Daily analysis 21.04.2016:
Oil remains significant for the broad market stance. Today's ECB meeting probably won’t bring any formal changes. However, Mario Draghi's press conference should be relatively dovish. The euro and the dollar are slightly cheaper, but the zloty remains weak due to a positive global sentiment.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Press conference after the ECB meeting.
- 14.30: Weekly jobless claims from the USA (estimations: 265k).
Oil reigns in the broad market
Despite the reasons for yesterday's increase in oil, it is worth noting that the behavior of this raw material has an impact on shares, bonds and the entire FX, and not only on the currencies of the countries which export oil. However, we could observe another significant matter on Wednesday – the appreciation of the USD against the main currencies, while there was an increase in the WTI.
Since March we have been dealing with a depreciation of the American currency, whilst the value of oil was growing. We took note that this is rather a disturbance of a general dependency, which was caused by a significant flow of capital to the currencies of countries which export raw materials. However, considering the Fed's attitude, a higher evaluation of oil equals a higher evaluation of the dollar.
The increasing prices of oil expand the chances for a rebound of inflation. Considering the situation of the main global economies, this should have the biggest impact on an increase in the American interest rates. Higher evaluation of oil also decreases the global risk aversion, especially regarding resource companies and their debt. This signal should also be positive for the Federal Reserve.
This attitude is confirmed by the behavior of the American treasury debt. Yesterday, profitability of two-year treasury bonds have exceeded 0.80%. This is their highest level since the end of March. Thus, we can start assuming that if the WTI and Brent continue to increase, the dollar will take advantage of these actions. Moreover, capital flows related to the expectations concerning the American monetary policy will be stronger than those caused by increases in value of raw materials currencies.
Getting back to yesterday's increase in value of oil, it is worth taking note of the report from the U.S. Energy Information Administration (EIA). Despite the fact that the supply of oil in the USA increased again (2.1 million barrels per day), this growth was lower than the API estimations suggested the other day. On the other hand, the supply of destillates clearly decreased (3.6 million barrels). There was also a decrease in fuel supply, which only confirms that a strong demand remains. It is also worth noting that oil mining in the USA has decreased again, and is currently at its lowest level for the past year-and-a-half.
Of course, there is the question – are the weekly changes in the fuel market and the slow decrease in the production of oil in the USA a signal which is strong enough to cause a 3-4% increases in the WTI and Brent? Probably not, especially given the context of no decision regarding freezing the production at the meeting in Doha, as well as the risk of an increase in mining by the leading producers. However, in the past few months the market was reacting lively on many signals, and not all of them were logical, even during downward moves. However, it is difficult to hope that clear increases will continue in the next few weeks. Investors will quickly recall the current oversupply, and the risk that the main producers will increase mining. Even if we consider the expected increase in supply in the USA or India, the prices of the WTI and Brent should not continue such a strong appreciation.
Before the ECB
After the ECB’s decision in March, it is difficult to expect that the monetary authorities will decide on a further soothing of the monetary policy. It is even less likely because such elements as the next round of TLTRO and the purchase of treasury bonds announced six weeks ago, have practically not started yet.
However, Mario Draghi may try to slightly reverse the disadvantageous (regarding inflation) move of the euro. One-and-a-half months ago, the ECB chairman's suggestion regarding limited perspectives for a further decrease in deposit rates, caused a clear increase in the value of the European currency. If Draghi withdraws from this statement, we can expect it to be negative information for the EUR/USD.
Thus, considering the strengthening of the USD and the perspective of pressure on the EUR, the main currency pair should move downwards. However, the scale of this move can be quite limited. This is due to the fact that investors still remember the recent behavior of the yen. The Japanese currency started gaining value, after the Bank of Japan soothed its monetary policy.
Zloty is not taking advantage of the positive trends
The Polish national currency is not taking any advantages of an improvement of the global sentiment, whilst all the emerging markets currencies are clearly gaining value. This also concerns the Hungarian forint. Even though after the opening of the American market yesterday, and we could see a better sentiment towards the zloty (it caused the EUR/PLN to go in the area of 4.27), there is practically no trace of this move today. The EUR/PLN returned in the area of 4.30.
Animosity toward the zloty has been observed for approximately three weeks. It is most likely that it has something to do with Poland's internal situation, especially the risk of cutting the rating by Moody's. It is possible that investors are afraid that the move from this agency may be seen as spectacular, as the one made by the S&P was. Thus, it is possible that aversion towards the zloty will at least continue until the announcement of Moody's decision (May 13th).
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