Audio analysis 30.12.2016

30.12.2016 10:44|Marcin Lipka

The strong currencies volatility during the Asian session. ECB Nowotny’s comments slightly strengthen the euro. Future market interest rates are below the recent highs. The Polish currency remains weak. The EUR/PLN was at around 4.42-4.43, the USD/PLN near the 4.20 level.

The most important macro data (Central European CET time). Estimates of macroeconomic data are based on information from Bloomberg unless stated otherwise.

  • 14.00: Inflation in Poland (estimates: +0.4% y/y, +0.3% m/m)
  • 15.45: Chicago PMI Index (estimates: 56.8 p.)

A higher volatility during the Asian session

After midnight Polish time, strong movements in the currency market were noted. The EUR/USD rose from around 1.0500 to above 1.0650. More than a one-percent increase was recorded on the EUR/GBP pair. However, relatively slight changes were noted on the USD/JPY (30-40 pips) which suggests that the movements were generated by the euro and not the dollar.

We had to deal with a similar situation with the pound in October. Then, there was a lot of speculation related to the causes of such currencies behavior. Speculations about the automated trading involvement or a nervous behaviour of traders increased the movement.

It is also possible that such strong changes are intentionally provoked. It is no secret that at the end of the US session and before the start of trading in Asia, the market liquidity is thin. It is also known that regardless of whether transactions are executed by people or computers, there are a lot of pending orders, which are activated at specific levels. Sudden exchange rate changes put these orders on, thereby increasing the initial volatility. If we assume that after the momentary panic, rates are back to normal, profits may reach about 1% within a few minutes.

However, quite apart from the causes of nightly movements, it can be seen that the sentiment favors slight increases of the EUR/USD. After the US bonds moves on Wednesday , and declines on the US stock market, quotations on 5-year interest rate swaps show a reduction in expectations for the future credit costs. After Christmas, 5-year instruments ranged at around 2.08%, and now they are traded below 2.00%.

With a little more nervous trading, the EUR/USD was somewhat supported by Ewald Nowotny comments. The ECB member said that monetary policy will remain expansionary, but "not for an infinite period of time." Of course, the market is aware that at some point QE taper will happen, but when this fact is more frequently highlighted at the time of greater volatility and less liquidity, it may slightly raise the euro value.

In the long term, there are still quite a lot of reasons to expect a return to appreciation trend of the US currency. At the beginning of the year, the new administration’s economic plans will probably start to crystallize. There is a good chance that the Republican Congress will implement at least part of Trump’s election campaign proposals. Cutting taxes for companies and wealthy households, as well as the regulation decrease may be expected. Slightly more uncertainties may be related to increased infrastructure spending, especially that Republicans may be concerned about the deficit growth. It seems, however, that the US economy will be awaiting fiscal stimulus, which in the current economic cycle should translate into an inflation increase, compared to the baseline scenario. This will be the moment when the Fed will probably come closer to a more aggressive monetary tightening path which may contribute to the next wave of the dollar’s appreciation.

The zloty is still weak

The zloty behaved quite interesting during the strong EUR/USD spike at night. The EUR/ PLN pair responded marginally to the global euro strengthening. This, in turn, resulted in a strong slide on the USD/PLN and the GBP/PLN, which fell below 4.15 and 5.10 level respectively. However, the positive news for the zloty are ending here. During the European session, the domestic currency overall weakness can be perceived.

The EUR/PLN is traded in the range of 4.42-4.43, and the dollar is only slightly below the 4.20 level. The PLN/HUF is also close to the 70 level. This means that the zloty is about 2% weaker to the forint this year and 4% comparing to the 3-year mean level. Today's preliminary inflation data (without breaking into components) should not lead to significant zloty’s changes, because they can be markedly affected by changes in energy prices, which MPC will rather try to ignore.



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