better than expected, as well as by 8k better than last week. At the same time, this was the best week in two months, when it comes to the amount of applications. However, the data was not positive for the dollar. The markets continued a progressive wear-off trend of the American currency, as a reaction on the dovish message from the Federal Reserve.

Tomorrow’s events

Shortly after the opening of the European stock markets, we will know the PMI from industry and services for the German economy (9.30 AM), as well as the euro zone (10.00 AM). The recent readings showed small dissonances with the consensus. Therefore, we don’t expect a large impact on the euro. Only significantly worse data could cause any chances in quotations of the European currency.

At the beginning of the American session, we will know the industrial PMI data from the USA. Even though the ISM index is more significant for the American economy (in August it indicated the 49.4 level, which means a decrease in economic activity), a weak PMI reading may be negative for the dollar. However, this publication will most probably have a limited impact, taking into consideration that the ISM data from August is already known.

At 18.00 (6.00 PM), we will have testimonies from three FOMC members. One of them will especially attract investors’ attention. Loretta Mester was one of the three members that voted in favor of rate hikes yesterday. This was basically the only hawkish message from yesterday’s meeting, taking into consideration that this was the first time since 2014 when the fOMC members were so divided. Investors are definitely curious of how Mester will justify her decision, as well as distance herself from Janet Yellen’s statements.

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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