Daily analysis 04.04.2016

Solid data from the US, but the dollar gains are limited. Record high current account in the UK and inconclusive opinion poll results weight on the pound. The zloty remains fairly stable to major currencies around midday.

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

The dollar remains fairly weak

On Friday the market wasn't able to make up its mind whether the solid jobs data is a reason to buy the US currency. But after a better than expected ISM reading and a significant jump in new orders (from 51.5 to 58.3 points) the dollar gained some value. However, the appreciation didn't last long and the “greenback” finished the weak around 1.14.

It confirms our scenario presented on Friday that investors remain reluctant to open new positions on the dollar and they are expected to wait for a series of solid economic reports to increase the odds for interest rate hike and boost the dollar.

The macroeconomic calendar is fairly empty this week but is worth noting the ISM services reading and the most recent “minutes” of the Federal Reserve meeting. Th “minutes” might bring some more details regarding the FOMC discussion on global threats and some fears that too steep monetary tightening might end with the need of cutting the benchmark back to zero-lower-bound.

Investors should be also interested in the comments from Fed's chairwoman. Janet Yellen is scheduled to take part in a discussion with former FOMC governors. Some “headlines” from that meeting might also bring some further weakness to the dollar especially that The Federal Reserve is not expected to withdraw form its current dovish bias soon.

The pound remains under pressure

The GBP/USD pair is still above 7-year lows recorded at the end of February this year but the overall condition on of the pound remains weak. The pound index calculated by Barclays dropped 8% and is at the lowest levels in 2 years. The EUR/GBP have also been moving higher. It rose to 0.8 level which is the highest since one and half years.

Besides concerns regarding Brexit the GBP may be under significant pressure from the recent current account data (C/A). According to the ONS in Q4 the C/A deficit topped 32 billion pounds (7% of the GDP) and in the whole 2015 it rose to 96.2 billion GBP (5.2% of the GDP). Both numbers are the highest since the 50s.

All key components of the C/A – trade, primary and secondary income – has significantly worsened. Additionally, the balance of services, which is traditionally positive for the UK, also slowed and was at lowest level since the Q2 of 2014.

The situation paints even worse if we look at the whole balance of payments. According to the ONS since 1997 the UK had a positive balance of the FDI. In 2011 it was 53.5 billion pounds. Year 2015 ended, however, with first since 20 years a negative FDI balance of minus 3.5 billion pounds.

The record high C/A combined with the negative net FDI may be a significant threat to the currency in the short term especially in the event of Brexit. If the new data are implemented to investment bank models they might mean that the depreciation of the currency which removes the imbalances would have to be really significant. As a result the previous estimates presented by the HSBC claiming a 15-20% pound slump might not be exaggerated.

The zloty remains stable

Trading on the Polish zloty is fairly neutral on Monday morning. Before the midday we had a set of conflicting news regarding the economy but it failed to spur much volatility. Eurostat published that Polish unemployment dropped 6.8% which is multi year low. After few minutes, however, Moody's, cited by Bloomberg, reported that “Polish constitutional crisis is credit negative”. The zloty's muted reaction regarding possible rating cut may be contributed to the fact that at least he “perspective” cut has already been priced in after a significant downgrade by S&P earlier this year.

In the short term the MPC conference on Wednesday is expected to be more important. The market will probably try to get some hits from the members where any of them is leaning toward interest rate cut in the following months. In our opinion, however, there will be very few such suggestions, so the pressure on the zloty should be limted.