Daily analysis 10.01.2017

10.01.2017 13:19|Marcin Lipka

Fed representatives remain relatively hawkish, but the dollar continues to overvalue. The Turkish lira is record weak against the euro, as well as against the dollar. The zloty anticipates the second part of this week. The EUR/PLN remains within the range of 4.37-4.38.

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

  • No macro data that could significantly impact the analyzed currency pairs.

Dollar continues to overvalue

During the Asian session, the EUR/USD went above the 1.0620 level. Moreover, the USD/JPY went below 115.50. Worse condition of the dollar is the result of an overvalue in the oil market, as well as of the lack of information regarding changes in fiscal policy, which would boost the USD.

The comments from Fed representatives confirm the will of a more rapid monetary tightening. Eric Rosengren (without the right to vote this year) claimed that the American economy should reach both of Fed’s goals by the end of 2017 (2% inflation and a stable maximum employment). He also thinks that three rate hikes this year is a proper move.

Moreover, in his interviews with Bloomberg, as well as with the Financial Times, Rosengren took note of a possible discussion regarding a reduction of Fed’s balance. The Boston Fed representative emphasized that, “fiscal stimulus could influence Fed rate-hike pace.”

Dennis Lockhart’s testimony was generally positive as well. However, the Atlanta Fed representative didn’t include monetary stimulation in his projections. Therefore, he currently expects two rate hikes for this year. However, he emphasized that the American economy is near the full employment and a larger fiscal stimulus would make the scenario of three rate hikes more likely. Nevertheless, significance of Lockhart’s views is decreasing, because he will leave the Federal Reserve in February.

Lira’s weakness

This year’s beginning was fatal for the Turkish currency. Today, it has reached its lowest level against the dollar, as well as against the euro. At the beginning of January, the USD/TRY was near the level of 3.50 and today it reached the level of 3.78, before 12.00 AM. Moreover, the lira lost approximately 10% against the zloty during one month.

The Turkish economy is in large trouble, which clearly limit tourism (approximately 40% during summer) and may have a negative impact on investments. Moreover, the local central bank’s policy is most likely too mild. In December, inflation went above 8.5% YoY (baseline inflation: 7.48% YoY) and real interest rates are near zero.

Such significant economic risks provoke central banks to aggressively raise real interest rates as high as possible. Due to such actions, interest rates in Brazil or in Russia, were remaining above 5% in critical moments. However, Turkey calculates the entire risk through the currency channel. This puts the lira under strong depreciation pressure.

Zloty is stable

The zloty is calmly anticipating the events that will occur in the second part of this week. The EUR/PLN is within the range of 4.37-4.38 and due to the dollar’s global weakness the USD/PLN was pushed to 4.12-4.13. Moreover, due to today’s evaluation of the GBP/USD (1.2150), the pound went below 5.00 PLN.

The forthcoming hours shouldn’t cause any crucial changes on the zloty. The market anticipates the MPC meeting on Wednesday. It’s likely that there will be some hawkish statements during the press conference that will suggest monetary tightening before 2018. This would support the zloty slightly. However, the decisions from the rating agencies on Friday (especially from Moody’s) are burdened with a large risk of downgrade in Poland’s loan credibility. Therefore, a space for the zloty’s hypothetical appreciation will remain limited until the end of the week.



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