Afternoon analysis 14.06.2016

Fairly good data from the US. The Federal Reserve meeting may be dominated by Brexit issue. The zloty remains weak and the situation on the domestic currency is expected to remain nervous in the following days.

Good data from the US

Investors are waiting for the new news concerning the UK referendum. No new poll has been published lately, but in the coming days many are expected. Apart from the British voting market participants received today retail sales data from the US. Generally the reading was fairly good. The sales rose by 0.5% m/m with expectations at +0.3% m/m. Excluding gasoline and cars the result was in line with the consensus (+0.4% m/m)

Looking at the yoy publication and on different categories the demand generated by US consumer looks encouraging. The overall growth excluding gasoline was 3.7% y/y. Expenditures on building materials & garden equipment and health rose 8.0% and 7.3% respectively. This data should not be a constrain to raise the interest rates in the following months.

What to expect tomorrow from the Fed?

The FOMC cannot ignore the Brexit issues. Capital inflow to bonds significantly lowered its yields what causes that market does not price in any rate hike until first months of 2017.

Additionally one week before the voting and during a high volatility the FOMC is supposed sound as neutral as possible. In the statement there is expected to be some comments regarding weaker jobs market. However, there will be some phrases that the second quarter is on track for much better growth. According to the GDPNow model from Atlanta Federal Reserve the currency data shows annualised growth at 2.5% pace for the last three months.

We would see no modification on the dot plot for 2016. The Fed is expected to suggest 2 hikes this year. Some changes may be possible for 2017. In our opinion the FOMC will signal 3 rate increases for the following year. In March the Fed anicipated four 0.25 percentage points raises.

Some changes may occur in macroeconomic projections for the current year. The growth at 2.2% looks too optimistic and will be probably reduced toward 2.0%. On the other hand the headline PCE inflation may be slightly hiked due to the oil increase. As a result no significant impact on rates is anticipated.

The June meeting is scheduled to end with the press conference. Janet Yellen will have an opportunity proceed it with the neutral tone. She is expected to take into the account how the situation on the bonds has changed in the recent days. Even if the FOMC still wants to hike twice this year she will refrain from any comments to suggest that the move is imminent. Finally the base case scenario for the USD is to stay in a fairly tight range with no clear direction after the meeting.

The zloty’s weakness remains

In yesterday’s commentary we noted that with unfavourable opinion polls the zloty might significantly weaken and reach the 3.95 level on the dollar. This scenario was fulfilled but this does not mean that the Brexit is fully priced in. If the new polls show an increasing level of Brexit support the USD/PLN may easily reach 4.00 level.

Both the franc and the euro may also be worth much more moving toward 4.15 and 4.47-4.48 level respectively if the following days bring similar polling results we have seen in recent hours. We can clearly note that the zloty is a hostage of the British referendum and that situation won’t change until 23rd of June.