Daily analysis 24.03.2016

, author:

Marcin Lipka

The oil market and the comments from the Fed's officials are elements that determine the dollar performance. Is there a risk that Polish MPC will follow the Hungarian central bank? The pound slides toward new lows against the zloty.

  • 13.30: Weekly jobless claims form the US (survey: 269k).
  • 13.30: Durable goods orders from the US (survey: minus 3.0% m/m excluding transportation minus 0.3% m/m).
  • 14.45: Services PMI index from the US (survey: 51.4 points).

The oil vs Fed

The oil took a lead regarding global market conditions yesterday afternoon. Before the US data on crude hit the wire, the sell off on the Brent and WTI had begun. It accelerated when the Department of Energy announced that the inventories rose by 9.4 million barrels and reached another all-time high level at 532 million barrels. As a result, the WTI at the end of the US session dropped below 40 USD/barrel and today the slide continues.

However, it is worth noting that the publication wasn't entirely negative. The production level in the US slowed again and is lower by 384k barrels, comparing to levels a year earlier. Inventories increased due to much higher import, which rose 691k barrels a day comparing to last week.

Regarding the US inventories and their impact on oil, it is also worth it to recall the March STEO estimates from EIA. The peak of inventory build up should occur at the end of Q1 with the amount of 530 million barrels. Later, we should observe a significant decline to 500 million at the end of H1. If that trend is markedly disturbed by another increase or by a slower decrease, it can produce some more pressure on the WTI prices.

By analyzing the WTI and the Brent, it is also worth remembering about the incoming OPEC/Russia meeting scheduled for April. According to the latest news, Iraq is also scheduled to participate in the freezing production agreement at the January levels. On the other hand, in January, Baghdad produced a record amount of oil in its history – 4.5 million barrels, 1.1 million more that during the same month a year earlier.

So, the agreement may have a limited impact regarding the bullish impulse, but it can significantly lower the probability that the oil may slump again toward 30 USD per barrel.

Moving toward the currencies, the oil slide can have a mixed impact for the dollar and the EUR/USD pair. On one hand, it pushes the commodity currencies lower which is positive news for the greenback. But, on the other hand, it increases the global risk aversion which may decrease the odds for the Fed's hike. The latter serves as a bearish message for the USD.

Finally, the probability that we may see a significant move on the EUR/USD is limited. It is possible that investors would have to wait until the situation stabilizes on the oil market. At that time, the Fed will be able to evaluate the incoming data from the real economy, especially jobs growth and inflation. If both payrolls and the PCE remain fairly high, it would be a strong case for the monetary tightening in the H1, which should also serve as an argument to push the EUR/USD even below 1.10.

A slight zloty's depreciation

Since the morning, the EUR/PLN rose around 0.01-0.02 PLN comparing to the levels observed yesterday. A similar situation is observed on the Swiss franc. The zloty depreciation is mainly caused by some risk aversion increases. Only the pound dropped today toward the new one-and-half year low, which is below the 5.37 level.

Regarding Polish currency, some investors from our region try to evaluate whether the MPC may follow moves from the Hungarian central bank and unexpectedly cut the interest rates. Currently, the odds for such a scenario are fairly low. It is confirmed by the recent MPC member comments for Reuters news agency. Eugeniusz Gatnar said that the Hungarian decision, “does not influence the MPC's decisions at all, because in Poland, lending both for households and companies is stable and developing very well. There is no analogy. Besides, in my opinion the level of effectiveness of using such unconventional instruments is problematic.” adds Gatnar.

Overall, if the Polish MPC view does not change, we will probably see some more resilience for the zloty during risk off sentiment, comparing to its Hungarian counterpart.

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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