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Afternoon analysis 03.11.2015

3 Nov 2015 17:40|Marcin Lipka

In the next few days it is likely that the US tightening scenario will be confirmed. The dollar gained on the hawkish expectations. The zloty was steady before the Monetary Policy Council's statement.

In the next few days, information concerning the Federal Reserve will be updated. On Wednesday, the three major Fed policymakers are scheduled to speak in public. The major event will be the speech of the Fed Chair Janet Yellen during Congress. Other Fed members Stanley Fischer and William Dudley will also speak tomorrow.

In the last week, the Federal Open Market Committee presented clearly a hawkish message as it pointed directly at the next meeting as the moment of the possible hike. The statement supported the dollar. Tomorrow's speeches of the Fed policymakers will support the tightening scenario before the end of the year. It will add to the dollar's strength.

Moreover, on Thursday other Fed members are scheduled to speak (Dennis Lockhart is among them). And finally, on Friday the monthly report on the labor market is due.

The reading is important to the Fed, thus it may spur volatility in the market, if it misses the forecast. The latest ISM report showed some deterioration in employment conditions. As a result, the probability of disappointment increased slightly. Earlier, the ADP report is scheduled (it is highly correlated with the labor market data).

To sum up, the major factors seem to point at a December hike. And the next few days are going to support this scenario. Given the situation, the dollar is in the position to extend gains. In contrast, the emerging market currencies are likely to decline (including the zloty).

Unclear ECB

During the press conference after the decision on rates the European Central Bank President presented a dovish stance. Mario Draghi said the monetary policy will be re-examined in December. The statement signaled readiness to provide more stimulus. However, his view presented in the Italian press was less decisive. Similarly, Ewald Nowotny from the ECB presented a rather neutral stance.

The latest reports concerning the eurozone are rather calming. The inflation rate and unemployment data were better than expected. And PMI reports showed an improvement in industry. Today Bloomberg said that capital needs of the Greek banks may be smaller than expected. Given the situation, pressure on the ECB to act has been limited.

Stable zloty

On Wednesday, the Monetary Policy Council will decide on rates. No change is expected. However, tomorrow's meeting will be quite important as the MPC will reveal the National Bank of Poland's new forecasts.

The outlook for the GDP growth and the inflation rate will be lowered. It will be due to the recent deterioration in the economic reports. In general, the latest data disappointed, and the labor market readings were only exception. A similar outcome of the MPC meeting will be negative for the zloty, as the probability of further cuts will increase.

The impact of political risk is weaker than it was in the prior week. However, the potential for a rebound will be limited as the Federal Reserve is moving closer to hikes. In contrast, the ECB stance is unclear, thus this factor will not help the risk asset class in the near term. As a result, the probability that the zloty will gain is rather limited.

3 Nov 2015 17:40|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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