The interview with Lockhart for “The Wall Street Journal” caused significant changes on the FX market, but the reaction might be overstated. More data from the US – ADP and the ISM readings. The zloty significantly weakened not only to the dollar but also to the euro.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.15: Payrolls change according to the ADP (survey: +215k).
- 16.00: The ISM non-manufacturing index (survey 55.2 points).
Hawkish but the reaction might be too strong
There was only one reason behind the significant appreciation of the US currency yesterday evening. Dennis Lockhart, the voting Fed member from Atlanta who is also regarded as a neutral central banker told “The Wall Street Journal” that “it will take a significant deterioration in the economic picture for me to be disinclined to move ahead”.
He was commenting on the idea concerning an interest rate hike in September. The market quickly connected facts and interpreted the message as hawkish. The probability for an interest rate hike during the next meeting rose from 38% to 50% according to Bloomberg calculations. At the same time the dollar rose markedly and the EUR/USD dropped to 1.0850.
It is certain that the message was hawkish and brings us closer to the first hike for almost 10 years. However, there is one question, whether the market has overestimated one comment from a single Fed official.
This might have happened if we look at the broader perspective. Firstly, investors were surprised by the comments. Lockhart’s speech was scheduled on August 10th. However, no one expected the interview with “WSJ”. It was published in the second part of the US session, which is characterized by lower liquidity on the FX.
Another possibly confusing element was the fact that the “WSJ” published two articles. The first one is Jon Hilsenrath’s article and the second is the full interview. The interpretation of Lockhart’s words in the Hilsenrath material is spotless, but when we look at the full interview it is much calmer. Lockhart was also saying that moving the decisions on by one meeting or a quarter “isn't going to make a significant difference to the economy. I don't think it would be a big policy error to wait somewhat longer.”
The last reason why the reaction can be regarded as overstated is that Lockhart in May claimed that his preferable hike date is September. Broadly the data since that time didn't really change much and the Fed's chief from Atlanta just confirmed his view.
The summarizing comments from Lockhart were hawkish but taking into account its full context and some previous opinions, the market reaction might have overstated its importance and can be corrected by either other less hawkish comments from other FOMC participants or by weaker data from across the pond.
The ISM and ADP in focus
The surprising comments from Lockhart are expected to be confronted today by US data. Mainly investors are scheduled to focus on the ADP reading. Taking into account some recent nervous reactions even a fairly small difference (20-30k) between the consensus (215k) and the published data can be an argument for significant change on the dollar valuation.
Important data should also be the ISM non-manufacturing publication and especially subindexes on new orders, employment and prices. Readings from June showed that the job market index dropped to 52.7. A further slide may be negative for the dollar.
The foreign market in a few sentences
Despite the fact that Lockhart’s comments confirmed the scenario presented before in one of the previous analyses of the first interest rate hike in September the market reaction was overstated taking into account the fairly balanced statement from the Fed and previous opinions by the FOMC's member from Atlanta. As a result, if today's data turns out to be weaker the dollar can be corrected. On the other hand, if both ADP and ISM beat expectations the dollar can continue its bullish move and the EUR/USD may even drop below 1.0800.
Significant slide on the zloty
Two days ago in our video comments and yesterday in the daily analysis we stressed that the zloty looked weak taking into account the solid PMI from Poland. On Tuesday evening, even before Lockhart’s comments, this weakness was seen when the forint’s fall was quickly translated to the zloty's slide.
Additionally after the hawkish Lochkart view and in low liquidity on the EUR/PLN the pair topped 4.18. Today, in the morning the move was partly corrected but the local currency remains under selling pressure and it is possible that it may top 4.20 as early as this week.
The zloty is even weaker to the dollar. A faster interest rate hike perspective in the US and some capital outflow from other EM currencies caused that the dollar is worth 3.85. In the case of stronger readings from the US on Friday the dollar may even top 3.90 at the end of the week.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/PLN rate: