Afternoon analysis 04.07.2017

A relatively calm trading day, although volatility could increase as soon as tomorrow around the publication of the recent FOMC’s meeting minutes. The zloty didn’t see much change today, however, the Polish currency could be under significant pressure should the dollar visibly strengthen.

Limited trading range

Due to the Independence Day celebrations in the US, today’s session could be summarised as a calm one. The trading range of major currencies was relatively narrow. The Australian dollar stood out as it visibly depreciated as a result of a dovish statement from the Reserve Bank of Australia accompanying its interest rate decision (1.5%, no change). The AUD/USD pair fell approx. 0.7% to the lowest level since Wednesday.

On the other hand, the US dollar maintained the gains it made the day before. The US treasury yields were higher as well: two-years were still close to their highest level since late 2008 (approx. 1.42%). This was due to June’s ISM manufacturing index beating expectations. However, the dollar’s reaction was fairly limited, taking into account how the yields behaved.

Most investors approached the data somewhat with reserve and chose to wait for the publication of then recent FOMC meeting’s minutes (Wednesday) and the labour market report (Friday). Until then, the chances for a substantial change in the currency market seem quite low.

Zloty could face further pressure

The aforementioned increase in US treasury yields caused some of the capital to flow out of emerging countries, bringing about a weakening of the Polish currency. The price of the euro on the interbank market fluctuated around the 4.24 PLN level, while it was 4.20 PLN only a week ago. The dollar was valued at 3.74 PLN, which was close to the settlement level yesterday.

A weaker condition of the zloty could also be seen in relation to the Hungarian forint – PLN/HUF dropped to a three-month low. Tomorrow’s minutes and Friday’s labour market could potentially be a major threat to the zloty’s value. Should they turn out to be positive for the dollar, the value of zloty could decrease. In such a scenario, the price of the euro could move closer to 4.30 PLN and of the dollar to 3.80 PLN.

Tomorrow’s preview

The most important event planned for tomorrow will probably be the publication of the recent FOMC meeting’s minutes at 8 p.m. CET. Most of the committee members were relatively hawkish which, in theory, should be positive for the dollar. However, there have been some mixed data from the US economy, especially regarding inflation which failed to meet market’s expectations, even though FOMC underlined that the recent slump in price growth was temporary.

Additionally, it overlaid with a significant strengthening of the euro after Mario Draghi’s comments suggested an earlier than expected tightening of the very accommodative monetary policy. As a result, this also contributed to the dollar’s slump.

A confirmation of a hawkish tone coming from the aforementioned minutes could give an argument for the dollar to strengthen. However, its potential appreciation seems to be limited. In order for it to become a more lasting trend, the Friday’s labour report need to be really solid, especially in terms of the average hourly earnings.

Around midday, the Polish Monetary Policy Committee will publish its decision regarding the interest rate level. There are no changes expected either by the market or the MPC itself whose president even suggested the possibility of the main reference rate unchanged until the end of 2018 (at 1.5%). The statement will be published at 4 p.m. and also the press conference will start at the same time. Taking into account that the inflation pressure eased in recent months, we don’t expect a change in MPC’s views. Hence, both the statement and the press conference should be relatively neutral for the Polish currency.