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Afternoon analysis 27.10.2015

27 Oct 2015 17:37|Marcin Lipka

The dollar gained before the Federal Open Market Committee's decision on the interest rates. The zloty remained weak as political risk prevails.

Today's data from the US was disappointing. Industrial orders missed the forecast as it dropped 1.2 percent. Also, the core orders data was weaker than projected. In addition, the Conference Board consumer sentiment index was below expectations. The housing market reading was in line with the forecast. The S&P/Case-Shiller index increased 5.1 percent on a yearly basis. It confirmed a steady expansion in the housing market.

However, the readings will not alter the FOMC's decision. The US central bank is expected to leave rates unchanged at record lows. The statement will likely leave doors open to increase rates in December. In general, the majority of central bank members, including the Fed Chair Janet Yellen, support a similar scenario. In addition, improvement in the US reports, the calming of anxiety concerning the Chinese situation, and the prospect that the European Central Bank will expand its stimulus, all support the tightening in the US.

If the FOMC's statement is quite hawkish, it will support the dollar. As a result, the emerging market currencies will be additionally pressured. Given the situation, the zloty may drop even more, as the currency has been negatively affected by political risk.

Weak zloty

The National Bank of Poland President Marek Belka, calmed the situation down. The President of the NBP said, that promises made during election campaigns will likely be forgotten. In his view, there is no way to force the NBP to "print money" as it is forbidden by the Polish constitution.

Marek Belka criticized the project of financing credits to small businesses using the central bank. His opinion is that,in Poland, there is a problem with credit demand, but not with supply. The NBP Chief criticized the proposal to increase taxes in the banking sector and converse franc-denominated credits. It will undermine the banking system's ability to finance the economic growth.

Henryk Kowalczyk, who is responsible for economic program in the PiS party, currently sees no need to use the central bank to support the credit action. Earlier, he announced the plan to spend as much as 350 billion PLN using the central bank. However, Kowalczyk considers the proposal to converse franc credits as reasonable. He also supports the plan to offer aid to families with more than two kids, which may cost as much as 20 billion PLN.

Moody's Investors Service considered the voting outcome as a threat to Poland's credit rating. The agency cited the major PiS proposals as negative to public finance. It also criticized the proposal to use the central bank to stimulate the economy. However, Moody is not expecting the budget deficit to be higher than 3 percent.

The post-election turmoil is hurting the zloty. The Polish currency did not manage to tame losses. However, the rebound potential of the zloty will be limited by the outlook for tightening in the US.

27 Oct 2015 17:37|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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