Daily analysis 27.07.2016:
The dollar remains steady in the global market before the Federal Reserve meeting. New speculations regarding actions from the Japanese authorities. The GDP reading from the United Kingdom is irrelevant for the pound. The zloty wears-off by approximately 0.02 PLN against the main currencies.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Orders for durable goods (estimations: negative 1.4% m/m; excluding transport positive 0.3% m/m).
- 20.00: Announcement after the Federal Reserve meeting.
Many factors indicate that the Federal Reserve meeting today will not be crucial. It will not end with a press conference, there will be no new macroeconomic estimations nor a new consensus of the FOMC members regarding future interest rates. Thus, what will count are the nuances. If all of them suggest a move towards a more hawkish direction, we will see a minor strengthening of the dollar.
As usual, first part of the announcement will describe the economic situation. It's most likely that mainly the situation in the labor market will change. It did not look too positive in the mid-June, due to a low payrolls reading in May. When it comes to the real estate market, the consumers expenses, investments or export, we should not expect any larger changes.
The FOMC message will be rather neutral regarding inflation. It is possible that information about the market evaluating lower prices for the future will be sustained. However, the Fed will continue to notice that pressure on lower inflation is the effect of the resources market.
The Federal Reserve was “cautiously” observing the situation in the worldwide financial markets and the worldwide economy by the end of April, as well as in the mid-June. Taking into consideration that the Brexit risk decreased, stock markets are at a relatively high level and the situation in China is stable, there is a chance that the word “cautiously” will disappear from the announcement. This would be one of the hawkish nuances.
Taking into consideration the most recent statement from Esther George, it is possible that today she will vote for rate hikes. She also supported the idea of monetary tightening in March, as well as in April. However, a weaker labor market in June and the danger of Brexit have made her to support the status quo. Her support for the hikes would be the second hawkish nuance.
However, today's announcement will only be the first element that the Federal Reserve may use to prepare the market for the monetary tightening. Other elements are statements from the particular Fed members, minutes that will be published three weeks from now and finally Janet Yellen's testimony in Jackson Hole on the 26th August. Of course, we must not forget the macro data. They need to be relatively positive, in order to allow the FOMC to prepare the market for the possibility of the monetary tightening in September.
Japanese package and British data
It remains unclear, how will the stimulating package of the Japanese authorities look like. Economists who were surveyed by Bloomberg are assuming that the value of quantitative easing may remain at the current level, or even increase by an amount within the range of 20-100 trillion yen per year (approximately one trillion USD). However, we may assume that 95 trillion or more, may not be favorable for the yen.
There is a lot of uncertainty regarding fiscal actions as well. According to the Prime Minister Abe, the package is worth approximately 13 trillion yen (slightly less than 130 billion USD) for the time being. However, it remains unclear how much of previously planned funds is included in these estimations. The USD/JPY managed to change its direction many times this week and these moves were even larger than 2%.
It is worth noting that the pound market did not react positive on a positive GDP reading. The economic growth in quarter on quarter relation was at the level of positive 0.6%, against the positive 0.5% consensus. Skeptical reaction of investors is a result of the fact that the second quarter does not have a great significance for predicting the situation in forthcoming months, due to negative consequences of Brexit. We continue to claim that the pound is most likely to continue its losses, especially regarding an increase in risk that the Bank of England may decide on a significant monetary easing next week.
It is difficult to say what caused the morning wear-off of the zloty. This was probably not the debt auction that is planned for tomorrow. Profitability of bonds are at similar level as they were yesterday. It is also difficult to explain the EUR/PLN at the 4.38 level by anxieties regarding the Federal Reserve meeting, especially that the main currency pair remains stable, the zloty lost against the forint as well and the global sentiment remains neutral.
We can speculate that weaker zloty is a result of a worse condition of shares (unofficial news from Bloomberg regarding sale of entirety of UniCredit shares in Pekao) or the government plans regarding an increase in expenses for health care. However, the reaction regarding the latter would be too strong, since this process is to be spread until 2025. As a result, we may come to a conclusion that a worse condition of the PLN should be temporary and the EUR/PLN should return to the area of 4.36.
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