Daily analysis 16.06.2016

, author:

Marcin Lipka

The Fed is slightly dovish. New phone surveys indicate a visible advantage for the Brexit supporters. The Bank of Japan and the SNB meetings. The recent news from the United Kingdom caused the EUR/PLN to increase to 4.45, and the franc to exceed 4.10.

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

  • 14.30: CPI inflation from the USA (estimations: positive 1.1% y/y; excluding fuel and food: positive 2.2%).
  • 14.30: New jobless claims from the USA (estimations: 270k).

Federal Reserve is basically neutral for USD

We have recently took note that the Federal Reserve will want to remain relatively neutral, because the readings from the American labor market were unclear. Moreover, the danger of Brexit is increasing, and the capital is flowing to the debt instruments. It appeared that the announcement, as well as the projections, were slightly more dovish. On the other hand, Janet Yellen's testimony was slightly hawkish. As a result, at the end of the American session the dollar index was approximately 0.1% below the level from before the Fed's decision.

In comparison to the April announcement, the Fed took note of an increasing pace of the number of workplaces, as well as of higher expenses of households. Regarding the real estates market, the FOMC emphasized a progressive improvement. However, it sees the weakness of the enterprises investments. This is not surprising, as well as neither should be the fact that the Federal Reserve sees a decrease in the market expectations regarding inflation.

The fact that Esther George (the hawkish Fed representative) resigned from her vote for the hikes, may be one of the dovish elements as well. This does not impact the final result. However, it goes to show that the recent events were so significant that even some of the hawkish representatives cannot see the perspectives for the monetary tightening.

Median of estimation regarding proper level of interest rates in forthcoming years, made by particular Federal Reserve members, continues to assume two hikes by the end of the year. However, six out of seventeen members estimates just one hike, while in March this scenario was estimated by just one representative.

On the other hand, the entire method of reaching neutral interest rates went down slightly. Currently, the Fed expects interest rates to grow at the pace of 0.75% within two next years. In March, this growth was estimated for 1% per year. Target interest rates were reduced as well (3.0%). It will neither be expansive nor restrictive, because the economy is developing in consistency with its potential, inflation is near its target, and employment is full.

It seems that a clear migration of some of the FOMC members towards one hike this year, as well as changes in neutral interest rates, were both considered as relatively dovish signals. On the other hand, the press conference went in a different direction.

Janet Yellen claimed that, “the British referendum was one of the uncertainty elements that we have discussed, and it had an impact on our decision.” This may be interpreted as a relatively hawkish signal. If Brexit does not happen, the door to the monetary tightening should be open wider.

Yellen's approach towards the recent data from the labor market can be interpreted in a similar way. If there is a rebound on the payrolls next month, it would quickly appear that the data from May was just a statistical disturbance. This would be an argument for higher interest rates as well.

It is difficult to interpret the answer regarding July's meeting. Was it a confirmation of the statement that the hikes may be made at each meeting? Or perhaps the FOMC is taking the hikes in July under a serious consideration? This is of course considering that there will be no Brexit, as well as the data from the labor market will improve. It is likely that the minutes that will be published in three weeks, or the statements from the Fed members in the following days, will cast more light onto this matter.

BoJ and SNB

The Bank of Japan (BoJ) meeting was held at the end of the Asian session. Some of the market participants expected a further monetary tightening. However, these expectations were not met, and the yen continued to strengthen. Since the beginning of July, the JPY gained 6% against the USD.

Some investors focused on the Swiss National Bank (SNB) meeting as well. It was important due to the matter of Brexit. An opinion that the franc could strengthen significantly due to Brexit, is dominating in the market. Thomas Jordan said that, “information exchange between central banks, regarding the market events, is intense.” Also, he said that, “Brexit is not a part of the base case scenario. However, it is a possibility, and it is likely that its probability increased in the past few days.”

The Goldman Sachs report that was quoted by Bloomberg today, assumes that due to Brexit the pound will lose 11% against the currencies of developed countries. On the other hand, the yen will gain 14%, and the franc 8%. Thus, the expected moves are very strong. Even if they become true only in 50%, they would cause a serious worldwide changes.

Zloty remains dependent on surveys

This morning we could see how strongly is the Polish currency dependent on surveys from the British Isles. After eliminating the votes of people who are not decided whether they will participate in the referendum, the Brexit supporters achieved a 6% advantage (53:47) in the phone survey that was conducted by Ipsos Mori and Evening Standard.

Moreover, this survey and the survey conducted by the same research center in the mid-May, are diametrically opposite. The Brexit supporters gained 10%, while their opponents lost 10%. Last month the result was 57:43 for the European Union supporters.

The zloty lost approximately 0.02 PLN against the euro almost immediately after announcing the above information. The EUR/PLN pair is now at the level of 4.45. The Polish currency is even more sensitive for increasing risk than the pound. Reaction of the British currency was relatively calm.

Regarding the Goldman Sachs estimations mentioned in the previous paragraphs, it is worth considering a hypothetical reaction of the zloty in the case of Brexit. Considering the recent events, as well as a very likely depreciation of the PLN against other currencies, it is possible that a one-time move on the franc could amount more than 0.30 PLN. This value would most likely be at least 0.10-0.20 PLN against the euro, as well as the dollar.

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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