Daily analysis 10.09.2015:
Discussions regarding interest rates in the USA intensify. Arguments for and against the hikes from Richard Fisher and Lawrence Summers. The RBNZ cuts interest rates in New Zealand and significantly wears off the local currency. The zloty is stable and is practically dependant on the global appetite for risk.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Changes of import prices in the USA (minus 1.6% m/m and minus 11.1% y/y).
- 14.30: New jobless claims in the USA (estimations: 275k).
A duel for arguments before the Fed meeting
A discussion regarding the monetary policy is becoming more and more visible, before next week's meeting of the Federal Reserve. Despite the fact that since Tuesday it is forbidden for the particular members of the Fed to publish their statements, the other representatives of the monetary policy environment are still free to speak.
In 40 minutes the Financial Times published two extremely different opinions suggesting the FOMC actions. The first of them was by Richard Fisher, the former chairman of the Dallas Federal Reserve. The second one, is another strong statement from Lawrence Summers, who was Janet Yellen's opponent for the position of chairman of the Fed in 2014.
Fisher suggests that the current inflation is mainly lowered by temporary factors such as depreciations in prices of resources and food. Also, the general level of the base case inflation is only by 0.34 points lower than the 10-year-old average. Additionally, unemployment decreased to a level of 5.1% faster than expected. The former chairman of the Dallas Fed also claims that an increase in salaries should come soon.
Thus, if the FOMC does not begin the monetary tightening now, it will take a risk that due to increasing inflation the hikes at a later date will go faster than the market expects. This on the other hand, will have a negative impact on the economy's condition.
Summers presents an opposite view. He claims that a decrease in the stock market and a wider spread in loans, have already tightened the financial conditions as a 25 point increase in interest rates. The former rector of Harvard also thinks that we are not threatened by pressure on an increase in salaries. It is because the unemployment among the academy graduates decreased to 2.5%, and in the state of Nebraska it is only 4%. These factors did not cause pressure on an increase in salaries neither among citizens with lower education, nor in the above mentioned region.
Summers also states that China is currently in “the most uncertain period since the beginning of the economic reform in 1979, and may experience the biggest capital outflow in the history of their economy”. Actions of the Fed can cause additional economic tension in the world. This is why Summers suggests waiting with the monetary tightening, until the situation calms down. If the coming months are not negative for the finance, the hikes should begin. This scenario should be fulfilled even with a risk that too mild a monetary policy will cause “higher inflation by a fraction of a percent, and slightly euphoric relief on the markets”.
It is even more interesting, because in 2014 Summers was considered as less dovish than Yellen. The chairwoman herself has not made any statements since her testimony in Congress in July. However, this year's hike and even a six-month break in monetary tightening, is still the most likely solution. This decision may be considered as a good one by the “hawks”, as well as the “doves”. It will also fulfil the suggestions presented by the Federal Reserve for many months.
RBNZ suggests further easing
According to expectations, the Royal Bank of New Zealand (RBNZ) decreased interest rates by 25 base case points, to 2.75%. It has also sustained its mild message in the announcement published after the meeting. It suggested another easing. Despite a decrease in value of the New Zealand dollar to the American dollar to the area of a 6-year-minimum, the RBNZ claims that considering the economic situation the currency is still overvalued.
A very clear cutting of the economic prognoses is also worth noting. In comparison with June's estimations, the GDP for 2016 was reduced from 3.3% to 2.1%. Also, the perspective of inflation was decreased by 0.1 points, and the expected unemployment rate was increased by 0.8 points. The RBNZ chairman also mentioned about the careful observation of the situation in China.
As a result, the NZD lost 2% of its value to the USD, and heads towards 6-year-minimums in the limit of 0.60. On the other hand, if the situation in Asia does not improve and the prices of dairy products remain record low, it is possible that this limit will be broken in the following months.
Few words about the foreign market
The main currency pair currently reacts only to the behaviour of the stock markets. Their overvalue causes an increase in the EUR/USD, and higher evaluation of shares is a signal to sell the euro and purchase the dollar. Today's macro publications should not disturb this situation. The behaviour of the floors on the other side of the ocean will again determine whether this day finishes in the area of 1.1150, or closer to 1.12.
The zloty remains calm
Trade on the national currency, just like on the EUR/USD is significantly dependant on the stock markets. In general however, the changes are relatively small and the base case scenario is still to remain in a small range of variabilities. Only an increase in S&P 500 above 2k could lead to an attempt of going below 4.20. On the other hand, a return to the stronger decreases, and overvalue of the main American index below 1900 points, are an argument for testing the area of 4.25 PLN per euro. None of these extreme scenarios are likely to come true by the end of the week. Thus, the EUR/PLN should remain close to the area of 4.22.
The situation looks similar with the franc. Recent global wear off on the Swiss currency continues. Assuming that the zloty remains stable, the CHF/PLN should remain in the range of 3.85-3.87 until the end of the week.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate:
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