Afternoon analysis 18.05.2016

, author:

Piotr Lonczak

The financial markets anticipate the protocol from the FOMC meeting. Fitch rating agency notices an increased fiscal risk in Poland. The zloty is under depreciation pressure before the macroeconomic publications.

The dollar is strengthening since Tuesday afternoon. The source of this strengthening is in the hawkish comments from the Federal Reserve representatives. They have suggested a possibility of at least two hikes this year (more details in today's Daily Analysis). In their opinion, the economic condition is relatively positive, and this is an argument for the monetary tightening in the USA. This opinions has been also confirmed by yesterday's macroeconomic reports.

The protocol from the recent FOMC meeting will determine, whether an increase in the value of the American currency continues. The report is planned to be published at 20.00. If the protocol contains the arguments for continuing the hikes, the chance for the stronger dollar will grow. However, this factor will not be received well by the emerging markets currencies, including the zloty.

Zloty under pressure

The Moody's decision had a favorable impact on the zloty's behavior. However, the next days have brought a serious wear-off of the Polish currency, due to a pressure of comments from other significant institutions. On Friday, Moody's did not change the rating for Poland, but decreased the country's perspective to negative. This was a surprise, because the market rather expected a decrease in evaluation of the loan credibility.

However, the next days have brought negative comments from other significant institutions. On Monday it was the International Monetary Fund. Even though the IMF expects relatively positive economic results, it has a negative opinion regarding the reforms announced by the government. The Fund claims that it may violate steadiness of the public finances.

On Wednesday we have received a critical comment from the Fitch rating agency (source: ISBnews). This institution claims that the disappointing GDP from the first quarter suggests a weak economic growth for the entire 2016. As a result, the agency decreased the GDP forecast to 3.2%, against 3.5% from the previous report. The government's forecast assumes a growth at the level of 3.8%, which is relatively optimistic regarding the agency's forecast.

The Fitch agency expects a higher deficit at the level of 2.8% of the GDP in 2016, and 3% of the GDP in 2017. This indicates a significant increase in risk of initiating the procedure of excessive deficit by the European Commission yet again. The agency also implied that the investment perspective is under a negative influence of an increase in political instability, as well as deterioration in relations with significant economic partners.

The Fitch agency will publish the review of Poland's rating on July 15th. Earlier, on July 1st, a similar report will be presented by the Standard & Poor's agency, the same one which downgraded Poland's credibility in January. On September 9th, we will receive a new report from Moody's.

The fact that Fitch focused on the data from the Polish economy, moved the attention of investors to macroeconomic reports. Today's data from the labor market was better than the market expected. The employment increased by 2.8%, as expected. However, the salaries have quoted a better result. They increased by 4.6%, against the expected 3.8%. The data confirmed a steady revival at a high level.

The reports regarding the industrial production, as well as the retail sale, will be of greater significance, because they were disappointing recently. The data will be published on Thursday. If the reports do not show an improvement, we will see an increase in anxieties regarding the economic results for the entire year. This scenario will increase an unfavorable pressure on the zloty, because of relatively disadvantageous comments from the rating agencies.

Another factor will be an increase in pressure on the Monetary Policy Council, to decrease interest rates. Previously, the monetary authorities claimed that deflation does not have a negative impact on the economic results. However, the latest reports suggest a slowdown. This may force the MPC to revise its standpoint. Currently, we can expect the zloty to stabilize at a low level, with a tendency for a further wear-off.

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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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