Daily analysis 18.12.2014:
Fed confirms path toward the first interest rate hike in mid 2015 and bullish projections for the US economy. Swiss central bank introduces negative deposit rate. Russian rouble remains in a wide range. Zloty stays under significant pressure due to regional risk aversion.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30 CET: Weekly jobless claims from the US (survey: 295k).
- 16.00 CET: Philadelphia Fed business index (survey: 26 points).
Few surprises from the Fed but mid-year increase in place
On Wednesday we presented a pretty detailed analysis what might drive both the currency and equity market. In line with our expectations both the dollar and shares benefited from the FOMC decisions. There were, however, some details which made the ride somewhat bumpy.
The Federal Reserve confirmed a better job market conditions both in the statement and in the Fed's economics projections. It is possible that the unemployment can drop below the natural rate as early as in 2015. It is a signal for the inflation and pay check rise, which might confirm the view to hike the interest rates.
On the other hand, the Committee expects a significant slowdown in the inflation rate. According to the FOMC estimates the PCE should slide toward 1.0-1.6% in 2015 whereas in September there were projections on inflation hitting 1.6-1.9% range. It is, obviously, the effect of the oil slump. But the chair Yellen explained that the commodity prices have transitory effects on the future prices and the Fed, similarly to previous events, will not change its view due such issues. Janet Yellen also confirmed that the oil slide should have the net positive effect on the economy.
The Fed's chairwoman played pretty tricky game with the “considerable time”. The new word was introduced - “patient” - which should characterize the period to the first rate hike, but the “considerable time” remained in palace as a reference to the past communications. It was the reason why the EUR/USD jumped just after the statement was released. Probably it was the effect of automatic trading systems which were not able to differentiate the same context issues.
The other important short term trigger was sentence that the Committee 'considers it unlikely to begin the normalization process for at least the next couple of meetings'. Yellen saying that she will not raise the benchmark before March sort of opened the doors to earlier rate hike – for example in April. It was a pretty hawkish message, which probably will not be used, but it was also a main reason why the dollar returned to appreciation bias after the 'considerable time' turmoil.
Summarizing despite some confusion, which caused some short-term volatility, the fairly strong growth scenario was confirmed. It was also confirmed that the inflation fall is transitory, the oil slump is net positive and there is no major threat for the economy regarding Russian crisis. As a result the meeting was dollar positive. The base case scenario is still rate increase during the June meeting, but the market will start fairly soon 'discussion' what will the pace of rate increase. It will be the main “theme” in 2015 for the dollar-pairs.
Switzerland and Russia
In the morning the Swiss National Bank (SNB) introduced the negative sight deposit rates for banks. It should discourage financial institutions to put money in the CHF causing too much strength on the franc and pushing the Bank to intervene constantly. According to the statement the SNB was pushed by the tense situation in Russia, but it was rather an “excuse”. The real reason is probability increasing odds for the QE in the euro area and an attempt to surprise some “hot” capital.
The EUR/CHF fairly quickly jumped toward 1.2100 but the rally didn't last long during and the noon the pair was around 1.2050. Maybe part of the capital managed to rescue some of the capital or the market aims to test the SNB for more action fuelling the EUR/CHF much further from the 1.2000 level.
Combined currency intervention from Russian Central Bank (CBR) and ministry of finance caused a 20% rouble appreciation. Luckily for the RUB the oil also rebounded significantly. We may assume that the situation is going to stabilize in the near term with the range trade for the USD/RUB between 55-65 level. Only further significant crude depreciation (less and less probable this year) might push the USD/RUB further the 70 mark.
Foreign market in a few senteces
Yesterday's Federal Reserve meeting should be a strong signal for currencies to come back toward previous trends – weaker yen and euro – against the bullish dollar. Additionally, the situation on the rouble should stabilize in the short-term in a fairly wide range. In the longer run the Russian currency will still be under pressure unless we see a strong rebound on the oil prices.
The regional risk-off sentiment still negatively impacts the local currency. We still confirm our few that the situation is transitory and the zloty should begin new year below 4.20 especially that some calmer trading is also observed on the rouble. However, we should not rule out that some part of highly speculative capital wants to exploit the CEE nervousness and engaged in short-term operation aiming to push the EUR/PLN to 4.25 range.
Today's SNB decision hasn't changed much on the franc, but may a good message for the new year. The MPC from Zurich tries to predict future events which may result hat the CHF/PLN can return below 3.45 when the overall PLN situations settles down.
Incoming hours on the zloty may be pretty tense, especially that the PLN does not react to the rouble appreciation or the bullish session on capital markets. It may mean that the shot-term capital is getting much more active. As a result more volatility is on the horizon with some unpredictable moves even above 4.25 per the euro.
Expected levels of PLN according to the EUR/USD rate:
Expected GBP/PLN levels according to the GBP/PLN rate:
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