Daily analysis 17.08.2016:
William Dudley's statements strengthened the dollar, as well as increased profitability of the American debt. Did the New York Fed chairman suggest a rate hike in September? Dennis Lockhart on the recent GDP readings and the monetary tightening in the USA. The zloty is becoming weaker due to a worse global sentiment.
Most important macro data (CET – Central European Time). Estimated macro data are based on Bloomberg information, unless marked otherwise.
- 20.00: Record of the previous Federal Reserve meeting.
There is no doubt that William Dudley's statement for Fox Business from yesterday caused significant changes in the market. Profitability of the American two-year treasury bonds increased by 6-7 base case points, to the 0.75% level. In comparison to Tuesday afternoon, the dollar is more than 0.5% stronger against other currencies. Was William Dudley's statement misinterpreted?
Most of all, it's worth noting that Dudley is considered as a rather dovish FOMC representative. This means that he'd prefer to raise interest later than the FOMC consensus assumes. Thus, an information that, “rate hike in September is possible” in Dudley's opinion, caused the market to react quite quickly, even though many of the market participants doubts this scenario.
A relatively cursory analysis shows that chances for hikes in September did not really increase. A question that Fox Business reporter asked Dudley was: “Do you see a potential rate hike in September? You have the meeting in November and December as well.” Dudley replied: “Yes, it's possible. We will have to see the new data.”
First of all, this statement did not necessarily concern September, because there were two other months included in the question. Even if Dudley actually referred to the next month, basically the entire Fed claims that moves on interest rates are possible before each meeting, especially a few weeks before them.
The second matter from the interview was too low evaluation of the future interest rates by the market. In this case it's crucial to refer to a specific year. The question mainly refers to 2016. On the other hand, Dudley speaks of 2017, which is consistent with his testimony in Bali, Indonesia, on the 31st of July.
Moreover, our previous thesis regarding the market misinterpreting Dudley's words, is confirmed by his statement from two weeks ago. In his official testimony he said that, “I think that it's too soon to exclude the monetary tightening this year.” There's a significant difference between this statement and a rate hike in September, especially considering that there are three more meetings left this year.
Another matter is the market estimating probability of rate hikes. It was described by Dudley as well. His comments clearly concerned the year 2017. He took note that estimation of one rate hike by the end of next year is an underestimation.
Theoretically, the FOMC representative could have changed his mind during the past two weeks. However, he emphasized in the interview with Fox Business that his views on monetary policy did not change. As a result, we need to assume that the debt market or the currency market reaction was too intense. We continue to think that the dollar should remain under pressure, as well as that the chance for rate hike in September is very limited. Stronger dollar should return in the fourth quarter. This is when we can actually see higher interest rates in the USA or at least clear suggestions of the monetary tightening, if the GDP data appear significantly higher than the previous readings.
We received an official statement from Dennis Lockhart yesterday. It did not cause a clear market reaction. This is most likely due to the fact that the Atlanta Federal Reserve chairman does not have a right to vote regarding interest rates this year. Moreover, he confirmed that he supports at least one rate hike this year that has been already known.
However, it is worth noting Lockhart's comments regarding the GDP. He tries to prove that its recent readings are decreasing the actual economic growth. If we exclude the supplies, we will see that in the second quarter the GDP increased by 2.4% in annualized interpretation, as well as by 1.9% in year on year relation. This confirms our remarks from the end of July, right after the data was published. However, we also took note that the Federal Reserve seldom tries to accelerate the official data. This happens even when there's a large chance that a specific reading is disturbed by statistical elements (the June payrolls) or temporary elements (supplies in the GDP).
In conclusion, we continue to think that the dollar has a chance to remain relatively weak, at least until the beginning of the fourth quarter. The Federal Reserve will not want to suggest a monetary tightening, before macroeconomic data actually improve.
A higher probability that the Federal Reserve performs the monetary tightening, as well as deterioration of the global sentiment (including declines in the American stock market) caused the emerging market currencies, including the zloty, to overvalue. However, if our assumption that the Fed will remain relatively dovish in the forthcoming days confirms, the zloty should not clearly lose value against the main currencies.
Today, it is worth focusing on the Federal Reserve minutes. They may be relatively dovish considering the announcement. Theoretically, this may continue to increase the risk aversion, as well as wear-off the PLN in the evening. On the other hand, we must keep in mind that the FOMC meeting in June was held before the weak GDP data from the USA was published. However, we still do not assume that the EUR/PLN will return clearly above the 4.30 level.
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