Daily analysis 19.03.2015

, author:

Marcin Lipka

Fed gets more dovish despite erasing 'patience'. The SNB didn't introduce a new currency regime and failed to cut interest rates. The zloty has gained value after it turned out that the pace of tightening across the pond may be slower than expected.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • No macro data which may significantly affect the analysed pairs.

A chance for a weaker dollar

The most recent key FOMC members suggested that the US is on the path of fast GDP growth, sliding unemployment, perspective of wages appreciation and slow inflation move toward the target. This view was shared by market consensus when it entered the FOMC meeting results.

The Fed, however, did everything possible to add some elements of uncertainty to this picture and 'explain' the drop on the dot-chart rate expectations. Even in the statement the Federal Reserve pointed to some moderation of growth and weakening export.

In the entry speech, which includes some elements of statement, Janet Yellen mentioned the stronger dollar which has negative effect on export and pushes down the inflation. Additionally, around 0.2 percentage point was cut form the PCE core inflation for 2016. Even theoretically hawkish element like employment rate reduction should be regarded dovish because the FOMC lowered the neutral employment level from 5.2-5.5% to 5.0-5.2%. As a result it gives more room for the job market to improve without pushing the wages higher.

The culmination of 'dovish' Fed message was a revision regarding future interest rate level. Currently the FOMC expects that the 2015 will be ended with rate 0.625% while after 12 more months the Federal Fund Rate is expected to hit 1.87%. Taking into the account previous expectations the cut for both periods was around 0.6 percentage point.

All mentioned elements were aimed to suggest that the interest rates are set to be raised only when the Federal Reserve is certain that unemployment continues its depreciation trend and expected inflation is on the rising path. It is a negative message for the dollar.

Besides yesterday's chaotic moves on the US currency, the current moment may be a good starting point to weaken the USD. Yesterday we suggested that it is better to wait until the dust settles after the Fed and then try to evaluate the situation. Currently there is a high probability that we may see a significant depreciation of the dollar in a few weeks period. It should not end the dollar appreciation trend but the “greenback” strength might be cut by longer correction and the overall trade won't be one way like in recent months.

The SNB policy unchanged

The Swiss Central Bank (SNB) didn't bring any new measures during today's meeting. Despite some speculations that the SNB may introduce the new currency regime which was expected to be based on the basket of currencies was not mentioned. The Swiss monetary policy makers also didn't lower interest rates but this element is fairly easy to introduce so it should not be excluded in the near future.

The SNB repeated that the franc is overvalued and does not exclude interventions on the currency market. Thomas Jordan, however, didn't want to confirm whether the Bank is present on the FX. The EUR/CHF pair is set to remain close to the current range and most of the transactions are expected to be processed inside the 1.05-1.08 range.

The foreign market in a few sentences

Excluding the chaotic moves on currencies in the recent 24 hours it is worth pointing out that the recent Fed's meeting slightly changes the view on the dollar. Its future appreciation should be more benign than we expected earlier. Additionally, it would also be cut with more significant corrections which are set to be provoked by either FOMC comments or US macro data. It is possible that currently the EUR/USD is fairly close to a stronger correction which may push the main currency pair above 1.10.

The zloty should take advantage from dovish Fed

The zloty, similarly to other EM currencies, should benefit from slower and later monetary tightening in the US. We should expect that if the dollar resume its appreciation move it would probably be cut by more visible correction and the pace can be more benign. Additionally, there is a probability for stronger correction with target around 3.70.

The domestic currency has also higher odds to gain value toward the euro. We still confirm our target set at 4.10 per the single currency till the end of the current month even with a chance for a move toward 4.08-4.10.

The situation looks worse regarding franc. Switzerland is not really eager to introduce new elements to weaken further the CHF. As a result the base case scenario for the CHF/PLN is a range trade around 3.85-3.90.

Expected levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.0650-1.0750 1.0450-1.0550 1.0550-1.0650
Range EUR/PLN 4.1000-4.1400 4.1000-4.1400 4.1000-4.1400
Range USD/PLN 3.8400-3.8800 3.8800-3.9200 3.8000-3.8400
Range CHF/PLN 3.8900-3.9300 3.8900-3.9300 3.8900-3.9300

Expected GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD 1.4850-1.4950 1.4750-1.4850 1.4950-1.5050
Range GBP/PLN 5.7400-5.7800 5.7000-5.7400 5.7800-5.8200

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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