Daily analysis 28.10.2015

, author:

Marcin Lipka

Weaker data from the US brings more hurdles from the Federal Reserve in the following weeks. The Riksbank increases the asset purchase program in fear of stronger krona and lower inflation. The zloty remains weak, but comments from Fitch Ratings and Goldman Sachs are fairly neutral about the new administration.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 19.00: Comments from the Federal Reserve after October meeting. No conference, no new macroeconomic projections.

The question mark is growing

There is still a higher chance that today's Fed meeting will be more hawkish than the market expects, but Tuesday's readings increase fears about the condition of the US economy and its strength to absorb the monetary policy tightening.

The recent publications weren't that important, but if we combine them, the picture looks less bright. Factory orders, excluding more volatile items like transportation, dropped by 5.3% y/y after the downward revision in the previous months from minus 3.9% to minus 4.8%. It is a significant number even taking into account the stronger dollar and lower investments in mining.

Some signs of concern are pictured in the services PMI and in the Conference Board consumer index. Markit writes that “the latest expansion of payroll numbers was the weakest since February, which some firms also linked to greater caution regarding the business outlook”. Moreover, the Conference Board suggests that consumers were “less upbeat about the job market”.

The Fed may be more concerned about the data due to the fact that services and consumers are the major driver for the US economic growth. As a result, after the Fed's meeting, which may remain fairly neutral today, investors may start looking for reasons to move the interest rate hike towards 2016. In this context, the incoming payrolls data will be scrutinized.

Riksbank increases QE

Despite the fact that the Swedish economy is expected to grow by 3.3% this year and slow to 3.0% in 2016, and the inflation excluding energy is 1.8% y/y, the Riksbank not only keeps the negative interest rates at minus 0.35%, but also increased the QE by 65 billion krone. In mid 2016 the Swedish QE is going to top 200 billion SEK.

The MPC in Stockholm has one concrete argument to keep the policy extremely loose. They don't want a stronger domestic currency. If the krone appreciates, especially to the euro, it would push inflation further from the central bank target. The Riksbank sees that the currency channel as the main threat to this strategy.

However, the direct reason behind this move was more suggestions about further monetary stimulation from the ECB. More aggressive QE from the euro area and expected deposit rate cut would probably push the euro lower and bring the EUR/SEK below the current level.

The Riksbank showed again that it is vigilant about threats to its inflation goal. As a result, we should expect that the EUR/SEK should remain fairly high – 9.30-50 and the odds for slide below 9.20 remain quite slim.

The foreign market in a few sentences

The Fed's meeting should be as neutral as possible. On one hand, the FOMC will suggest that it is still on track to increase the benchmark this year, but on the other keeps the options to withdraw from this promise. In our opinion the statement will be more hawkish than the market expects due to the fact that the situation on the capital markets and in emerging economies has improved. However, it is possible that comments from FOMC members in the following days and minutes published in three weeks would be more important than today's statement.

More benign views

The zloty remains under pressure. It is still the election effect and the fact that fiscal plans remain foggy. Moreover, it is not clear who is going to be responsible for the country's finances. These two issues cause the EUR/PLN to flirt with the 4.30 level, while the dollar is closer to the 3.90 mark.

Today, however, two more neutral messages appeared on the market. Goldman Sachs writes that potential changes in fiscal and monetary will probably weight on the zloty. But on the other hand, the current fiscal rules and comments from Law&Justice to keep the deficit below 3% of the GDP combined with the under performance of the zloty before the election should limit future pressure. Fitch, the rating agency, claims that the Law&Justice victory should not affect the country's reading.

We confirm our expectations that if the Ministry of Finance is governed by a person familiar to the markets and the 2016 deficit remains below 3% of the GDP, then the EUR/PLN should remain below 4.30. Contrary to this, if the fiscal policy is loosened, the EUR/PLN may quickly exceed the 4.30 mark. Additionally, in a scenario of much more dovish new MPC – more than 50 bps rate cut – the 4.40 level would be threatened.

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

Range EUR/USD 1.1050-1.1150 1.1150-1.1250 1.0950-1.1050
Range EUR/PLN 4.2400-4.2800 4.2400-4.2800 4.2400-4.2800
Range USD/PLN 3.8200-3.8600 3.7800-3.8200 3.8600-3.9000
Range CHF/PLN 3.9200-3.9600 3.9200-3.9600 3.9200-3.9600

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

Range GBP/USD 1.5350-1.5450 1.5250-1.5350 1.5450-1.5550
Range GBP/PLN 5.9200-5.9600 5.8800-5.9200 5.9600-6.0000

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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