Afternoon analysis 25.05.2016

Sentiments in the financial markets are very positive despite an increasing probability of the hikes in the USA. The dollar has stabilized after strong growths on Tuesday. The zloty remains at a low level, despite favorable economic data.

Investors of the worldwide stock markets are calm. This opens the door to the hikes in the United States. Currently, there is a 38% probability of an increase in interest rates at the Federal Reserve meeting in June. To compare, only two weeks ago it was less than 10%. The chances for the hikes in July are estimated at 61%.

A change in the market's expectations regarding interest rates suggests that the hikes will be made this Summer. This factor did not succeed in discouraging investors to buy shares. Moreover, the quotations of raw materials are increasing, especially for copper. This is a sign that investors have interpreted the Fed's plans as an evidence that the economy is in a sufficiently good condition, and it will handle an increase in interest rates.

After a strong depreciation yesterday, the EUR/USD has stabilized at the level of approximately 1.1150 dollars on Wednesday. Considering an increase in probability of the monetary tightening in the USA, we can expect an appreciation of the dollar in the long-term.

Zloty at a low level

Increasing optimism in the broad market has created an opportunity for the emerging market currencies to strengthen. The zloty used this impulse to work-off some of the losses against the main currencies on Tuesday. However, the Polish currency stabilized at a low level on Wednesday, even though the emerging markets currencies are gaining. The Hungarian forint, which is strongly correlated to the zloty, is gaining against the euro, as well as against the dollar.

Arnaud Louis of Fitch presented the expectations before the review of Poland's rating in July (source: Reuters). In his opinion, the assumptions regarding the budget for 2017 will be crucial for sustaining the rating (especially keeping the deficit below 3% of the GDP). Arnaud Louis suggested that Fitch will rather not change Poland's loan credibility in July.

Today, the Polish Central Statistical Office (GUS) informed that in April the unemployment rate decreased to 9.5%. The forecasts assumed it would be 9.6%. The month before, the unemployment rate was 10%. The last time the unemployment rate was as low was in December 2008. Today's data confirmed a strong revival in the labor market. On the other hand, the acceleration of industry is supported by a strong increase in orders (29.5% in April, after a 17.5% increase the month before).

April's reports suggest a significant improvement in economic results for the next quarters. The reports regarding the industrial production were also very positive. The retail sales data met the expectations. However, we could expect an increase in consumption due to a gradual development of the 500+ program. Thus, the data suggests that a slowdown from the first quarter was temporary.

Due to positive economic data, the Monetary Policy Council should not be eager to decrease interest rates. This factor may support the zloty in the long-term. However, for the time being the Polish currency remains under the influence of expectations regarding the hikes in the USA. Moreover, an increased political risk is a negative factor. Considering the above factors, the chances for a stronger zloty are relatively low.