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Daily analysis 25.04.2016

, author:

Marcin Lipka

Will the Fed announce a desire for an increase in interest rates in June this Wednesday? The forthcoming meeting of the Bank of Japan may be interesting. The zloty remains very weak against other currencies from the emerging markets. The euro is near 4.40, and the dollar exceeds 3.90.

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

  • 16.00: Sale of new houses in the USA (estimations: 520k).

Fed's dilemma

The Federal Reserve meeting on Wednesday will not include new macroeconomic projections, nor will it end with a press conference. However, it may give a signal regarding the chances for an increase in interest rates in June.

Judging by the recent macroeconomic data, the FOMC announcement may describe the economic situation in a more pessimistic way than it was described in March. Every element, apart from the labor market, is currently relatively weak. There was a deterioration in the situation in the real estates market, retail sale, and industrial production. Additionally, the GDP from the first quarter may be near zero, and the base case inflation did not keep its previous growth dynamics. This information should be a good argument for the Fed to sustain its mild message.

On the other hand, the situation in the global market had clearly improved. There was a rebound on energy resource prices and prices of industrial metals. Anxieties regarding the condition of China decreased. Also, the currencies from the emerging markets gained value, and the basic index of the American stock market is almost at its historically high level. Considering the fact that the Fed feared the global dangers the most, the current improvement of sentiment is a support for the hawkish FOMC wing.

It is most likely that due to mixed signals, the Fed will avoid any significant suggestions regarding the possibility of the hikes in June. Thus, once again we will not see the general risk balance, nor will we hear a clear suggestion regarding a possibility of monetary tightening at the next meeting, just as it was in October 2015.

It is possible that the market may interpret the FOMC message as dovish. If investors believe that the likelihood of the hikes in June is really small, September will become the next possible term. This may mean that there will be only one increase this year. Thus the meeting on Wednesday may bring a wear-off of the USD.

Bank of Japan and yen

More than half of economists (23/41) surveyed by Bloomberg expect the Bank of Japan to soothe its monetary policy on Thursday. The majority of those who expect actions from the BoJ, claim that the scale of the assets purchase is going to be increased. Eight of them think that the Japanese monetary authorities may decrease deposit rates.

Considering the past week's information regarding the possibility of giving loans at negative rates to commercial banks by the BoJ (this would increase the space for reducing deposit rates), the meeting may be mild. Thus, if such an action occurs, the chances for a wear-off on the yen will increase. This is despite the fact that the Japanese currency started gaining value after a similar decision at the beginning of the year.

Also, a lower evaluation of the JPY may improve the global sentiment, especially if it is combined with a mild approach from the FOMC. As a result the dollar, as well as the yen, may be under pressure at the end of this week. Currencies of the emerging markets will probably gain value again, as well as the euro and the pound.

Zloty remains very weak

We are constantly observing a visible wear off of the zloty. This morning, the EUR/PLN approached the level of 4.40, the franc exceeded the level of 4.00, and the USD tested the level of 3.90. These are the highest levels for many weeks. It is also worth continuing the observations of the evaluation of the zloty against the forint. For the past month it has decreased by approximately 4%, and it is getting closer to the level which was observed right after Standard & Poor's had downgraded Poland's rating.

The PMI index for services and production decreased 0.1 point to the level of 53.0. Even though it was a minor change, Markit took note of, “an increase in new orders against its three-month peaks, and a minor increase in employment.” In his comment regarding the data, Chris Williamson, chief economist of Markit, estimated that the PMI is yet again suggesting an increase at the level of 0.3% for the entire euro zone in the second quarter.

It is also worth noting that it is not the scale of overvalue which is the most important, but the fact that it occurs without a bigger reason considering the relatively neutral global conditions. The zloty continues to close the ranking of the weakest currencies from the emerging markets. Since the beginning of April, the PLN lost more than 3% against the euro, while the Philippine peso (the second worst) lost only 0.5%. The forint gained approximately one percent against the euro at that time.

Of course, this fact can be explained by the anxieties related to the new Moody's rating planned for 13th of May. This rating is expected to be lower. However, this publication is anticipated for many months. With a positive global sentiment, the currencies from the countries with a worse rating do not lose value.

In conclusion, a concept presented in this past Friday's analysis, may be the answer to the question, “where does the weakness of the zloty come from?” The national assets are simply too hazardous for conservative investors. At the same time, their return rates are too low to attract funds (their risk aversion is lower, due to a rebound in the raw materials market, and a greater attractiveness of such countries like Brazil, Russia, and the Republic of South Africa). Theoretically, the disturbance should not last too long. The situation should become stable, because the market is able to take care of such gaps quite quickly. However, if the global sentiment deteriorates, the zloty's evaluation may deteriorate quite clearly, due to a general aversion towards the PLN. In this case, the EUR/PLN may go to the area of 4.50, the USD/PLN may exceed 4.00, and the franc may increase by 0.10 PLN, even before the announcement of the Moody's decision.


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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