Daily analysis 04.01.2017

The dollar worked-off its yesterday’s records. Taking into consideration the changes from the Fed’s meeting in December, the minutes should be relatively hawkish. Increasing expectations regarding rate hikes in Poland are beginning to support the zloty.

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

• 20.00: The minutes from the previous Federal Reserve’s meeting,

Too many signals

The market has received many signals within the past few hours. Increasing oil quotations, caused by production limits in Kuwait and Oman, appeared supportive for profitability of the American treasury bonds. Moreover, surprisingly positive ISM reading from the American industry (production and new orders exceeded the level of 60 points) caused the EUR/USD to increase its fourteen-year minimum.

However, everything changed yesterday evening. Oil quotations started falling from their one-and-a-half year peaks. Perhaps, investors were hoping that more countries will confirm production limits, which didn’t happen. This decreased evaluation of the future American interest rates, as well as evaluation of the dollar.

Additionally, the market might have recalled the positive PMI readings from the euro zone, as well as rapid inflation growth in Germany. However, the Eurostat data currently show that the price growth in the euro zone was not as strong, as the previous estimations suggested. In comparison to November, the baseline inflation increased by 0.1%. Moreover, this index remained at the same level in the Year over Year interpretation (0.9%). The ECB shouldn’t be under pressure of withdrawing from the QE program sooner, for the time being. This may keep the euro at a low level.

Minutes from December

The Federal Reserve raised rate hikes in December. Moreover, the majority of the Fed members are in favor of performing three hikes in 2017 (0.25% each). Currently, the market estimates that the American interest rates will be raised by 0.6% by the end of this year.

The opinion regarding today’s minutes are diversified. However, we’re assuming a relatively hawkish message, which will consist of two elements. There might have been a discussion regarding changes in fiscal policy. Despite that this element is still burdened with large uncertainty, at least a portion of Trump’s announcements (decrease in taxes for households and companies) will most likely be implemented. This is because they are consistent with plans from the Republicans, who have the majority in the Congress.

Therefore, we may expect some FOMC members to justify their change of hearts with a milder fiscal policy. The discussion regarding increasing value of the dollar may be interesting as well. Some FOMC members may consider that this would decrease competitiveness of the American currency. However, we claim that the attitude, which has been represented by William Dudley, will prevail.

In his interview with CNBC a few weeks ago, Dudley drew a clear line between a negative impact of the strong dollar (related with viewing the USD as a safe coast) and the capital flow related to positive economic perspectives in the USA. Moreover, we need to keep in mind that export is not as significant for the USA, as it is for Europe or some Asian countries. This index is less than 15% of the American GDP, while in Germany, export is approximately 50% of the GDP.

However, we don’t expect the minutes to contain any suggestions of new rate hikes. This would make the message too hawkish and would increase the market volatility, which is unnecessary. In general, the minutes should be positive for the USD.

Expectations regarding rate hikes

The zloty has been strengthening over the past few hours. Not only has it gained against the euro or the dollar, but also against the forint. This is most likely caused by increasing expectations regarding rate hikes in Poland. The FRA 9X12 contracts, which estimate the potential WIBORM3 level within the next nine months, are currently at the level of 1.90%. Meanwhile, this index was within the range of 1.76-1.82% in December. Moreover, this is its highest level since September 2014.

This move on the future interest rates has raised the bar before the MPC meeting next Wednesday. If the Council suggests a more hawkish attitude, we may observe a clear pressure on the PLN value, especially that potential rate hikes are currently very unlikely in Hungary, as well as in the Czech Republic. This supports the scenario that the EUR/PLN would remain near 4.40, even if the opinions from the rating agencies are negative.