Afternoon analysis 22.06.2016

Comments from Jerome Powell confirmed some more dovish stance from the Fed. The market is still optimistic regarding the referendum. The Polish MPC member claims that the zloty seems undervalued.

Risk on sentiment

The market remains fairly optimistic. Currency rates, stocks and bonds show that investors are much less concerned with incoming surveys regarding the Brexit risk. In our commentary published earlier today we noted that it is mainly a result of bookmakers rates.

Investors both during the most recent parliamentary election in the UK an the Scottish referendum failed to get accurate reports from opinion polls. On the other hand the bookmakers made much more viable bets so there is a broad perception that they describe the social situation much better. Of course, it is slightly in contrast to the situation from the beginning of June when both polls and bookmakers moved in the same direction which pushed the market sharply lower.

We still have to remember, however, that there at least two opinion polls scheduled for the following hours – one around 17.30 Polish time and the second just before midnight. As we wrote earlier even if the final result is favourable for the surveys may generate some volatility especially if the phone one is “to close to call” and the online poll shows support for Brexit

Jerome Powell of Fedu

Since the last Federal Reserve meeting there has been only comments from James Bullard and Janet Yellen regarding the monetary policy. The analysis published by Bullard which suggested only one hike till the end of 2018 should be regarded as academic discussion rather then a significant signal for the monetary policy.

On the other hand Yellen during her hearing has mostly repeated what we had already known when the most recent FOMC press conference finished. As a result today’s interview with Jerome Powell on CNBC should be regarded as helpful concerning the future monetary policy.

The FOMC governor said that “dip in U.S. job creation in April and May, plus his sense that the neutral rate of interest rate may be lower, have gotten his attention”. Lather however he added that “I don’t want to take too much signal from that, but the right thing to do, seems to me, from my perspective, is to wait and see how much momentum there really is in the economy”.

We can conclude that Powell’s comments support Yellen’s stance. The Fed is on hold and turned on “wait and see” mode. If the data from the US improve there will be probably another attempt to convince market participants that the hike is quite possible as we observed since mid May. On the other hand if macro readings remain uncertain the FOMC remains fairly dovish.

In our view if there is no Brexit and the US data comes back to the most recent trend the FOMC members will return to more hawkish stance. It should both push the yields higher and bring some strength to the dollar.

The zloty is slightly stronger

The Polish currency finally gained some ground from better global sentiment. The EUR/PLN is currently quoted around 4.38 level and the franc slides below 4.05. In the afternoon there were also some comments from Marek Chrzanowski

In an interview with the PAP agency cited by Bloomberg the MPC member said that zloty “seems undervalued”. While this comments don’t change much regarding the current rates it may mean that further zloty weakness my be uncomfortable for the MPC. As a result any discussion regarding the cut may disappear both from the broader discussion and the “minutes’.