Daily analysis 30.03.2016

, author:

Marcin Lipka

Janet Yellen clearly reduced the chances for future hikes due to the global dangers. Today, the ADP data will be published. The dollar goes down to the area of 3.75 PLN. An improvement of the global sentiment reflects in a lower evaluation of the euro and the franc against the zloty.

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

  • 14.00: CPI inflation from Germany. Initial reading from March (estimations: positive 0.1% y/y).
  • 14.15: New workplaces in the American private sector according to the ADP (estimations: positive 195k).

Chances for hikes in the USA are decreasing

A few elements from yesterday's testimony from Janet Yellen suggest that the path of monetary tightening in the USA can definitely be milder than many observers expected. This may cause the pressure on the American currency to be longer than we thought. Moreover, the return to the appreciation of the dollar will require a clear increase in inflation, as well as a clear improvement on the labor market. The significance of the global situation will also increase, especially considering that it was a dominating motive of the Fed chairwoman’s testimony.

“The global events increased the forecasts related to risk. Industry and export have been strongly touched by a slowdown of the global increase and a significant appreciation of the dollar. We need to take under consideration the potential side effects of recent economic and financial events,” said Janet Yellen in New York.

The FOMC chairwoman also claimed that, “the path of monetary tightening is currently slightly slower, due to the worldwide financial and economic changes that have occurred since December.” In one of the paragraphs, Yellen also wrote a lot about the situation in China. She took note of an “uncertainty” regarding the transformation of the Chinese economy from being an export oriented economy to one in which the increase is dependent on consumption.

“Considering the danger of the forecasts, I find it appropriate for the Committee to adjust its monetary policy cautiously. This cautiousness is especially justified, because interest rates are at such a low level that the use of a conventional monetary policy in order to react on economic disturbances, is asymmetrical,” claimed Yellen. She suggested that if inflation is higher than expected, it would be easier to increase interest rates rather than to decrease them, because they are already close to zero.

Apart from the global matters which have a negative impact on the American economy, the Fed chairwoman also spoke of the recent increase in inflation to the level of 1.7% y/y. She said that, “the core PCE is slightly above my expectations from December. However, it is too soon to say if the recent quicker path will last for long.” Yellen spoke similarly of an increase in the base inflation, during the press conference after the FOMC meeting in March.

It seems that the purpose of emphasizing the global situation by the Federal Reserve chairwoman so strongly, was to give the market participants one specific message. Without a stable worldwide economic situation, the chances for hikes in the USA are small, and even if the FOMC returns to the monetary tightening it will be very mild, if not extremely mild.

Investors seemed to understand the suggestions from Janet Yellen. The dollar lost approximately 1% against the majority of currencies. There was also a strong reaction in the debt market. For the past 24 hours, profitability of two-year treasury bonds decreased by approximately 10 base case points, bringing them down to 0.78%. According to the current estimations of the market, the next increase in interest is planned for November.

Significant changes in the market expectations may also decrease the impact of macro-economic data on the currencies, especially if the data is better than expected. On the other hand, if the ADP readings from today, or payrolls from Friday are lower than the estimations, the dollar may yet again clearly lose value. This will be because the market will be convinced because of the dovish message from Yellen.

Milder monetary conditions are positive for the PLN

A very dovish message from the Federal Reserve, combined with an increase in appetite for risk (defined by the behavior of the American indexes), also causes the Polish national currency to improve. The zloty gains the most to the weakening dollar. Today before noon, the American currency was at the level of approximately 3.75 PLN. This is its lowest level since October 2015.

Low interest rates within developed markets cause the zloty to be more attractive to the euro. Today, the EUR/PLN went to the area of 4.24, which was its lowest level since the beginning of the year. The situation on the franc is similar. The Swiss currency is at its lowest level for 6 months, which is below the level of 3.90.

If the positive sentiment remains in the market, it is possible that the EUR/PLN will begin to go to the range of 4.20-4.25. This may happen especially if it appears that the ECB will return to the topic of a decrease in interest rates, and the Polish monetary authorities keep the neutral attitude in the forthcoming months.

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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