Afternoon analysis 11.01.2016:
Nervousness prevails in the financial markets. The dollar dropped despite the Fed going to continue tightening of the monetary policy. The zloty weakened against the euro and other major currencies.
Yesterday's Janet Yellen speech was a repetition of the Federal Reserve stance that has been presented since the initial interest rate hike in December. The Fed president confirmed that the tightening process is going to be continued. However, increase in credit cost will depend on the economic developments. The Federal Open Market Committee is now closely watching the inflation rate and the labor market situation is less important.
Just after the statement was released, the dollar gained. The move was continued after Janet Yellen started her speech. However, the tendency was reversed very soon. Investors do not believe the Fed will increase the rates according to the plan outlined in December.
The outlook for higher rates has been clouded due to recent spike in risk aversion. Moreover, the commodity market situation, slowdown in the emerging market economies and the uncertainty concerning the European banking system all add to risk aversion. Given the situation, the futures market shows the probability of hikes in this year near the zero level (according to CME data).
To some extent the remarks made by Janet Yellen diluted the major plan to continue tightening. The US central bank president quoted several factors that may hurt the economy. The major risk factor is China, where the economy is slowing down and depleting of currency reserves may impede the exchange rate policy.
Today's data from the US labor market did not change the situation in spite the report exceeded the forecast. The number of unemployment claims dropped to 269k against 285k in the prior week. The forecast was for the 287k level. Currently the labor market data is less important than the inflation reports.
Today the EUR/USD hit 1.1367. It was the highest level since the end of October 2015.
More loose policy
The Riksbank cut the major interest rate to minus 0.50 percent. The decision was based on the deterioration of inflation outlook. The monetary authorities see improvement in the economic situation. Falling unemployment will support consumption, which will support the inflation in the longer term. The Riksbank may cut the rates even deeper. The forecast for the average repo rate in the first quarter is minus 0.53 percent.
The Riksbank decision may be seen in the context of the ECB's plans. The Frankfurt-based institution is expected to add to stimulus in March. Additional tools considered are lowering deposit rate and extension of the asset purchase program. A similar move may result in a weaker euro. The Swedish monetary authorities may try to protect price competitiveness by weakening the crown.
The zloty resumed declines
Although the Federal Reserve cited several risk factors to the US economic outlook, it is still willing to continue the tightening plan. As a result, the Fed will not support the risk assets until it declares more dovish stance. Although the ECB is going to provide more stimulus, this factor did not result in stronger risk appetite.
Given the adverse market environment, the zloty resumed losses against the euro and other major pairs. The EUR/PLN exceeded the 4.46 level against below 4.40 on Wednesday. The factor that may result in heightened volatility of the Polish currency was the information that the finance minister may resign (according to Bloomberg). The zloty will stay near low levels and will remain susceptible to risk aversion.
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