Afternoon analysis 13.04.2015

Focus shifts to comments from the central bank as the economic calendar is empty. The zloty strengthened in the second part of the day before the Monetary Policy Council meeting.

No important economic reports moved the market’s focus to comments from the central banks. Reuters published an interview with the San Francisco Fed president John Williams – a Fed member that is viewed as being close to the Fed president Janet Yellen. As a result, his comments are usually important for market participants.

The comments from Williams were rather neutral – thus the overall market impact has not been significant. The San Francisco Fed president sees the strong labor market expansion as a factor that limits the risk of raising interest rates to soon.

Currently, the Fed is searching for appropriate interest rate paths, that would lead to interest rate normalization within several years. However, if some risk factors occur during the normalization procedure, the Fed may always flatten the path or decide to lower the pace of increases. Thus, the Fed is not going to worry too much due to the unexpected slippages of economic reports – for example March labor market data that missed expectations.

Moreover, Williams considers a later tightening more risky due to the fact that the Fed will be forced to raise the rates more aggressively in the future if the inflation growth accelerates to fast. The statement has been somewhat hawkish in the context of comments that an early rate hike would dampen the expansion.

With respect to June as a possible moment for interest rate hikes, Williams said that before this month many important economic releases are scheduled, that may affect the Fed’s decisions.

The dollar five-day winning streak against the euro has shown, that the US currency was not affected by poor labor market data. Today's comments from the Fed's Williams prove that a similar assessment of the situation was correct.

Still, it the second part of the day the dollar gave away its earlier gains against the euro. This move has been sparked by some profit taking in the EUR/USD after five days of decline.

Stronger zloty

Quite a strong appetite for risk assets among investors – reflected by the increase of major indexes in the US and Europe – creates a favorable environment for the zloty. The Polish currency it the second part of the day managed to recoup most of the losses against its major pairs. Still, only the EUR/PLN was significantly lower.

Today's data on the balance of payments was in favor for the zloty. The current account balance was higher than expected – in February it stood at plus 116 million euro against 37 million in the previous month (revised from 56 million) – clearly a result above the 46 million that was projected.

On Wednesday the Monetary Policy Council will decide on interest rates. No change in the monetary policy is expected. However, an important issue is the MPC view of the zloty recent appreciation. If the monetary authorities see no threat in a strong zloty to the price developments and the GDP growth, the zloty will continue to rise. This scenario is most likely.