Afternoon analysis 21.03.2016:
A positive sentiment prevailed in the markets. The Polish government may dilute the frank conversion proposal. The zloty steady at its local highs.
Last week meeting of the Federal Reserve resulted in a more dovish stance of the major central bank. Currently the Fed foresees two interest rate hikes against four predicted in December. As a result, the market consensus for interest rate increase move to September.
The Fed wants to be certain that the inflation rate returns to the 2 percent target and the labor market moves to the equilibrium. Fed President Janet Yellen told a press conference that given the current level of interest rates the central bank has more scope to react to high inflation than low inflation.
However, the latest comments from the central bank were more hawkish. Last Friday St. Louis Fed President James Bullard was quite hawkish. Richmond Fed President Jeffrey Lacker presented a similar stance (more on the issue in the previous commentary).
In addition, John Williams, the San Francisco Fed president, was also rather dovish. He said that if it wasn't for the global risk factors, the Fed would raise the rates sooner and faster. Finally, Williams assessed the US economy has proven its resilience and the basis path for rates has not been altered.
After signaling rather dovish stance, the Fed's members have shown rather a hawkish stance. In contrast, the European Central Bank officials have stressed the readiness to provide more stimulus. All in all, in spite of many statements form the central bank members the EUR/USD was steady in the narrow range around 1.1250.
Appetite for risk
The start of the year in the financial markets was determined by anxiety concerning the Chinese economy. Currently the country GDP growth is the lowest in 25 years. This factor was responsible for heightened volatility in the markets and severe drop in commodity prices.
The Chinese government addressed the economic problems with a more active fiscal and monetary policy. Since China signaled more proactive stance, the commodity prices have rebounded. The Chinese has started to fulfill its commitment to support the economy. It launched short term financing after 18 months of suspension. It may reduce tension in the economy.
Coupled with the actions of the ECB and the Fed the Chinese government activity may support positive sentiment in the markets. The shift in the stance of the major central banks has been reflected in the commodity markets.
The zloty exploited the positive trends in the markets. On Monday, the Polish currency was steady at relatively high levels.
The Polish government may dilute the franc conversion project. Today Deputy Prime Minister Jarosław Gowin said the overall cost of the bill should not exceed 10 billion zlotys (according to Interia.pl). His remarks suggest that one of the major risk factors for the Polish financial sector may be limited. The zloty may exploit the situation to gain in the longer term.
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