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Daily analysis 07.01.2016

7 Jan 2016 13:15|Marcin Lipka

Events from China in the spot, but when the dust settles investors should return to evaluation of the US economy. Solid data from the US with limited impact on the dollar so far. The zloty is significantly weaker in risk aversion environment.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • Weekly jobless claims from the US (survey: 275k).

China is crucial but other issues are set to be also important

There is no doubt that the situation on the Chinese market creates most of the moves on currencies, stocks, bonds and commodities. However, it is worth to look through this main event and analyze the other most recent reports.

Firstly the EUR/USD valuation is closely dependent on several issues. On of them is China, of course. The risk aversion is positive for the funding currency for the carry trade. As a result it pushes the main pair higher.

The other element which can significantly deviate the EUR/USD is the US economy and signals from the Fed. The most recent minutes were slightly more dovish then expected. Besides the fact that all members backed the hike, which was already known from the statement, “some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely”.

On the other hand macroeconomic reports from across the pond were reasonably good. According to the ADP report the US crated more than 250k jobs in private sector in December while the expectations were around 200k. Additionally it is the highest report since the 12 months and it may be a positive message before the official Labor Department report.

The services ISM should also support the US dollar. Despite that the Wednesday's publication was slightly below the forecast (55.3 vs 56 points) the publication was still good. The most important sub indexes rose and were quite solid – production 58.7 points, employment 55.7, and new orders 58.2. The 50 level separates expansion from contractions. Mostly the readings are between 45-60 range.

It is also worth to quote comments from Stanley Fischer. The vice chair of the Fed suggested on CNBC yesterday that he supports the base case scenario of four hikes this year. It is also the median expectation from all FOMC members. It is also the element which should support the US dollar in the long term especially that the market currency prices in only two rate increases.

Finally, assuming that the element which significantly disturbs the EUR/USD valuation – Chinese panic – abates, the other issues should take the lead in generating changes on the currencies. Taking into the account that US readings are fairly solid and speculations on further easing from the ECB, the EUR/USD should heading toward weakness.

The foreign markets in a few sentences

In the following days most of the moves on currencies ale still expected to be generated from China. However, assuming the base case scenario that the stock market sell off and yuan devaluation do not mean significant deterioration of Beijing economic conditions the situation should stabilize as it was observed in August. Then much more attention would be focused on interest rate perspective in the US. As a result the dollar should be supported in the following weeks.

The Polish currency remains weaker

The zloty lost around 2% of value since the beginning of the year. What is interesting the similar slide is noted toward the forint. The Hungarian currency resisted to the downward pressure and was fairly stable in the recent days.

If we return to similar conditions observed during the sell off in China in mid August last year both forint and the zloty were trading likewise. At that time the EUR/PLN rose from 4.18 to 4.24 and the EUR/HUF appreciated from 310 to 315. Additionally there were even stronger moves on Shanghai stock exchange. In six session the index lost 25% value and the reaction was much calmer.

The zloty's weakness might be partly the effect from weaker sentiment toward the domestic assets and still expectations for the interest cut. On the other hand the element of monetary easing might be overstated. There is a fairly slim chance that during heightened market volatility the new MPC members would be eager to decrease the benchmark. As a result when the significant tensions abate both EUR/PLN and CHF/PLN should fairly quickly return below 4.30 and 4.00 respectively

7 Jan 2016 13:15|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:

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Afternoon analysis 04.01.2016

4 Jan 2016 13:13

Daily analysis 04.01.2016

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