Daily analysis 02.03.2017

02.03.2017 12:15|Marcin Lipka

The Fed is clearly trying to sustain expectations regarding rate hikes in March. Interesting behavior of the market after yesterday’s data from the USA. The zloty’s positive streak will be difficult to sustain, taking into consideration increasing expectations regarding the monetary tightening in the USA.

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

  • 14.30: Weekly jobless claims from the USA (estimates: 245k).

Consequences of hikes in March

It basically was not necessary to read the entire testimony from Leal Brainard, in order to know that she will not oppose rate hikes in March. Already the first paragraph stated that, “we are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time.”

Moreover, the following sentence states that, “assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” This is perfectly consistent with the general message from the other Fed members, regarding rate hikes. Taking into consideration that the market estimates the monetary tightening in March for 85-90%, we shouldn’t expect that testimonies from both Yellen and Fischer will change this.

The current moment is perfect for rate hikes. Investors expect monetary tightening, the share market behavior increases the consumer optimism and the economic data is positive. As a result, there is a relatively minor risk that the market will be nervous about this decision. Moreover, some investors may comply with the Fed’s suggestion that higher interest rates are a symptom of a positive economic condition.

However, despite the fact that this potential move from the Fed is already included in the currency evaluation, it may still cause the dollar to strengthen. This is because the scenario of three rate hikes for 2017 may be strengthened. We also can’t rule out that many FOMC members (five out of seventeen in December) may suggest four or more hikes (including this month’s potential hike). Currently, the market estimates that the American interest rates will increase approximately 65 base case points in 2017 (two or three moves from the Committee, 25 base case points each.) Therefore, there is still space for an increase in the profitability of the American bonds, as well as for the dollar’s growth.

Lucky coincidence

Yesterday afternoon, the market received the data regarding the American industrial ISM. The data was positive (57.7 points) and the new order subindex boosted up to 65.1 points. The production component was also at a positive level (62.9 points).

However, the dollar wore-off slightly after this data and the EUR/USD went up to the 1.0570 level. This was related to a decrease in the employment subindex (from 56.1 to 54.2 points). The profitability of the American bonds decreased as well. This may suggest that investors have chosen an optimum scenario.

A slight decrease in pressure on rate hikes (negative employment component), related to a clear acceleration of the business cycle in the industrial sector, has given hope for positive economic results in the environment of a mild monetary policy. Hence a wear-off of the dollar overlapped a strong growth in the share market.

What’s interesting is that this translated to a significant strengthening of the zloty. However, a recurrence of this scenario seems unlikely in the long-term. The market will most likely return to a more predictable behavior. This means that positive data will cause the growth of shares, the profitability of bonds and the dollar.

Difficulties in the zloty’s appreciation

Yesterday, there was the short-term strengthening of the zloty against the main currencies. However, there are minor chances for a more significant appreciation of the zloty, due to increasing interest rates in he USA, as well as a relatively mild monetary policy in Poland.

Today’s data from the USA (new jobless claims) shouldn’t cause significant changes on the PLN. Investors are anticipating tomorrow’s testimonies from both Janet Yellen and Stanley Fischer of the Fed. If their rhetoric is consistent with the recent views from Dudlay or Brainard, the USD/PLN may end this week above the 4.10 level.



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