Daily analysis 15.11.2016

The dollar and the American treasury bonds worked-off their recent growths. The majority of the Fed members who have spoken over the past few hours, didn’t want to take positions regarding the potential changes in the fiscal policy. The zloty is working-off a portion of its losses. However, a weak GDP reading is not supporting the Polish currency.

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

• 14.30: Retail sales from the USA (estimations: positive 0.6% MoM; excluding cars and fuel positive 0.3% MoM).

Sentiment has calmed down

After a few days of strong growths, the recent hours brought a clear working-off of the dollar. The EUR/USD returned near the area of 1.0800 and the Swiss currency is worth more than the American, yet again. Moreover, a strong appreciation on the USD/JPY has been corrected.

However, we still need to keep in mind that the recent events may appear fundamental fore the American currency. It seems likely that the USD will remain near its approximately thirteen-year peak long-term.

This is the result of the fact that the reaction of all assets was basically the same. Unprecedented increase in profitability of the American treasury bonds is causing changes among investors and is making the carry trade strategy less attractive. Moreover, their closing causes a capital flow, which seems difficult to stop due to a decrease in value of the emerging market currencies.

Of course, it’s still likely that the policy of Trump and of the Republican Congress will not decrease taxes, nor will it create additional expenses. However, such information may reach the market relatively late. Until then, increasing inflation expectations, as well as increasing likelihood of steeper than expected interest rate path, should support the dollar.

Fed on fiscal policy

Three Federal Reserve members made their statements during the recent twenty-four hours. The Dallas Fed chairman, Robert Kaplan, claimed that he would have supported rate hikes in September or in November (he doesn’t have the right to vote until 2017). However, he came to a conclusion that it’s too soon to estimate the impact of the expected fiscal policy changes on monetary actions.

John Williams didn’t speak of potential changes in public expenses. However, the San Francisco Fed representative stated that, “immigration is the net positive for the American economy.”

The market received definitely the most information from Jeffrey Lacker. The Richmond Fed representative (right to vote in 2018) claimed that, “increasingly stimulative fiscal perspective usually justify higher interest rates.” He also estimated that, “the elections could change the expectations regarding fiscal policy and the markets may forecast a higher deficit, as well as a higher inflation.” However, Lacker also emphasized that there’s too little information regarding the future expenses for the time being.

The Federal Reserve will most likely receive positively the transferring of economic stimulation from monetary policy onto fiscal policy. Similar topics have been discussed by economists for many quarters. It seems that the chances for activating this scenario at this moment are relatively large. Moreover, taking into consideration that the American economy is developing in consistency with its potential and unemployment is near its natural level, the Fed will have a good explanation for sustaining expectations regarding rate hikes. Therefore, this element should be fundamentally favorable for the USD, especially if the macro data shows that American economy is in a relatively positive condition.

Weak GDP may have consequences for PLN

The zloty is slightly gaining value, just as the other emerging market currencies. However, appreciation of the Polish currency is not very strong. The dollar is only slightly below the 4.10 PLN level and the euro still costs more than 4.40 PLN. There is a slight work-off of the recent moves in the debt market. However, profitability of the ten-year treasury bonds still remain near the level of 3.50%. We can still see that the foreign capital remains skeptical towards the Polish treasury instruments, despite their relatively attractive profitability, as well as a low evaluation of the zloty.

Today, it’s worth focusing on a significantly worse than expected GDP reading for the third quarter (2.5% YoY vs 2.9% YoY). However, the data was consistent with our estimates. This increases the likelihood of the scenario we have been presenting for over two months, which states that the GDP for 2016 may eventually be at the level of 2.0% YoY.

This worse reading is mostly a result of a decrease in expenses which are co-financed by the EU funds. However, such a significant differences between the consensus and the actual reading may limit private investments, as well as decrease household consumption. This may cause the slowdown to be longer, as well as more durable, even if the EU investments actually rebound.

We don’t estimate this to become the base case scenario in the near future. However, the discussion regarding this situation within the MPC alone, may decrease expectations regarding rate hikes at the beginning of 2018. Moreover, this may cause monetary easing in the forthcoming quarters more likely. This would be a negative signal for the zloty and may cause the PLN to become more sensitive on any external sentiment disturbances.