Daily analysis 02.09.2015:
An increase in aversion towards risk stops the overvaluing of the American dollar. Rosengren appeared to be dovish, but the market is indifferent to this information for the time being. The zloty remains under pressure of depreciating stock markets from the United States. The franc is relatively stable despite the global commotion.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.15: New workplaces in the private sector, according to the ADP (estimations: +200k).
- 16.00: Press conference of the MPC, after the decision regarding interest rates.
Is the market changing its attitude?
In yesterday's afternoon analysis, published right after the announcement of clearly weaker than expected ISM readings from the American industry, we took note of the correlation disturbance between the behaviour of the American stock market, profitability of 2-year-old treasury bonds, and evaluation of the American dollar.
Since a significant increase in aversion towards risk in the middle of August, one could see a clear depreciation in profitability of 2-year-old American treasury bonds, in the moments of depreciation in the prices of shares. And so, in the moment when S&P reached 1930 points, they were on a level of 0.60%. The lower profitability of American debt, is a smaller inequality between the global and the American interest rates. It also decreases the attractiveness of the dollar. The weaker the American currency, the higher the EUR/USD rate. When indexes and profitability had the above value, the main currency level was on a level of 1.15.
Diagram: Evaluation of the dollar, profitability of 2-year-old American treasury bonds, and the S&P 500 contract.
Source: Bloomberg, own calculations. Green line – USD/EUR – quotations are reversed in order to show the value of the dollar to the euro better. White line – profitability of 2-year-old treasury bonds in percent. Yellow line – contract for the S&P 500 index.
However, when yesterday afternoon the American stock market dived again and went below 1930 points, profitability of the 2-year-old American debt probably did not react, and currently it is on a level of 0.71%. Theses facts also prevent the American currency from overvalue. Thus, dependencies described by us in the past weeks begin to disappear.
This may be a result of weekend statements from the Fed representatives, especially vice chairman Stanley Fisher, and Dennis Lockhart. In short, members of the Federal Reserve suggested that the base case scenario of this year's hikes was not disturbed. This may stop depreciation in profitability of 2-year-old treasury bonds and at the same time keep a relatively high evaluation of the dollar considering its behaviour during the last few weeks.
This may also have more serious consequences for the future. If the situation on the global markets does not calm down, we may see appreciation of the dollar relatively quickly. However, it should not take the EUR/USD below the level of 1.10. Even though, it can be relatively sudden, if the investors see a failure of movements in the other direction.
Yesterday's testimony of Eric Rosengren in New York was interesting. The Chairman of the Federal Reserve from Boston does not have a right to vote this year, and he is also considered a declared dove (although not as much as Kocherlakota). However, in a scenario of a significant increase in aversion towards risk his conclusions may migrate to the central part of the Fed and impact its market announcement.
Rosengren questioned a crucial element of the Fed policy. It is an opinion of the Federal Reserve that in the mid-term inflation will return to the 2 percent target, which will overlap with the moment of monetary tightening. However, according to Rosengren the future inflation (also the base case inflation) may increase more slowly than expected. It should be a result of the global situation among others. According to some indexes, the labour market approaches full employment, while Rosenberg thinks that it still has a lot of vacant workplaces. This should continue to keep increases in salaries on a limited level, and also cause inflation not to grow.
For the time being, this view will not be shared by the majority of the Fed and will probably not be used to postpone the hikes for 2016. However, it may be used for an even slower pace of monetary tightening, than the one currently observed on the Fed macroeconomic projections and the primary dealers surveys. This fact is also supportive for our scenario regarding the 6-9 month break between the first and the next hike.
Few words about the foreign market
During the coming hours, the market should focus on the ADP readings. Private research of the new workplaces does not always overlap with the official Friday's publication. However, knowing how much the investors care for any signs allowing to estimate the likelihood of hikes, the reaction of the market can be relatively strong.
Considering the review of data for the last month, a reading below 170k should cause the EUR/USD to grow by at least 50 pbs. On the other hand, if the publication crosses the market consensus on a level of 200k by 30k, it will be a signal for the main currency pair to go below the limit of 1.1200.
Zloty susceptible to aversion towards risk
When it appeared that yesterday the American indexes finished the session with 3 percent negatives, the EUR/USD pair went above the level of 4.25. Today, this movement was slightly corrected, but the zloty should still be susceptible to the global sentiments, and during another session on the other side of the ocean, the return of the euro above 4.25 can last longer than just a few hours.
For the time being there is no increase pressure on the CHF/PLN. It is mainly a result of a general weakness of the franc on the global market. The franc is no longer considered as a safe coast during the recent commotion on the market. This may be related to the intervention of the SNB during the Greek crisis. Those who were then disappointed by a lack of appreciation of the CHF, this time may not be willing to cause any stronger movements. Thus, the base case scenario is still the rate of the CHF/PLN in the area of 3.90.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate:
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