Daily analysis 19.08.2016:
The Fed representatives are announcing the forthcoming monetary tightening in the USA, but they are doing it very cautiously. The zloty is currently under limited pressure related to worse readings from the Polish economy. However, the interest rate market is beginning to evaluate a decrease.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could have a significant impact on the analyzed currency pairs.
When looking at the currency market and trying to estimate the situation on the American dollar, it's impossible to avoid another series of statements from the Fed members. Three of them have spoken within the past few hours. Even though these comments had a minor impact on the market, they should confirm that we are getting closer to the monetary tightening.
John Williams was the most optimistic out of the whole three. The San Francisco Fed chairman suggested that he is tired of constant questions regarding the moment of monetary tightening. However, he took note of positive aspects of the American economy as usually, especially its reaching the moment of full employment.
Regarding a hypothetical moment of rate hikes, he said that, “September remains in the game.” However, he also said that this concerns all meetings. This was quite similar to a controversial statement from William Dudley, which for a moment was interpreted as a suggestion that the hikes will take place next month.
However, the statement alone, as well as Williams' previous comments, suggest that he would support rate hikes. Moreover, it seems he is feeling uncomfortable with keeping interest rates at a too low level for too long. The problem is that Williams doesn't have the right to vote this year. Thus, his opinion (although significant) does not have a crucial impact. Yesterday, we wrote more about the differences between the views of those members who have the right to vote and those who cannot directly decide about interest rates.
William Dudley has yet again sounded quite mysteriously. The official part of his testimony did not directly concern the monetary policy. It focused on the situation in the American regions that are supervised by the New York Fed (including a difficult situation in Puerto Rico).
However, during the questions&answers session, Dudley took note of a temporary character of a lower GDP reading (due to a decrease in supplies), as well as of the fact that he finds the condition of the labor market more important than the economic growth. This is partially a result of the Fed's mandate. However, emphasizing this fact in the current conditions, can be considered as a hawkish factor.
On the other hand, Dudley said that a strong GDP reading for the third quarter would convince him more to rate hikes. However, it is worth noting that the third quarter data will be published at the end of October. Of course, it's possible to make attempts of estimating the reading. However, that kind of projections are burdened with an error. We have seen it during the previous quarter. Thus, we may come to a conclusion that Dudley would support rate hikes not sooner than in December.
Robert Kaplan's comments were the least controversial. His testimony did not have a previously prepared text and he refused to answer questions regarding the monetary policy.
Thus, the Federal Reserve will most likely make attempts to prepare the market for rate hikes in December. Next week, the market will wonder on whether Janet Yellen's testimony in Jackson Hole on Friday will give any answers regarding this process.
However, it is possible that Janet Yellen will focus more on the neutral level of interest rates, which may be lower than the current FOMC models indicate. This discussion has been recently initiated by James Bullard, as well as referred to by John Williams.
On the other hand, the statements from yesterday can be interpreted as slightly positive regarding the dollar. There were slightly more hawkish than dovish suggestions. However, these differences are small, so they shouldn't be crucial for evaluation of the American currency for the time being.
The zloty remains under pressure of weaker data from the Polish economy. Despite that yesterday's fatal reading of industrial production is most likely temporary, the market has begun to estimate an increased probability of cutting interest rates. The FRA 6x9 contracts (estimated rate of three-month loans for six months in the interbank market) went down to the 1.51% level. This is 10 base case points less than before the data from yesterday, as well as the GDP reading from last Friday.
The further terms of the future interest rates (for nine and twelve months) are lower than one week ago by 12 and 15 base case points, respectively. Even though we don't expect a move from the Council for the time being, the market evaluation may impact currency exchange rates for long. Therefore, the base case level for the EUR/PLN in this mild global environment is the area of 4.30. However, if the sentiment abroad deteriorates, the risk of a further wear-off on the PLN will increase.
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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