Afternoon analysis 30.10.2014

The dollar was fueled by solid economic data as the Fed shifts to tightening. The zloty rose against the euro and the dollar. The Polish government debt slightly fell.

After some hawkish statements from the Federal Reserve on Thursday, today we have seen another surprise in better than expected data from the United States. The gross domestic product growth stood at 3.5 percent (annualized) in the third quarter – more than 3 percent expected by economists surveyed by Bloomberg. In the previous three-month period the GDP growth was 4.6 percent.

Solid numbers came after very good second quarter, when the economy rebounded form the previous poor quarter. Therefore, recent reports confirmed that the US economy maintained to keep momentum. The economy growth was spurred by an increased government spending and positive contribution of a better trade balance. Back to back growth in the previous quarters was the highest since 2003.

In addition, the labor market data was quite good. The unemployment claims was a little higher than expected at 287k but coupled with very strong employment growth and the employment rate near 6 percent signaled, that labor market conditions are strong.

The labor market was the major premise for the Federal Open Market Committee to ultimately end quantitative easing. However, the Fed remained in an accommodative stance as it will continue to reinvest interest payments from its assets holdings. Moreover, the US central bank preserved phrase that rates will stay near zero level for a “considerable time” after the end of QE. To sum up, the Fed is going to raise the rates in the second half of 2015. That means we are encroaching in a period of a strong dollar.

The zloty lowest since July 2013

The hawkish Fed pushed the zloty lower against the dollar. The US currency hit 3.3657 – the highest level since July 2013. Later, however, the Polish currency recouped losses.

For the Polish market, the Fed move may signal a significant correction as the US investors leave high yielding assets from emerging markets for dollar-denominated assets. The impact of this factor was apparent on Thursday as the Polish 10-year government bond yields rose to 2.64 percent from a record low 2.591 percent yesterday. But the drop of bond prices was tamed in the second part of the session.

In the long term CEE assets may benefit from the agreement between Russia and Ukraine on restarting gas supplies. Today ITAR-TASS said that the parties are close to a final accord as the European Union agreed to provide additional funds for Kiev (around 1 billion euro). But the list of the Ukrainian problems is much longer. The GDP fell 5.1 percent in the third quarter and the policymakers wrangle on the leadership position in a coalition talks.

The second part of today's session provided some relief for the euro as the common currency gained ground after severe losses. Nevertheless, the long term view on the EUR/USD is negative as the Fed is tightening and the ECB moves in the opposite direction.

Eventually, Thursday's afternoon was somewhat positive for the zloty. The Polish currency exploited a rebound of the euro. Additionaly, the zloty was supported by the International Monetary Fund comments about the economy which may need support from a more loose monetary policy. The statement confronted with a rather hawkish view presented by the Monetary Policy Members on the media in the recent days was supportive for the zloty.