Afternoon analysis 26.01.2016

Risk aversion determines the market landscape. The market focus shifts to the Fed's meeting on Wednesday. The zloty remained at the low level. Comments from the Polish authorities did not help the zloty.

Optimism after the European Central Bank meeting has faded. Last Thursday, ECB President Mario Draghi signaled than additional measures are probable as soon as in March. A dovish statement supported the stock markets and rebound in the oil price. However, the move has diminished on Monday.

Now the market focus moved to the next Federal Reserve meeting on Wednesday. The US central bank is expected to leave rates unchanged. The key factor to watch will be the Fed's statement after the meeting.

The Chinese turmoil and slowdown in other emerging economies, sliding commodity prices, spreading political risk and high volatility in the markets are the arguments to postpone interest rate hikes. Some market participants believe the Fed will decide to slow tightening pace due to mounting risk factors. According to the latest Fed's signals, the next hike should be expected in March.

If the Fed signals decision to postpone hike, the dollar may drop and the risk appetite will be strengthened. However, the probability of a similar scenario is not very high. The tightening cycle has started in mid-December. As a result, decision to revamp the plan so soon would be a huge surprise. As a result, three interest rate hikes in 2016 is the basis scenario for now.

Oil returns to declines

In the second part of the previous week the oil price rebounded. It increased due to optimism spurred by the ECB. However, the market ignored the factors that were negative for the oil price: report of the US inventories, information that sanctions against Iran were lifted and that Iraq increased output on record.

Given the situation, today's oil drop was not surprising. The oil price dropped 3 percent. Today it moved near 31 dollars against last week's record low below 28 dollars. Drop in oil price hurts commodity currencies. After two-day rebound the Russian currency dropped again. The USD/RUB moved above 80 rubles. Last week the USD/RUB increased almost to 86 roubles.

The zloty at low level

In spite of sentiment improvement in the last week, the zloty remained at low level. Little increase in the risk-taking environment suggests the sentiment against the zloty remains negative.

On Monday the zloty did not exploit calming comments from the government. Development minister Mateusz Morawiecki said in TVP Info that introduction of banking tax will not hurt the banking sector as it is well capitalized. He said there is not risk for the financial sector stability. Deputy finance minister Leszek Skiba said the general government deficit will not exceed 2.8 percent GDP (according to ISBnews agency). Skiba added that the next year deficit will be below 3 percent GDP and it will be reduced 0.25 percent on average starting in 2017.

On Monday zloty stabilized against the dollar and the British pound. The zloty dropped against the euro. Currently the probability the zloty will increase is rather low.