Daily analysis 18.06.2015:
The Fed meeting was dovish despite the fact that two hikes are still expected. No breakthrough today regarding Greece. Volatility on the zloty due to geopolitical issues. Polish economic data in the background.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.00: Industrial production from Poland (survey: +3.3% y/y)
- 14.00: Retail sales (survey: +1.7 y/y)
- 14.00:18.00 Eurogroup meeting
- 14.30: US inflation (survey: +0.5% m/m and +0.1% y/y; excluding gasoline and food +0.2% m/m and 1.8% y/y
- 14.30: Weekly unemployment claims from the US (survey: 277k)
Dovish Fed pushing down the dollar
In the first few seconds after the FOMC published its statement and macroeconomic projections the dollar strengthened, but this move quickly reversed. Despite the fact that the median of the Fed's estimations still assume two interest rate hikes this year, the odds for such a move decreased significantly.
In March 2015, only three Federal Reserve members claimed that the rates this year would either remain unchanged or we would see one increase. Now, there are 7 participants who expect such a scenario and only two more would have given the outcome as the “median dot” showing only one hike. Additionally, the economic projections were markedly reduced. In March, the Fed expected the economy to grow around 2.5%, currently it is only 1.9%.
Moreover, the unemployment rate was pushed up from 5.1% to 5.25%. It should also cause the monetary policy to be more benign than expected earlier. Coming back to the interest rate projections it is also worth noticing that the benchmark perspective for 2016 was slashed to only four hikes, while in March participants were assuming 5 increases.
Janet Yellen's conference was less exciting but also should be assumed as dovish. The Fed's chief commented on the strong dollar which negatively affects export creating some issues for economic growth. Additionally, the chairwoman suggested that the strong currency may push the core inflation lower, which can be regarded as an argument to keep the monetary policy dovish in order to prevent further dollar strengthening.
Overall, the market reaction, which pushed the dollar down, was logical. If the Fed's approach does not change and the incoming data from the US remains mixed, then there will be a huge question mark about whether the dollar is able to regain its strength in the medium term.
Greece on the spot
Expectations before today's Eurogroup meeting are limited. Both sides claim that it may end without any deal. It pushes market participants to look for an alternative scenario. If no solution is found today there will probably be an emergency EU summit this weekend.
If the EU leaders decide to implement capital control, we may see a strong reaction on the euro and EM currencies on Monday. On the other hand, Greece may secure the funds for the IMF and further talks can be held during the EU summit on June 25th-26th and the program may be extended for another month.
The real deadline is, however, July 20 when Greece has to pay the ECB more than 3 billion euro for maturing bonds. It would not be possible without further assistance from the creditors. Failing to payback the ECB would equal an introduction of capital control and may well be the last step before introducing its own currency.
The foreign market in a few sentences
The Fed put some pressure on the dollar yesterday. The trend may continue if the US data remains mixed. Regarding Greece the base case scenario is still the deal with the creditors without capital control or country bankruptcy. The least probable solution is grexit. However, the agreement is expected to be announced at the last possible moment.
The zloty is waiting for local data and news on Greece
The zloty range has moved to 4.15-4.17 range. It is mainly a result of the Greek issues. The PLN can be pushed significantly lower if the negative scenario is realized. Currently, the odds for capital control and grexit are still low, but the fear already pushes the local currency lower.
Some uncertainty is also visible before today's economic data. The most recent readings from Poland were weaker than expected. Economists assume that the industrial production rose 3% y/y in May while the retail sales edged 2% y/y last month. However, taking into account the fact that the sentiment is currently set by the Greek issue the reading would have to be markedly higher than the expectations (at least 1.5 percentage points) to give the PLN any boost.
Some nervousness is still visible on the zloty. No improvement regarding Greece may push the EUR/PLN toward 4.20 before the weekend. On the other hand, a quick solution should give the PLN an opportunity to strengthen towards 4.10.
Anticipated levels of PLN according to the EUR/USD rate
Anticipated GBP/PLN levels according to the GBP/USD rate.
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