A hit on the zloty may come from America

20.03.2018 16:35|Marcin Lipka

“Important words for the dollar and stock exchange as well as the fall of all global financial markets on Wednesday after the the Fed meeting. A probable theory: the announcement of a greater number of interest rate increases will strengthen the dollar,” says Marcin Lipka, Conotoxia senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

A very interesting meeting of the US central bank is ahead of us. This will be the first press conference for new Federal Reserve Chairman Jerome Powell. In addition, the assembly that structures changes of the cost of credit in the US and indirectly also in the world is changing. An interesting and important fact in the context of currencies is whether the new Fed chairman would like to meet with reporters after each session of the Federal Open Market Committee (FOMC).

What is beneficial for the dollar? More increases in interest rates...

Interest rates last year have been raised three times (0.25% each) and are already in the range of 1.25-1.50%. On Wednesday, another increase will probably be announced. However, this does not matter much. There is some different information that matters more for the dollar and the American stock exchange.

Investors will be primarily interested in the future course of interest rates in subsequent years. In December, the FOMC suggested that in 2018 and 2019 we will see two or three increases of 0.25% each based on the each member’s estimate.

There are limited chances for four increases this year (which would be a strong positive signal for the dollar) resulting from FOMC members point of view in December. Too many would have to change their minds at this point.

On the other hand, the likelihood of monetary authority representatives suggesting that the rates will increase three times in 2019, one time more than December’s projections, is quite large. This, though to a lesser extent, should favour the dollar.

...more press conferences

Market reactions are often observed not only in the context of hard data, but also in softer aspects. The latter include, among others, the fact that the March press conference is run by Jerome Powell, the new head of the Federal Reserve.

During the question and answer session, the leading financial media reporters asked questions with the intention of extracting information that is not available in the statement or macroeconomic projections. Over-discovering the cards or one wrong word can mean strong market reactions. Sometimes, however, the Fed members consciously use the conference to communicate certain phrases in monetary policy, in a somewhat less official way.

Considering the changes in the Fed personnel or macroeconomic data, we can expect a more hawkish message that would suggest a faster rise in interest rates than expected. In the current market situation, this would cause dollar strengthening, increases in government bond yields and probable decreases in stock markets.

Tomorrow, journalists may also hear an invitation to meetings after each Fed session, while until now there was a custom of organizing conferences after every second meeting. This type of change would also be positive information for the dollar. Why? This increases the room for maneuver for the Fed. Until now, more serious decisions were made when it was possible to immediately explain them to the media and investors. The new custom introduction can be interpreted as opening the gate to faster increases.

Is there nothing good for the zloty?

The Polish currency is sensitive to signals related to the US monetary policy or the American stock exchange condition. A change in expectations regarding future interest rates combined with the willingness to communicate to the market that the rate increase may be more probable, would strengthen the dollar and deteriorate sentiment on the American stock markets. And this is a negative scenario for the zloty.

It is worth remembering that since the beginning of March, the Polish currency is also under the sellers’ pressure due to the lower chance of interest rates raising in Poland. As a result, the mild monetary policy by the Vistula River, connected with the Fed’s more restrictive approach, gives a recipe for another several-penny depreciation on the zloty in relation to the main currencies.

 


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