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Daily analysis 07.04.2016

7 Apr 2016 13:39|Marcin Lipka

The evaluation of the EUR/USD has been affected by many factors in recent hours. Were the minutes more hawkish than expected? The view that the Polish policy regarding interest rates will remain unchanged in the forthcoming months, is supported by yesterday's MPC meeting.

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

  • 14.30: New jobless claims from the USA (estimations: 270k).
  • 23.30: Janet Yellen will participate in a discussion with the former Federal Reserve chairmen.

Accumulation of factors

The rather chaotic behavior of the main currency pair within recent hours is a result of overlapping of many factors in a short time. The situation on the EUR/USD is affected by changes on the yen, as well as on the pound, an increase in oil prices, and moves on the American stock market. Moreover, the market received yesterday's publication of the minutes from the Federal Reserve, as well as today's signals from the ECB.

When trying to put all these matters in order, it is worth noting the events from yesterday afternoon. An increased move on the EUR/USD (from the area of 1.1350 to 1.1420), has been initiated by appreciation of the EUR/GBP pair. This was a result of a wear-off of the pound, as well as a decrease in contracts for the S&P 500 before the opening of the stock market in the USA.

Signals from the shares market and the pound market were joined by the issue of oil. According to the EIA, its supplies decreased more than indicated by the API data from the day before. This caused a clear rebound of the WTI and Brent oil. Theoretically, this is a positive signal for the dollar, so it should cause the main currency pair to overvalue. However, higher evaluation of oil is better for the currencies of countries which export raw materials. As a result, the purchase of the rouble, Australian dollar, Mexican peso, and the rand, caused a slight wear-off of the USD. This pushed the EUR/USD upwards.

Yesterday's publication of the minutes from the Fed were yet another impulse for the main currency pair. It is worth noting that the general message was dovish. This is concerning, especially due to anxieties regarding the global situation, expectations regarding inflation, as well as the lack of will for preemptive hikes (which could increase the risk of a fast return to interest rates at the level of 0%). However, the above topics were recently discussed at length.. The minutes were dovish, but not more than the market participants expected.

On the other hand, the minutes also contained a few elements concerning monetary tightening. Two FOMC representatives were in favor of hikes in March, and some of them indicated that, “an increase in interest rates at the forthcoming meeting might be justified, if the forthcoming macroeconomic data is consistent with expectations.” This statement may be considered as a hawkish conclusion, and it probably translated to growth of the USD, as well as a profitability of the 2-year American treasury bonds, right after the minutes were published.

The dollar did not increase more because of a significant appreciation of the JPY against the USD during the Asian session. This caused a general sale of the USD, and an increase in the main currency pair. As if the above factors are not enough, we received a few comments from the ECB representatives today.

Vitor Constancio, the ECB vice-chairman in Brussels, said that he is ready to do anything necessary so that inflation in the euro zone returns to its target. Mario Draghi wrote in his annual ECB report that the monetary authorities will not surrender to a slow increase in prices. This was negative information for the euro, and caused the EUR/USD to go from its 5-month peak (1.1450) down to the area of 1.1370.

Direct and indirect signals on the main currency pair will probably remain as they are. However, the market should return to a more fundamental approach relatively soon. This approach is mainly based on evaluating the new macro data, as well as the opinions of particular Fed members in the context of monetary tightening in the USA.

Within the perspective of the forthcoming hours, investors will probably focus on the discussion between Janet Yellen and the former chairmen of the Federal Reserve. The meeting begins at 23.30 (11.30 PM). Considering the recent comments from the FOMC chairwoman, we can yet again expect dovish comments. This time, however, their impact may be limited, due to the fact that they are more included in the current prices.

Zloty should stabilize

Yesterday's announcement, as well as the press conference held after the MPC meeting, should support the view that the Polish monetary policy will not change within the forthcoming months. When it comes to signals from the Polish national market, the reduction of expectations regarding a decrease in interest rates is a factor which will stabilize the zloty.

On the other hand, the global situation remains volatile. Moreover, it is affected by many factors. Thus, a typical approach of an increase or a decrease in risk aversion, does not always translate to evaluation of the PLN. This suggests that the EUR/PLN and the CHF/PLN may experience some bigger and more chaotic fluctuations in the short term. However, assuming that the global factors will calm down, and the MPC policy will be relatively hawkish, we should observe a stabilization of the PLN for the long term.

7 Apr 2016 13:39|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 05.04.2016

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