Daily analysis 10.08.2016

, author:

Marcin Lipka

Record high inflation in Norway pushes the krone higher and significantly lowers the odds for interest rate cuts. The EIA report and the highest oil production from Saudi Arabia. Markedly weaker dollar. The zloty is gaining value to major currencies - particularly to the dollar.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • No economic data, which can significantly affect the analyzed currency pairs

Surprise from Norway

In recent years, the central banks of developed countries have tried to stimulate local economies and increase the odds to push the inflation toward the goal, which is usually around 2% on annual basis.

The Norwegian economy, even though it is a bit different due to high share of commodities impact and high savings collected during the oil boom, was also using the expansionary monetary policy. For a long time, it wasn’t really seen in the prices - which just slightly exceeded the gaol.

During the March meeting, the Norges Bank lowered interest rates by 25 basis points to 0.5% - claiming that the growth perspective of the Norwegian economy weakened. Additionally, it was noted in the statement that current economic projections suggest that the benchmark may be cut further this year.

This suggestion was theoretically confirmed in June by the Monetary Policy Report where the inflation projections excluding energy (CPI-ATE) were assuming its fast slide in the following months. Today, however, instead of a drop we saw a strong rise of the CPI-ATE to a 3.7 y/y level. This was the highest reading for at least 15 years.

The overall inflation was also at multi year highs at 4.4%, but in that measure the reading was pushed higher due to energy price hikes. However, in looking at other inflation components, the prices rose substantially. Clothing and footwear rose 7.1% y/y and recreation/culture is almost 5% more expensive than it was a year ago. Moreover, airfares went up by 11.1 per cent according to Statistics Norway.

It will be very interesting whether the September meeting of Norges Bank will look through these numbers and still suggest further monetary easing to push the growth higher. Or if on the other hand, they will try to ease some inflation pressure and ease the losing bias. Currently, the latter solution looks more probable and is what also pushed the krone around 1% higher against most currencies.

Oil and the dollar

Again, oil returns toward 42 dollars per barrel. During recent hours, there have been at least three elements which impacted the price. The first was a monthly EIA report where the US production estimates were raised for the following quarters. But, on the other hand, new projections show that the inventories draw may be slightly faster in the second part of 2017.

The second element was a weekly API report, which showed an increase in oil inventories but a faster-than-expected reduction in product inventories. As a result, we may conclude that the data was mixed.

Finally, a negative message for the prices came from unofficial Bloomberg reports, which claimed that Saudi Arabia produced 10.67 million barrels of oil per day in July. If the data is confirmed today by the official OPEC publication, it will be the highest level of production in history. The previous high was recorded in June 2015 (10.56 million).

Overall, taking into the account that in a few quarters the oil demand will get much closer to its supply, the current fluctuations may not significantly affect the commodities currencies. The view should be actual, even if the WTI remains in the 40 dollar range until the Spring of 2017.

Returning directly to currencies, there is some weakness of the dollar on the broader market. We have suggested since the weak GDP report from the US, that it will be really difficult for the Federal Reserve to hike the benchmark, as the FOMC would have to lower the growth projections for the rest of the year.

As a result the dollar may be under pressure for the forthcoming weeks. On the other hand, at the end of the year the growth reports should improve and the Fed will probably be able to hike the benchmark - which should support the US currency.

The zloty is stronger again

The zloty has gained value against major currencies, but it is rather the effect of capital inflow to most EM economies that the internal strength of the PLN. As a result, the forint is even slightly stonger to the zloty, but is still approximately 2% lower than before the so called “Swiss franc bill” was presented.

In the following hours, there are no elements which may significantly change the value of the Polish currency. There is, however, a fairly high probability that due to global weakness of the dollar the USD/PLN may test the 3.80 level quite soon.


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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