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Daily analysis 04.12.2017

4 Dec 2017 12:27|Marcin Lipka

The dollar has been supported by reports on the US Tax Bill, but US currency movements were still quite limited despite significant changes in debt instruments. The pound waited for a breakthrough. The zloty pared Friday's losses. The EUR/PLN pair again in the range of 4.20-4.21. Tomorrow the outcome of December's MPC meeting will be observed.

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

  • No macro data that can clearly influence the analysed currency pairs.

Stronger dollar

At Friday’s closing, the EUR/USD pair was close to 1.1900, but the market did not yet know the Senate's vote on changes in the US tax system at that time. It wasn’t until Saturday morning that it was voted on by the Upper Chamber of Congress. It doesn’t differ much from what was announced. Corporate taxes are to be reduced to 20% beginning in 2019. There is also a different number of PIT thresholds than in the House of Representatives version.

This means that in coming days, Congress will work to continue to create a unified form which will again be voted on by both the House of Representatives and the Senate. However, the probability of proposed changes being adopted is still growing, especially as the legislative process has already gone quite far and many Republicans are supportive of the compromise version so far.

It is also possible that the position of the White House might become more flexible at the final moment. Today, the Wall Street Journal wrote that President Trump's position on CIT at the level of 20% has been weakened. During the weekend, he said that it could even move to 22% to allow higher deductions related to children or state taxes, etc. It is still unclear whether it will be possible to implement a CIT cut from next year or in 2019.

Generally, the dollar appreciated in comparison to Friday’s closing by approx. 0.5%. However, these changes seem to be minor considering the movements on debt instruments. The yields on bonds maturing in 2 years have reached 1.80% (the highest level in over 9 years). The yields on instruments bonds maturing in 5 years amounted to 2.16%, reaching 6-year highs. Additionally, by the end of 2018, the interest rate market measures more than 3 interest rate increases by 0.25 core points (0.77 percentage points). With changes such as this, the response to the USD is rather moderate.

Important days for the pound

Last week, especially the beginning, was positive for the sterling. The coming days may also be important for the British currency. On Monday, talks between the main negotiators of the London-Brussels divorce are scheduled, as well as the meeting of European Commission President Juncker and British Prime Minister May. The Brexit bill seems to be close to settling. However, the question of the Irish border and the European Court of Justice (ECJ) from which the United Kingdom would like to leave its jurisdiction, however, may not be easy (at least during the expected 2-year transitional period).

Since the strong movements in the Brexit Bill have been evoked by unofficial statements of negotiators, it may be similar this time. It looks like the pound's room for growth in the increasing probability of agreement on key issues may still be quite large. For the GBP/PLN pair, this could mean an approach to the 4.90 level. In turn, if conversations were to fail (not the core scenario), then the pound could lose its recent increases.

Polish MPC sensitive to inflation?

Other historical records on S&P500 futures contracts and the higher opening of the European trading market supported the zloty's exchange rate at the start of Monday's session. Additionally, a relatively small appreciation of the dollar despite the fact that Congress has taken another step in introducing tax changes also favoured the Polish currency.

The event of this week for the market will be marked by a December meeting of the Polish MPC. It will be crucial whether Tuesday's statement or press conference will significantly address the inflation which its growth was stronger than expected. If the dovish members (among other the President of Glapiński) had started to modify their position so far, it may support the zloty could make it possible for the EUR/PLN to reach as low as a 4.20 boundary.

However, a scenario where the MPC maintains its latest view of not needing interest rate changes and that inflationary pressures are likely to be lower in the coming months seems to be more possible. More attention will be paid to the NBP's March projections which may become a sufficient argument for changing attitudes in a quarter. Therefore, it seems unlikely that Tuesday's statement from the Council will give the zloty reasons to appreciate.

4 Dec 2017 12:27|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

1 Dec 2017 15:31

Afternoon analysis 01.12.2017

1 Dec 2017 12:49

Daily analysis 01.12.2017

30 Nov 2017 15:38

Afternoon analysis 30.11.2017

30 Nov 2017 12:48

Daily analysis 30.11.2017

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