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Daily analysis 06.07.2016

6 Jul 2016 13:26|Marcin Lipka

The pound increased its historical minimum against the dollar. Williams of the Fed underestimates the matter of Brexit, while Dudley wishes to wait for the situation to develop. The zloty and the forint are relatively stable, despite a clear increase in risk aversion. The most important element of today's MPC meeting.

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

  • 16.00: ISM index for the American services sector (estimations: 53.3 points).
  • 16.00: Press conference after the Monetary Policy Council meeting.
  • 20.00: Minutes from the recent Federal Reserve meeting.

Pound has clearly increased its minimum

The British currency has yet again increased its thirty-year minimum against the dollar. This time, however, the scale was definitely larger than previously. Yesterday, we wrote about a depreciation to the area of 1.31 on the GBP/USD. During the Asian session, this pair decreased to the 1.28 level. It took thirty-six hours to make a move of approximately 500 pbs. Since the referendum day, the total overvalue of the pound against the dollar was nearly 15%.

Considering that we are talking about a currency of one of the developed markets, these are very strong moves. On the other hand, the scale of problems is significant as well. Apart from the widely commented Brexit that may lead to the United Kingdom breakdown, there is also a serious leadership crisis within two of the main British parties. Moreover, deficit of the current account is at its record level.

The latter problem may be difficult to solve. This is even when we take under consideration the current depreciation of the pound. This deficit not only is a result of a huge surplus of import over export, but a negative balance of primary incomes as well (the difference between profits gained by the British investors abroad, and profits gained by the foreign investors in the UK). On the other hand, the currently positive services balance may reduce. Its significant part comes from the financial activity. If it is limited due to the loss of a part of the European market, the general deficit of the current account does not have to shrink clearly, despite wear-off of the pound, as well as a decrease in deficit of the products trade. This may sustain the decrease pressure on the pound.

Williams underestimates. Dudley waits

Yesterday, we have heard opinions regarding Brexit from two representatives of the Federal Reserve. John Williams claimed that the hikes in 2016 will be justified, if the forecasts appear real. The San Francisco Fed member also said that risk regarding Brexit is moderate, and he continues to estimate the 2016 economic growth for approximately 2%.

The statement from William Dudley was definitely more cautious. According to the MarketWatch website, the New York Fed chairman, as well as one of the most important FOMC members, said that, “we do not know what the next move of the Federal Reserve may be. We cannot foresee how the economy behaves. We were not able to foresee Brexit.”

Thus, it is rather unlikely that there will be any changes in the FOMC attitude after the July meeting. In our opinion, the dollar should remain the favorite in the currency market for the forthcoming months, regardless of the scenario. If it appears that the Brexit consequences are relatively mild, the Federal Reserve will return to a serious discussion regarding the hikes. On the other hand, if the economy slows down significantly because of the British referendum, the dollar will most likely remain the safe coast, especially for the emerging markets capital. This should support the condition of the American currency as well.

Zloty is slightly weaker. Retirement age will be decided next week

The zloty is slightly weaker than it was yesterday morning. However, condition of the Polish, as well as the Hungarian currency is not bad. Especially taking under consideration a visible deterioration in the global sentiment, as well as a strong overvalue of the pound. The press conference after the Monetary Policy Council meeting should be the main event today.

A suggestion whether the MPC is taking under consideration a decrease in monetary rates, if the economic slowdown is below the 3.0% level, is most likely to be to most valuable information for the market. Considering a mild fiscal policy, the Council will rather not want to decrease interest rates in our opinion. This is even considering that Brexit decreased significantly the GDP growth perspective.

On the other hand, it is interesting whether the NBP has considered Brexit in its forecasts for the new Inflation Report (today, we will only receive its crucial conclusions, and its entirety is most likely to be published on Monday), or has it presented a simulation on how may it impact the basic economic indexes.

Recently, we wrote a lot about consequences of hypothetical decrease in retirement age. The final decision was to be made at the government meeting yesterday. However, meeting of the Council of Ministers has been postponed for today. However, the official meeting order does not include the discussion regarding retirement age. According to the Prime Minister Beata Szydło, who was cited by the Bloomberg agency, “the government will discuss a possible decrease in retirement age next week.” Of course, it is difficult to say whether it has anything to do with the Fitch decision regarding Poland's rating that is planned for July 15th, or maybe this decision results from a necessity of discussing more important matters.

6 Jul 2016 13:26|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.

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