Daily analysis 26.08.2016:
The market is anticipating Janet Yellen's testimony today. The Dallas FOMC representative was relatively dovish in his interviews with CNBC and Bloomberg. Despite a reduction of some losses, the zloty remains clearly weaker than it was yesterday.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Revision of the GDP reading from the USA for the second quarter (estimations: positive 1.1% q/q in annualized interpretation).
- 16.00: Janet Yellen's testimony in Jackson Hole.
The market is relatively calm before Janet Yellen's testimony in Jackson Hole that is planned for 16.00 (4.00 PM). The EUR/USD is moving near the 1.1300 level. The pound and the yen are being quoted in quite a narrow range of fluctuations as well. There is a relatively minor chance that the market would want to accelerate the afternoon events and generate a stronger move during the coming hours.
This week we have focused much attention on the matter of Janet Yellen's testimony in Jackson Hole. In our opinion, the market is too hawkish towards this presentation. This is probably because the interview with William Dudley, as well as the statement from the FOMC vice-chairman, Stanley Fisher, have been interpreted by the headlines from information agencies. Therefore, their message was slightly deformed and the observers thought it suggests rate hikes in September.
It is most likely that the FOMC chairwoman will focus on improving economic indexes. However, she may also suggest that due to the lack of inflation pressure, more macro data will be required to make the decision regarding rate hikes. Due to the fact that this will basically exclude monetary tightening in September or in November, consequences for the USD will be negative.
On the other hand, Yellen's views on the monetary policy perspective for the forthcoming years may appear very interesting. If the FOMC chairwoman clearly suggests that the monetary policy needs to be adjusted to a lower neutral interest rate (just as many of the Federal Reserve members did), this will mean that the space for rate hikes is limited.
This element may partially be calmed by suggestions regarding the necessity of a more active policy from the Congress. Its purpose would be to conduct structural reforms, regarding improvement in productivity through investments in studies and development, infrastructure and legislative changes. Higher expenses of the country are a chance for an increase in inflation, as well as a rather slow withdrawal from an active monetary policy. This would be a positive element for the USD in the long-term.
We expect the dollar to become weaker in the afternoon. This is mainly that the hawkish expectations regarding Janet Yellen's testimony may not be fulfilled. If other matters do not generate fundamental changes, they will be ignored in the short-term.
Kaplan is rather dovish
Robert Kaplan gave two interviews yesterday. One was given to CNBC and second one to the Bloomberg Radio. He seemed rather dovish and claimed that the monetary tightening will be slow. Moreover, Kaplan said that he is patient due to the lack of inflation pressure.
He also mentioned that according to the models (including the Dallas Federal Reserve models), the neutral interest rate is at the 2% level. This is definitely below the FOMC consensus, which is within the 3.0-3.3 range. Kaplan also spoke of the necessity to make structural reforms that will increase a potential economic growth in the case of negative demographic trends.
Kaplan's statements (especially those from the interview with the Bloobmerg Radio) cold give an impression that Janet Yellen's statement may be similar. In our opinion, if it really has a similar structure (no rush regarding rate hikes, lower neutral interest rate, necessity of structural reforms), the dollar should be weaker in the afternoon.
Zloty remains weak
Yesterday's wear-off of the zloty is a certain mystery. A simple explanation for a lower evaluation of the Polish currency is the projection of the next year's budget. This is because its publication overlapped the PLN depreciation. However, this interpretation does have a weak spot. The initial projections has been presented by the Ministry of Finance on the 22nd of August.
Its estimations regarding the deficit of public finance sector, expenses and incomes, economic growth, inflation, salaries, employment, etc., were no different from the ones that have been presented yesterday. Therefore, despite that the projections is very tight, it should not be a surprise.
The only new information was the fact that analysts of Moody's that were cited by Bloomberg, wrote that escalation of the constitutional crisis is negative for Poland's loan credibility. However, despite that this information increases the risk of the rating's downgrade on the 9th of September, the probability that this will happen remains relatively low.
Besides, the information from Moody's appeared after 18.00 (6.00 PM). At that time, the zloty has stabilized in the area of 4.33 per euro. The debt market, as well as the forint, were quite calm until the end of the day. As a result, we may assume that a weaker zloty is not a result of fundamental changes. Therefore, there is a large probability that the move from yesterday will be evened out within the forthcoming days.
When it comes to today's afternoon, the zloty's consolidation after Janet Yellen's testimony is the base case scenario. If this scenario is fulfilled, the dollar should return to the 3.80 level and the EUR/PLN may reach the 4.30 level. However, if it appears that the market's interpretation of Yellen's testimony is hawkish, the EUR/PLN may grow to 4.35 and the dollar may exceed the 3.85 PLN.
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