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Daily analysis 16.11.2016

The dollar is testing its thirteen-year maximum against the basket of six currencies of the developed markets. Interesting comments from Tarullo and Bullard regarding the monetary policy. The dollar is near its fourteen-year maximum against the zloty. The Polish currency remains weak against the franc, the forint and the euro as well.

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

  • 15.15: Industrial production from the USA (estimations: positive 0.2% MoM; industrial processing: positive 0.3% MoM).

Further appreciation of dollar

This morning, the dollar’s index against the six developed market currencies (the euro, yen, pound, Canadian dollar, Swedish krone and franc) was testing its thirteen-year maximum. The dollar’s strength is confirmed by the behavior of the American treasury bonds. Profitability of the ten-year debt instruments are increasingly closer to the level of 2.3%. Moreover, the two-year treasury bonds exceeded the level of 1.00%.

The dollar’s wider index which is calculated by the Federal Reserve (calculations are based on contribution of a particular country in trade exchange with the USA) is approximately 7% away from its highest level since at least 1973. This is the year in which this index was published for the first time.

The main reasons of the dollar’s strength have basically remained the same for the past seven days. Higher evaluation of the American currency was supported yesterday by positive data regarding retail sales from the USA. It’s also worth focusing on new statements from the Fed members. Despite their relatively moderate tone, they were referring more boldly to the changes, which are related to the recent elections.

Tarullo’s statements and Bullard’s summary

Yesterday, the Fed governor, Daniel Tarullo, who is considered as one of the most dovish FOMC members, claimed that, “the discussion regarding preventing the economy from overheating is, from my point of view, even more on the table than it was before.” Of course, Tarullo emphasized that cautiousness is still required. However, he is yet another FOMC member who referred to the recent events from the perspective of potential changes in the monetary policy.

It seems that James Bullard’s testimony in London this morning was the most interesting. He presented the impact of potential changes in fiscal policy, as well as of regulation reduction on the economic growth and by this on the monetary policy (Bullard’s presentation can be found on the St. Louis Fed website.)

Bullard also mentioned the idea of the tax system modification. This idea would allow to repatriate profits of the American companies abroad. Trump announced that such profits would be taxable for 10%, while the standard rate for such tax is at the level of 35%. According to Bloomberg agency’s estimations, profit of the American companies abroad is at the level of 2.5 trillion dollars.

The St. Louis Federal Reserve chairman emphasized that inflow of these funds would increase the investment level in the USA. As a result, combination of deregulation, lower taxed and infrastructural expenses may lead to a higher economic growth in the mid-term.

Getting back to the topic of profit repatriation, it’s difficult to estimate the amount of funds that would return to the USA. However, even it this would be a small portion of the mentioned 2.5 trillion USD, this may also be positive for the dollar, if its significant part is currently kept in the local currency.

Dollar is testing its fourteen-year maximum against zloty

The dollar’s global power translates to a high evaluation of the American currency against the zloty. Shortly after 12.00 AM, the USD/PLN exceeded its fourteen-year maximum (4.1560). The zloty remains very weak against the euro, the franc and the pound as well. These currencies are near the level of 4.45 PLN, 4.13 PLN and 5.15 PLN, respectively.

Animosity towards the Polish market can also be seen in the treasury bond market. Profitability of the ten-year instruments are near 3.60%. Even though this move is mostly caused by the global changes, this level should be attractive for the foreign capital, taking into consideration the zloty’s weakness. However, since it’s not, we may assume that many investors continue to expect an overvalue of the bonds, as well as of the PLN.

It’s worth noticing that the global matters are not the only reason for the zloty’s low evaluation. The Polish currency is only 0.5% above its three-year minimum against the forint. This means that the zloty is at least 3-4% undervalued against the HUF. This also shows that, if the zloty’s quotations against the forint were near their average from the past few quarters, the dollar, the euro and the franc would be cheaper.


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 Cinkciarz.pl Sp. z o.o is prohibited.

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