Afternoon analysis 13.07.2016

The ITV reports that Philip Hammond is expected to become Chancellor of the Exchequer. Monthly estimates form the EIA and IEA on crude oil. Kaplan comments on the dollar. The EUR/PLN remains above the 4.40 level and the Swiss franc is quoted around 4.04 PLN.

Despite the fact that the pound is mainly waiting for tomorrow’s Bank of England meeting, reports regarding the new government composition may also be important for the currency. In the afternoon, Bloomberg cited the ITV unofficial reports that the Chancellor of the Exchequer would be Philip Hammond.

This may be a positive message for the sterling. Until now, he was responsible for the foreign policy and additionally he was a supporter of the UE “remain” campaign. Today's Financial Times wrote that he was a supporter of keeping finance tight, and at the same time represents the free-market approach. However, Financial Times also added that "it is in contradiction with Theresa May’s plans, who wants to end the austerity policy."

Generally, the more pragmatic members in the cabinet, the greater the odds are that leaving the European Union will be carried out in an orderly manner, and that negotiations will be aimed at maintaining access to the common market. This should limit the pressure on the pound, even if the Bank of England decides on a more aggressive action than expected.

Oil market by EIA and IEA

Recently, we discussed rather extensively about the situation on the oil market and its products. We paid attention to the large stocks of gasoline in the United States and the downward revision of demand estimates. In recent hours, two major energy agencies reported their monthly outlooks.

The EIA (US Energy Information Agency) still expects the crude oil oversupply to last till Q2 of 2017 . Later, the market will start using its stockpiles, but they are currently at record high levels which should prevent a significant appreciation of prices. According to the EIA, the average quarterly price of the Brent is expected to exceed $50 in the third quarter of 2017.

The IEA (International Energy Agency) is slightly more positive for the oil market. Although the Agency notes that the recent decline in crude oil is caused by "growing concerns about the global economy and a stronger dollar," this downward pressure "has been limited by a further fall in production in the US and inventory."

In the short term, the most important data for the oil market will be the weekly EIA report. If it shows a slower fuel demand and maintains record high inventories then the oil will be more prone to falls. However, it seems that the only noticeable drop below $45/barrel may adversely affect the global sentiment and thus the currencies of emerging markets and those exporting energy resources.

Kaplan about the dollar. Zloty unchanged

In the afternoon there was a speech from another Federal Reserve member, Robert Kaplan. Apart from a relatively good assessment of the US economy, he said that many people “want to trade in the dollar, they want risk-free assets,” which is what is pushing the dollar higher than it otherwise would be.

He also added that the US central bank is “very sensitive” to the impact of the stronger USD. It may be regarded as a fairly negative signal for the buck or an attempt to reverse to flow to the US assets. The zloty on the other hand remains fairly stable in the afternoon and the base case scenario is to remain above 4.40 level on the EUR/PLN.