Daily analysis 06.04.2017

The market is trying to evaluate information regarding the minutes from the Federal Reserve, increasing risk of delaying the American fiscal reform and dovish message from the ECB. The zloty remains stable, but the perspective of unchanged interest rates in 2018 is fundamentally negative for the Polish currency.

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

• 13.30: The ECB minutes.
• 14.30: Weekly jobless claims from the USA (estimates: 250k).

Minutes and comments regarding fiscal changes

The market has received very interesting information over the past few hours. The Federal Reserve is preparing to reduce the central bank’s balance. This topic was the crucial element of the minutes from the Fed’s previous meeting. In addition, the minutes state, “provided that the economy continued to perform as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy is likely to be appropriate later this year”.

This means that the wallet of both treasury bonds and Mortgage-Backed Securities (MBS) will begin to reduce soon, which will cause the Fed’s balance to reduce as well. This is one of the elements of the monetary tightening, which should be positive for the dollar and support the profitability of American bonds.

Moreover, the general discussion regarding the economic situation has sustained the scenario of gradual rate hikes. One of the most interesting fragments of the minutes states that, “most participants continued to view the prospect of more expansionary fiscal policies as an upside risk to their economic forecasts”.

The Fed’s evaluation of the labor market, the real estates market and the industrial sector is positive as well. Moreover, the Fed claimed: “Although GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality”. In conclusion, the Fed seems relatively comfortable with the plan of continuing rate hikes. Nevertheless, the dollar became weaker at the end of the American session.

Shortly after the minutes, the dollar increased by approximately 0.1 percentage points. However, later the American currency started to decrease. This was most likely caused by statements from Paul Ryan of the House of Representatives, which were cited by both Reuters and CNBC shortly after the minutes.

According to these information agencies, Ryan suggested that the establishment of the tax reform may be even more time-consuming than replacing Obamacare. This information is negative for the dollar, especially that the new healthcare regulations haven’t been accepted yet. As a result, the impact of the minutes has been neutralized. Moreover, a decrease in the profitability of the American bonds has applied additional pressure on the dollar.

Testimonies from Draghi and Praet

Mario Draghi took note that the increasing inflation in the eurozone (from 1.4% to 2.0%) was mainly a result of the increasing prices of food and fuel, which is a temporary factor. Baseline inflation remains near 0.9%. Draghi also mentioned a low increase in salaries. The ECB chairman emphasized that the economic risks are focused on weak growth and there is no reason to resign from the forward guidance in the monetary policy.

Praet’s testimony was far more technical than Draghi’s. Nevertheless, it was clearly consistent with the ECB chairman’s statements. The ECB senior economist expects that, “the policy interest rate will remain at present or lower levels for an extended period of time and well past the horizon of our net asset purchases”. The euro had clearly weakened due to these comments, but managed to work-off a significant portion of these losses before noon. However, the European currency may remain under pressure, if it appears that works on the American fiscal package have accelerated.

Unambiguous message from MPC

Yesterday’s press conference from the MPC was relatively calm. However, chairman Glapiński presented a clearly dovish attitude in the end. According to the Polish Press Agency, he suggested that there are no chances for rate hikes in Poland this year, for the time being. He also added that he doesn’t see any reason for rate hikes next year as well. However, he claimed that he may be outvoted in his views.

This has clearly defined the MPC attitude, which will most likely be negative for the zloty. However, the sentiment towards the emerging markets is positive for the time being. Therefore, the negative impact from the MPC has been eclipsed. Nevertheless, in the case of sentiment deterioration, the zloty may lose significantly more than the other emerging market currencies. Moreover, the MPC attitude is reducing the chances for the zloty’s large appreciation scale, if the positive sentiment towards the EM continues.