Daily analysis 02.08.2016

The RBA lowered interest rates but the reaction of the AUD was relatively muted. The new stimulus package from Japan is softer than expected. The zloty significantly appreciates after the Presidential office presented a new proposal on foreign mortgage loans.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• No major macroeconomic data that may significantly affect the analyzed pairs.

A cut in Australia

In the morning, the Reserve Bank of Australia (RBA) decided to lower interest rates. In general, the movement of the central bank was expected and economists polled by Bloomberg anticipated a cut by 25 basis points to 1.5%. It is worth noting however that the Australian economy is still not balanced.

The GDP growth is primarily associated with the consumption of households and the boom in the real estate market. Although the RBA statement notes the introduction by the financial supervision of stricter lending conditions and the increase in the supply of real estate, but these are only early stage elements.

Looking at the current account, Australia's economy is not balanced. It suffers from a 5% current account deficit. In large part, it is due to the deficit on the goods accounts. This is still the effect of the recently ended boom in commodities. When industrial metals were booming, the trade was balanced, but when the slump in prices started and the demand from EM economies lessened, the deficit significantly widened.

Theoretically, the AUD is likely to be worth much less than 75 US cents. The industrial metal boom is unlikely to return quickly and the economy will have to be pushed into balance. It would be probably be executed by a lower AUD rate.

The Australian dollar is, however, supported by a fairly restrictive monetary policy, especially in comparison to other developed economies. It attracts yield-hungry foreign capital. But in looking at the interest rates, future cuts are on the horizon in the future so any AUD appreciation will be limited to a favorable global sentiment - but on the other hand, the slide can be substantial if the risk-off environment returns.

Below market expectations

Today, the Japanese government announced details of the program aimed to stimulate the economy. Around 4.6 trillion yen (45 billion dollars) will be spent on investments in infrastructure and to avert negative demographic processes this year. Overall, the package is expected to be worth about $ 130 billion.

This is not a small amount of money, taking into account the size of the Japanese economy, but the expectation was for it to be worth around $280 billion. As a result, the yen strengthened in relation to the dollar. In addition, the general weakness of the US currency after worse-than-expected readings of the US GDP published last Friday pushed the EUR/USD above the 1.1200 mark.

The dollar wasn’t supported by the fairly good manufacturing ISM reading. Both the production and new orders were strong and exceeded the 55 level. Overall, as we wrote on Friday and Monday, the dollar will be under pressure due to the low headline GDP reading. It cannot be ignored by the FOMC even though the low growth is a technical rather than an economic issue.

Of course, it doesn’t mean that investors should ignore all the incoming data, but the readings would have to be significantly above expectations to fuel any discussion regarding interest rate hikes. The incoming payrolls would have to be revised upwards for the two last months, and the current reading would have to be above 200k to give some hope for an appreciation of the dollar.

A significant zloty appreciation

Since early this morning, investors have been mainly focused on expectations regarding the Presidential proposal concerning foreign exchange loans. The appreciation of many banking stocks had already been fueled by the Rzeczpospolita newspaper, which suggested that the banks would just have to return spreads and there will be no conversions to the zloty.

In the conference, in addition to the Presidential Office officials, the NBP chief also took part. Overall the costs for banks is expected to be around 3.6-4.0 billion zlotys - which is several times less than was earlier expected. Moreover, the MPC governor said that the zloty is currently “significantly undervalued."

As a result, in the early afternoon, the EUR/PLN fell to the level of 4.32. Other currencies are also cheaper by about 1%. This brought the GBP / PLN to its more-than-two-year lows, around the 5.11 level. If nothing changes in terms of foreign currency loans, we can assume that the new equilibrium level for the EUR / PLN will be around 4.30 and the franc should remain slightly below the 4.00 zł.