Daily analysis 22.09.2016:
A clear domination of dovish elements in the Fed’s message overvalues the American currency. The zloty is benefiting from a better sentiment and a milder path of interest rates. The dollar is near the 3.80 level and the euro is in the area of 4.28.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.00: Minutes from the recent MPC meeting.
- 14.30: Weekly jobless claims from the USA (estimations: 261k).
- 16.00: Sales of houses in the secondary market (estimations: 5.45 million).
Dovish message with hawkish elements
Just as we expected, the Federal Reserve meeting was dovish, in general. This wore-off the dollar against the majority of currencies. However, the FOMC message also contained hawkish elements. One of them was a different view regarding interest rates that was presented by three voting Fed’s members.
The Federal Reserve didn’t raise interest rates, which was consistent with the market expectations. However, this was not the element that caused the dollar to wear-off. A clear reduction in the Fed members’ expectations regarding interest rates at the end of 2017 was definitely more significant.
In June, these expectations were at the level of approximately 1.6%. Currently, it’s at the level of 1.1%, as a consequence of reduction of estimated rate hikes from two to one in 2016, as well as from three to two in 2017. This is a serious difference, especially taking into consideration that only one quarter has passed since the previous projection.
Moreover, the market is strongly convinced that the path of tightening would be decreased, rather than increased. Reducing it so soon proves that the Committee is quite dovish in general, despite the three members that voted for monetary tightening yesterday.
The questions&answers series with Janet Yellen wasn’t particularly significant. However, it’s worth focusing on the Fed chairwoman’s opening statement. It contained at least two important arguments that suggest a possibility of keeping interest rates relatively low.
Primarily, it was a suggestion that with an increasing amount of workplaces and continuously unchanged unemployment level, some of the people who have been economically inactive is beginning to return to the labor market. This is a positive information for the future. However, it also suggests that there’s no need to search for pressure on salaries or inflation for the time being.
Another dovish element is the fact that Yellen described the current monetary policy as moderately stimulative. This statement is consistent with a discussion regarding a lower than previously estimated neutral interest rate. Therefore, even though it seems that the current cost of credit is at a low level, its impact on the economy is significantly smaller than it was in the past.
Relatively hawkish announcement
The announcement contained definitely the largest number of hawkish elements. The most significant was the fact that three out of ten voting FOMC members was in favor of raising interest rates yesterday. We discussed this matter yesterday, but we didn’t expect the opposition to Janet Yellen to be as strong, despite many hawkish suggestions from Rosengren recently.
We are not denying that this was a strong signal. However, it’s worth noting that the opposite view came from chairs of the Federal Reserve’s regional departments. Next year, they will not have the right to vote. Moreover, it states in the current schedule that they will be replaced by more neutral FOMC members. It would be definitely more significant if the votes in favor of rate hikes came from the Board of Governors members or from William Dudley. This is the part of the FOMC that has a constant right to vote regarding interest rates. However, this didn’t happen, so the opposition’s tone is not as strong as it would seem at first sight.
There were a few more hawkish statements in the announcement. Primarily, the risk balance for the economy is relatively balanced, which is confirmed by eagerness to perform rate hikes at the end of the year. The sentence about arguments regarding an increase in costs of credit is a hawkish element as well.
In conclusion, rate hikes in December remain the base case scenario. However, if the new American data is weaker, the market may begin to estimate the lack of hikes. This could continue to wear-off the dollar. The condition of the American economy at the beginning of 2017 will be definitively more significant for the currency market in forthcoming months. If the condition is not relatively positive, the scenario of higher interest rates would begin to breakdown. This would cause the dollar to clearly lose value.
On the other hand, if the coming quarters show a stronger increase in salaries and inflation is reaching its target faster than expected, the dollar would clearly benefit from this situation. However, until there are no real chances for this second scenario to become true, the likelihood of a visible appreciation of the USD is limited.
The general announcement from the Federal Reserve is positive for the zloty. Moreover, our scenario of the zloty’s behavior after the FOMC meeting has fulfilled. Today, the EUR/PLN went to the area of 4.28 and the USD/PLN is at the level of 3.81.
We don’t expect any clear changes in the PLN during the day. However, the Polish currency may give away a portion of its growths from past few hours. The only argument for a slight wear-off of the zloty may be the minutes from the recent MPC meeting, which will be published today. Professor Glapiński was surprisingly hawkish during the press conference at the beginning of September. However, the minutes may show that some of the Council members are still in favor of monetary easing in the case of an economic slowdown.
The zloty should sustain its recent growths over the next few weeks. The main argument for this scenario is the Federal Reserve’s announcement from yesterday, which assumes a very mild path of monetary tightening for the next quarters.
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