Afternoon analysis 26.04.2016:
The dollar dropped after a poor report on durable goods orders. Weak data may compel the Fed to loosen its stance further. The zloty rebounded against all its major pairs.
The report on durable goods orders missed the forecast. Orders only increased 0.8 percent on a monthly basis. The report, excluding transportation equipment, showed a 0.2 percent drop. The forecasts were for a 1.9 percent and 0.6 percent increase, respectively.
Today's data suggests deterioration on investment activities. The companies are reluctant to invest, as households are not spending money. In spite of a very good situation in the labor market, the data on retail sales and household spending don’t show rising demand. Moreover, the external demand is also weak due to the strong dollar and deterioration in the emerging market economies.
All in all, the latest reports from the US economy have been rather weak. Given the situation, one can see that the GDP growth was flat in the first quarter. As a result, the Fed may decide to soften its stance further. Especially as the inflation data suggests that the recent rebound was not sustainable.
The futures market suggests that the probability for an interest rate hike in June is only around 20 percent. In the meantime, the Fed is talking about two hikes this year. Given the situation, the Fed may be forced to adjust its stance on the data. The central bank will publish its monetary policy decision on Wednesday. If the report suggests a more dovish stance, the dollar may decline further.
The dollar dropped when the euro stabilized. The ECB said that it is not willing to adjust its policy in the short term, as it is waiting for the outcome of actions that have been just implemented. As a result, the probabilities of additional actions in the eurozone are rather small. Investors expect that the ECB will increase stimulus in September, but given the latest comments from the central bank, it is not very likely.
As a result, the EUR/USD gained. It exceeded 1.13 against 1.12 on Monday.
The zloty recouped losses
On Thursday, the zloty recouped the losses that it incurred recently. Recently the zloty has been under pressure, due to heightened political risk. In this context, the major issue is the high probability that the Moody's agency will cut the nation's rating. Moreover, the Polish assets are not very attractive given the yield to risk ratio. And finally, the data on budget showed that the deficit is higher than the schedule. This factor may increase pressure on the zloty in the longer term (more on the issue in the previous commentary).
The Hungarian Central Bank cut interest rates by 15 basis points to 1.05 percent. The decision was expected. The loosening of the monetary policy in Hungary may support the zloty's performance in the region. However, given the risk factors, the zloty's appreciation may be limited.
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