Daily analysis 03.01.2018

03.01.2018 12:49|Marcin Lipka

A slight sentiment cooling in emerging markets. ISM readings from the US industry and Fed minutes are in focus. The zloty revised recent increases and weakened to the main currencies by 0.01-0.02 PLN. December's data on inflation for Poland may be important for the zloty.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:00 p.m.: December's preliminary data on inflation from Poland (estimates: 2.1% YOY and 0.3% MOM),
  • 4:00 p.m.: Publication of ISM index from the US industry for December (estimate: 58.2 pts),
  • 8:00 p.m.: Minutes from December's Federal Reserve meeting.

Revision of recent movements. Important message from the Fed

Yesterday's session was very good for emerging currencies. Today the situation is very different. During the Asian session, the appetite for Malaysian ringgit or Taiwanese dollar increases was much smaller. The Korean won was depreciating while speeches from the finance ministry and the central bank (these institution members meet tomorrow) increased speculations that interventions that may weaken the KRW could be seen.

The first part of the European session shows that the dollar strengthened in relation to the euro. The EUR/USD dips also agree with the increase in the difference between yields on 10-year US and German government bonds, which may also suggest that the currency market will more closely correlate with debt instruments than it did at the end of last year. The spread between bonds was expanded from 197 to 201 basis points yesterday.

It is worth noting that in order to reverse the weak sentiment towards the US currency, many macroeconomic publications and market signals will be required. Today, in addition to the ISM index readings from the US industry (estimate: 58.2 points), investors will receive a record of the last meeting of the Federal Reserve's discussions. This signal may not be helpful to the dollar.

Three weeks ago, the entire meeting was relatively dovish despite an increase in interest rates. Inflation projections for subsequent years have not changed even considering that GDP growth has been revised upward. Moreover, two FOMC members wanted to keep interest rates unchanged during the vote.

After December's meeting, Charles Evans said that he is concerned that persistent factors are holding down inflation, rather than idiosyncratic transitory issues. Evans also drew attention to household inflation expectations, which may decrease below the 2% target. The FOMC member also stressed that "too many observers have the impression that our 2 percent objective is a ceiling that we do not wish inflation to breach, as opposed to the symmetric objective that it really is."

Similar arguments were also presented by another FOMC representative, Neel Kashkari, who decided to oppose the interest rate increase. The Fed representative from Minneapolis said that "it doesn’t appear that we are sustainably moving closer to our inflation target. Inflation expectations are low and may have already fallen." Kashkari also suggested that from a risk management perspective, the Federal Reserve has stronger tools to deal with higher rather than lower inflation.

First of all, the most important thing will be the number of FOMC members (including those who did not have the right to vote last year) who support a cautious approach to inflation. If it is noticed that the Fed is reluctant to any increases without any further inflation movements towards the target, then despite the recovery of the dollar in the last hours, pressure can then be seen on the US currency and US Treasury bond yields once again.

Slightly weaker zloty

The zloty depreciated in the morning. This was probably due to a slightly worse sentiment during the Asian session (stressed it in our morning video analysis) and falls on the EUR/USD caused by the appreciation of the dollar. The EUR/PLN appreciated to 4.17, while the USD/PLN tested the 3.47 level - a half percent higher than it was in the morning.

Inflationary data will be very important in the afternoon. The consensus shows that it slowed down in December to 2.1% YOY from 2.5% YOY in November. However, it is possible that this publication may be higher (possibly by 2.3%). If this is the case, some MPC members could have arguments that the expected slowdown of inflationary processes at the beginning of the year could be weaker than expected. This could mean a change in price path for the following quarters (higher inflation). This would be a positive signal for the zloty.

Today's FOMC statement may also have a positive impact on the zloty (details in previous paragraphs). Therefore, if higher inflation from Poland corresponds with concerns about the increase of inflation in the USA, the strengthening of the Polish zloty may be seen again.


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