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Afternoon analysis 12.04.2016

12 Apr 2016 16:34|Artur Wiszniewski

The IMF cut the global growth outlook. Bundesbank President Jens Weidmann defended Mario Draghi from criticism. Rising oil and copper helped commodity currencies. The zloty resumed declines.

Today, the IMF released its latest forecasts for the global economy. The world GDP growth is expected at 3.2 percent this year, down from 3.4 percent in the previous estimate. The forecast for 2017 was lowered to 3.5 percent from 3.6 percent. The IMF cited the rise of populism in the US and the European countries, the British referendum on leaving the EU and the immigration crisis, as the potential risk factors.

The US projection was cut to 2.4 percent from 2.6 percent. However, the IMF expects China to grow 6.5 percent against 6.3 percent in the prior estimate. Although the Chinese economy is going to slow down, the deceleration will be rather limited. The euro zone is expected to grow at a 1.5 percent pace (down from 1.7 percent) in 2016. In the next year, the monetary union is expected to expand 1.6 percent (against 1.7 percent previously expected).

The IMF forecast were rather gloomy. The release stressed the variety of challenges ahead of the world economy. As a result, the report may negatively affect the market sentiment.

Stable EUR/USD

The EUR/USD was stabilizing in a narrow range, as the Fed showed somewhat dovish stance and the ECB reiterated it is ready to act.

Yesterday, Robert Kaplan, the Dallas Fed President, pointed at June as a possible moment for an interest rate hike. His view supports the basis scenario for interest rates in the US, which assume two increases this year. Today's data on import prices pointed at a flat path for interest rates, as the prices increased only 0.2 percent against the 1 percent forecast.

Bundesbank President Jens Weidmann defended ECB Chief Mario Draghi (Financial Times interview). Recently, the German policymakers criticized the ECB for a loose monetary stance, which according to them, supports populism.

Weidmann said the Frankfurt-based institution has a very precise goal to fulfill - the inflation rate is close to the 2 percent level. He criticized the comments from German lawmakers as a possible violation of the central bank’s independence. Weidmann's stance may be surprising, as he is the major critic of the monetary policy which is conducted by Mario Draghi.

Oil prices rebounded to the highest level in four months, as the optimism increased before the meeting of oil producing countries. Investors are expecting the meeting on April 17th, to result in an agreement to freeze the output level. Moreover, the copper price gained, which supported the commodity currencies.

The zloty dropped in spite of hawkish MPC

The zloty did not exploit hawkish comments from the MPC's Jerzy Osiatynski (source: PAP). He cited factors which may lead to interest rate hikes. However, Osiatynski believes that the most appropriate route would be to leave rates unchanged. In contrast, yesterday Jerzy Zyzynski and Eryk Lon argued for interest rate cuts.

The core inflation data surprised. It dropped to negative 0.2 percent on a yearly basis against the negative 0.1 percent forecast. The report suggests that the period of low inflation may last longer than expected. However, today's data will not force the MPC to change its stance. The monetary authorities do not consider deflation as a factor that hurts the GDP growth. The MPC may alter its view if the macroeconomic reports deteriorates.

The IMF increased the forecast for the Polish economy. The Washington-based institution increased the expected GDP growth at 3.6 percent in 2016-17 period. Earlier, the IMF expected 3.5 percent GDP in 2016.

In spite of a relatively positive atmosphere in the markets, the zloty dropped significantly. The Polish currency dropped against all its major pairs. It may signal a prolonged period of the zloty's weakness.

12 Apr 2016 16:34|Artur Wiszniewski

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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