Daily analysis 24.11.2015

, author:

Marcin Lipka

Global strength of the dollar and weakness of the euro should continue to create the movements on the currencies. The German Ifo is better than economists excepted. The dollar costs more than 4.0000 for the first time for 11 years.

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

  • 14.30: Review of the American GDP (estimations: +2.1% q/q annualized).
  • 15.00: S&P/CS 20 real estates' prices index (estimations: +5.1%).
  • 16.00: Consumers' sentiments according to Conference Board (estimations: 99.5 points).

Strength of the American currency

Last afternoon the dollar index, which describes value of the USD to 6 currencies of the developed markets (the euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc), reached the level of exactly 100,00. If the dollar enforces by approximately 0.4%, the buck would become strongest since April 2003.

The main reason for appreciation of the American currency, is a relatively good macroeconomic situation in the United States. An increase in GDP is significantly bigger than in many developed economies. Also, since the 2008/2009 economic crisis, the United States did not experienced any bigger slowdown in the opposite to the eurozone or Japan.

Additionally, the American unemployment rate decreased to 5.0%. This practically means a full employment, and it is possible that a pressure on an increase in salaries will appear soon. Higher salaries are a strong argument for raising prices, especially in services sector. This on the other hand, should cause an increase in inflation, and a necessity of raising interest rates.

On the other hand, the eurozone still cannot rise after the 2008/2009 economic crisis. A low cumulated economic growth from the past few years, and a high unemployment on a level of almost 11%, are causing that the pressure on salaries is very unlikely to appear quickly. Thus, the European Central Bank (ECB) is planning to mild the monetary policy by an increase in assets purchase from the market, a decrease in deposit rate, and an extension of QE operation among others.

Thus, we have a clash of two different monetary policies – a tightening in the USA, and easing in the eurozone. This is the main reason for a difference between profitability of the American and German debts. Interest rate of the 10-year-old American treasury bonds is currently 2.2%, and in the case of the German it is 0.5%. This is a big difference, considering that both of these instruments have a similar loan credibility and liquidity.

Additionally, the current movements on the market are also creating expectations of the market's participants. If the American economy develops faster than expectations assume, pressure on an increase in prices can be stronger, and what follows, interest rates will be raised relatively quickly. If at the same time the eurozone countries are developing below the potential, the ECB will continue its mild monetary policy. Thus, a difference between interest rates should increase. This will continue to stimulate the inflow of capital to the USA, and enforce the USD.

On the other hand, the situation will be opposite in a positive scenario for the eurozone. Unemployment in this region will decrease, and expectations regarding future interest rates will begin to increase. This will result in a decrease in disproportions between future interest rates, and cause a reverse of transactions on the financial market – sale of the USD, and purchasing of the EUR. If this happens, we should see increases on the EUR/USD.

For the moment being continuation of the first scenario is definitely more likely. Currently there are no credible signals of an improvement in the eurozone's economic situation that would be fast enough to cause a change in perspective of the future interest rates.

Few words about the foreign market

In a short-term the market is focusing on current information. Today they are positive for the German economy. Accelerating index of the business condition (Ifo) of our western neighbour increased to the highest level for over a year. It is 109 points, whilst the expectations were on the level of 108.2. However, this reason is not sufficient enough to change the ECB approach regarding an increase in monetary easing on December's meeting. Thus, the reaction on the euro was muffled.

The dollar costs 4.00 PLN. The zloty is weaker also to the euro

Yesterday, the global strength of the dollar translated to an increase in the USD/PLN above 4.00. This is the highest level since April 2004. It is worth to most of all note that the appreciation of the American currency to the zloty, is mostly a result of global changes. Additionally, the zloty is strongly related to the euro, which pulls it down. Increases of the dollar from 3.00 to 4.00 within the past months, are a result of the political risk in Poland or expectations of changes in interest rate policy, only to a minor degree (approximately 0.10-0.20 PLN).

Today, on the other hand, the zloty ignored the good Ifo readings from Germany, and concentrated on geopolitical events. Depreciation pressure on the lira and the rouble, translated also to a slightly weaker zloty in relation to the USD, as well as the EUR. However, when the situation calms down, the EUR/PLN should return to the area of 4.25.

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

Range EUR/USD 1.0650-1.0750 1.0750-1.0850 1.0550-1.0650
Range EUR/PLN 4.2400-4.2800 4.2400-4.2800 4.2400-4.2800
Range USD/PLN 3.9600-4,0000 3.9200-3.9600 4.0000-4.0400
Range CHF/PLN 3.9000-3.9400 3.9000-3.9400 3.9000-3.9400

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Range GBP/PLN 6.0200-6.0600 5.9800-6.0200 6.0600-6.1000

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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