Daily analysis 05.04.2016

The testimony from Haruhiko Kuroda caused the global sentiment to weaken. Rosengren and Evans do not want the market to assume less than two hikes for this year. PMI from the UK is only slightly better than in the recent past. However, it still is clearly worse than the readings from the previous quarters. The zloty remains stable before tomorrow's meeting of the MPC.

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

• 16.00: ISM reading from the American services sector (estimations: 54.2 points).

Worse global sentiment

Testimony from the chairman of the Japanese central bank in the parliament, increased the global aversion towards risk. According to the participants of the yen market, the speech clearly lacked direct suggestions about a possibility of interventions to wear off the Japanese currency. From the beginning of the year, the yen strengthened by approximately 8% against the dollar, and approximately 4% against the currencies basket.

However, the basic question of the global market remains – is the stronger yen really a danger to the global sentiment? Theoretically, it is a good indicator for risk aversion. The JPY has been used for the carry trade transactions (borrowing the funds in a low-rate currency, and depositing them, where the return rate may be higher) for many years. In short, strengthening of the yen simply means the return of the capital from riskier assets. This should translate to a stronger yen, a decrease in stock markets, and lower evaluation of the emerging currencies.

However, this correlation has been disturbed recently. For two months, the yen has been clearly stronger. This period was also related to appreciation in the markets of emerging currencies, and increases in the stock markets of developed countries. Thus, the signals coming from the yen may be dimmed by the decisions of the other central banks (most of all the Fed), or moves in the raw materials market.

It is possible that today's deterioration of the sentiment may not last for long. The market is more likely to focus more carefully on what the FOMC representatives will suggest.

Rosengren and Evans

The market had received statements from the two dovish Fed representatives since yesterday. Charles Evans (who was recently speaking quite often), said that we may see one hike in mid-2016 or at the end of this Summer, and the second one at the end of the year. In general, this message is consistent with what Evens previously suggested. However, postponement of this year's first hike in September would rather be considered as a slightly milder signal.

Statements from Eric Rosengren were much more significant. Despite the fact that initially his testimony was supposed to concern “cyber-risks,” the Boston Fed representative spoke much about the current monetary policy of the Federal Reserve. Rosengren took note that the market estimates only one hike this year, as well as one next year.

According to the FOMC representative, “the return to the monetary tightening will probably occur sooner than suggested by the behavior of the terminal market.” Direct reference on the market's expectations may suggest that even the dovish part of the Fed (represented by Rosengren) does not want expectations of investors to go too far from two hikes, which were suggested in the March announcement.

This may also suggest that if the global situation does not deteriorate, and the American macroeconomic data is consistent with expectations, the FOMC may consider an increase in interest rates more seriously. Thus, it is worth observing today's reading of ISM index from the American services sector. If the value of this index exceeds the expected 54 points, and the employment component returns above the level of 50 points, we can expect a slow rebuilding of long positions on the dollar. Also, it will become less likely that the EUR/USD reaches its new maximum within the forthcoming days.

PMI from the UK remains weak

PMI from the British services sector took a rebound from its three-year minimum at the level of 52.7 points. Currently, its value is at the level of 53.7 points. However, considering the history of previous readings and the long-term average at the level of 55.2 points, today's publication remains relatively weak.

In his comment to the data, Chris Williamson, economist of Markit, wrote that the PMI readings suggest a slowdown of the GDP. In the fourth quarter of 2015, the GDP reached a pace of 0.6%, while in this year's first quarter it was 0.4%. Williamson also added that, “the surveys suggest a further weakening of increase in the second quarter.” Thus, considering the average data from the United Kingdom and danger of the Brexit, chances for a clearer rebound of the pound against the main currencies is not the base case scenario.

Zloty is relatively stable

Today's deterioration in the global sentiment reflected in a decrease in the stock markets of developed countries. However, it did not translate to a clear wear-off of the zloty. Mainly, it is a result of very mild global monetary conditions. Moreover, the Monetary Policy Council will probably decide not to cut interest rates in Poland.

This fact will probably be confirmed by tomorrow's announcement after the Council's meeting, and during the press conference of chairman Belka. If the MPC sustains its conservative approach, it should stabilize the PLN, even during moments of deterioration of the global sentiment.