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Daily analysis 27.01.2016

27 Jan 2016 13:09|Marcin Lipka

The Fed's statement should set market sentiment in the evening. 12-month low on Swiss frank to the euro. The zloty remains under pressure despite yesterday's rebound. Yields on Hungarian and Polish bonds are almost at the same level.

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

  • 14.00: Initial data of harmonized inflation from Germany for January (estimations: minus 1.0% m/m; +0.4% y/y).
  • 14.30: Weekly jobless claims from the USA (estimations: +281k).
  • 14.30: Orders for durable goods in the USA for December (estimations: minus 0.7%, excluding transport: minus 0.1%).

Slightly dovish message from the Fed

The Fed members prepared their announcement in a way which suggests keeping the door open for the further monetary tightening in March. At the same time, the Federal Reserve informed without causing a commotion that the economic situation demands interest rates to remain unchanged until the end of the first quarter.

However, the general message is slightly more dovish than expected. First part of the announcement shows most of all the current economic situation. Thus, we can find there an information about “a further improvement of the labour market” among others. On the other hand, the Fed is less positive about the consumers' expenses and investments. In December they were estimated as “strong”, and currently the growth is described as moderate.

More conclusions can come from further paragraphs. First of all, the information saying that “risk for the economic prognosis, as well as the labour market is balanced”. The risk was “almost balanced” before the December's meeting. At the moment when the Fed raised interest rates, “almost” was deleted. This may suggest that the Fed did not want to return to the announcement from before the hikes, and at the same time it did not intend to claim that the situation changed through the past 6 weeks. Thus, this is a sign that the FOMC may want to use it as an element of leaving interest rates unchanged in March.

To a certain degree this concept is confirmed by a statement appearing in further part of the announcement. “The Committee carefully observes the global economic and financial events, and estimates their consequences for the labour market, inflation, and risk balance for the forecast”. This is the crucial statement included in the January's announcement. It puts the global and local matters into a connected streak of events. By this, it shows that the Fed takes note of what is going on outside of the American economy.

Thus, it is possible that more dovish governors of the Fed are beginning to dominate in the discussion. Especially Lael Brainard. Just last year she wrote in her analyses about the global signs. For example, in November she claimed that “economic slowdown abroad is creating a risk for the USA”.

But does this mean that the chance for new hikes in March disappeared completely? Not necessarily. Even if we consider that according to the Bloomberg agency calculations based on short term contracts, this chance is only 26%. It only takes the global situation to stabilise. Also, the overvalue of energetic resources needs to stop, or it has to be taken as an effect of oversupply, instead of an effect of a smaller demand. If these conditions are fulfilled, the chances for the new monetary tightening will significantly increase, just as it happened at the end of last year.

Few words about the foreign market

The announcement from the Federal Reserve slightly wore off the American currency, and moved the EUR/USD quotations towards the area of 1.0900. Today on the other hand, we should take note of data about inflation from Germany. To a certain degree it may give us some clues about tomorrow's initial publications from the whole euro zone for January. Afternoon's publication about the American orders for the durable goods and local jobless claims, will be on the other hand significant regarding the dollar. The latter element is especially important. If the jobless claims grow above the level of 300k, which is the highest since February 2015, the anxieties regarding the labour market will appear. This may cause a further wear off on the USD, and appreciation on the main currency pair.

The national currency remains under pressure

Another disturbing announcement from a rating agency hit the market yesterday afternoon. According to the Bloomberg agency, the Fitch analyst Arnaud Louis said that “if we see the announcements resulting in a higher deficit, they may be a possible reason for decreasing the rank”. Additionally, Louis estimated that “the risk balance moved to a negative side”.

After these news the zloty slightly increased its overvalue, and the EUR/PLN went above 4.48. Despite the fact that the national currency remains under pressure, it is worth noting that the amount of pessimistic information in short term may be slowly coming to an end. On the other hand, relatively high profitability of the Polish debt and a low exchange rate of the zloty, may attract the capital which assumes that the market is balanced too negatively considering the balance of risks. This on the other hand should be a chance for a certain work off on the EUR/PLN, which may take the pair to the areas slightly below 4.40.


27 Jan 2016 13:09|Marcin Lipka

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 acknowledgement of the source is prohibited.

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