Daily analysis 07.10.2015

Elements which disturbed investors’ view on the US currency. Williams firms on tightening perspective this year. The Polish MPC remains bullish on the domestic economy and sceptical regarding interest rate cuts. The zloty is gaining value.

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

• No major economic data which may significantly affect the analysed pairs.

Side elements disturbed the dollar

Yesterday we suggested that John Williams, president of San Francisco Fed, whose view on monetary policy is close to the FOMC consensus would like to convince market participants that an interest rate hike this year remains the base case scenario. It turned out to be true, but the suggestions didn't translate into dollar strength due to the following reasons.

Firstly, the data on US trade was weak. The deficit for August was the second largest since April 2012 and topped 48 billion USD. Additionally, the 6-month average was pushed to around 46 billion which is very close to 6-year highs. It is a fundamentally negative element for the US currency.

Another issue was the revision of the global GDP growth by the International Monetary Fund (IMF). The Fund again lowered the growth prospects both for this and next year. In April, the IMF expected the global economy to grow at a 3.5% annual rate. Both in July and October the expectations were lowered by 0.2 percentage points. Some market participants may conclude that lower global growth can restrain the Fed's interest rate hike.

The commodity rebound was also negative for the US currency. Crude oil soared by 5% on lower US production estimates published by the EIA and a fall in inventories according to API. It pushed many raw materials driven currencies higher. Indonesian rupee. Malaysian ringgit or Russian rouble gained around 4% to the dollar since the beginning of the weak. It also had a slightly negative impact on the US currency

As a result, investors focused on the negative messages for the dollar even after fairly hawkish comments from John Williams. The statement from the Fed member was very similar to the previous one, but answers in the Q&A session firmly kept the interest rate hike perspective for this year.

Williams claimed that “the latest employment figures didn't change his view on when the Fed should raise its benchmark short-term interest rate from near zero” reports Dow Jones, Newswires. He also stressed that the September jobs report was “decent” and no obstacle for the Fed acting before the end of the year.

From Williams’ comments there are two outcomes. Firstly, the Fed clearly lowers the bar regarding the payrolls creation. It is logical, as we suggested such a strategy in the previous analysis. It is not possible to create 200k new jobs on a monthly basis because in a few years the unemployment will be pushed into negative territory.

The other outcome is that the Federal Reserve would like to withdraw from the interest rates hike this year. Something really significant would need to happen in order to modify the central view from the Federal Reserve. As a result, the following comments from the neutral Fed members should confirm the base case scenario and push the dollar slightly higher despite the fact that in some time other issues can disturb this tendency.

The foreign market in a few sentences

The bullish sentiment on commodities and neutral sentiment on the capital markets should keep the EUR/USD around the current levels. However, if market participants get more hints about a monetary tightening in the US the dollar should benefit.

Polish MPC far from cuts

The MPC meeting was quite surprising yesterday. The Polish monetary council left the benchmark unchanged as expected but the optimism regarding the domestic economy was surprising. It was expressed both in the statement and in the Q&A session.

The Committee claims that, “in Poland, stable economic growth continues, driven mainly by rising domestic demand, which is supported by favourable labour market developments, consumer confidence and financial standing of enterprises, as well as by stable lending growth”. Regarding the most recent weak reading the MPC sees “their decline will probably prove temporary”.

During the conference governor Belka suggested that the odds for interest rate cuts were very low. Also, the most dovish MPC member, professor Osiatyński, withdrew from earlier suggestions expressed in the PAP interview that there might be some space for a cut by 25-50 points and stressed that such a decision at this moment is doubtful.

As a result, interest rate cuts suggested by the FRA 9x12 will probably be modified. It should also decrease the pressure for the zloty and the EUR/PLN may remain inside the 4.20-4.25 range in the base case scenario.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: