Daily analysis 07.12.2016

Tomorrow’s ECB meeting will be significant, but the market will rapidly focus on the Fed. The Non-OPEC countries meeting regarding limits in oil mining, will be held on Saturday. The zloty is clearly gaining against the majority of currencies.

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

• 16.00: The announcement from the MPC and the press conference.

Will Fed suggest three rate hikes?

The situation in the global currency market has been relatively stable during the past few hours. The EUR/USD is near the 1.0700 level before tomorrow’s ECB meeting. The general evaluation of the dollar remains the same as yesterday, not counting the dollar’s wear-off against the emerging market currencies.

We wrote more about the forecasts regarding the ECB’s decision on Monday. However, it seems that next week’s meeting of the Fed will attract more attention. This is not only because of the expected rate hikes, but also because of possible modifications of the FOMC expectations regarding the optimum level of interest rates in 2017.

In September, nine out of seventeen Federal Reserve members claimed that there should be two (or less) rate hikes in 2017. The rest of the Fed members were in favor of three (or more) rate hikes. Therefore, the Fed’s consensus is two rate hikes, which would raise the current value by a total of 50 base case points in 2017. However, if two FOMC members change their mind and vote in favor of three rate hikes, the consensus will show that monetary tightening will be at the level of 0.75 percentage points.

The potential basic argument in favor of changes in forecasts, may be the expectations regarding an increase in fiscal stimulation. The raw material market may also cause a larger inflation pressure, which may translate to a necessity of a more rapid increase in interest rates. The scenario of higher rate hikes is also supported by positive data from the American economy.

In conclusion, there is a large likelihood that at least two Fed members will join the group that supports three rate hikes for 2017. This is due to the current market situation, economic data and the most recent statements from the Federal Reserve representatives. This situation would probably extend the dollar’s strength in the global market.

Non-OPEC countries meeting in Vienna

The meeting of the oil-exporting countries, which are not the members of OPEC, will be held this Saturday in Vienna. The initial assumptions show that they will reduce their mining by 600k barrels per day. Therefore, after adding the recent agreement between the OPEC countries, the total production limit would reach 1.8 million barrels. This would cause the oil market deficit to reach the level of approximately one million barrels in Day over Day interpretation.

Despite that fourteen countries will meet in Vienna, only Russia has a significant contribution in the oil market (this country produces approximately 11 million barrels per day and has already announced a reduction at the level of 300k.) Moreover, it’s difficult to estimate the level of hypothetical limits. For example, according to the EIA estimates, Mexico will limit its mining by 80k barrels in 2017.

It seems that the oil market will focus mainly on Russia, as well as on Kazakhstan. This country announced that it will increase its production by approximately 100k barrels in 2017. If Kazakhstan reduces this level, the market will most likely think that the non-OPEC countries are relatively motivated to fulfill their agreement. This would cause a further growth in oil prices (to the range of 55 – 60 USD for the Brent oil). However, if this scenario fails, the Brent oil may return to the area of 50 USD per barrel.

Clear strengthening of the zloty

The zloty’s value has increased since yesterday afternoon. The EUR/PLN went down from the area of 4.50 to the range of 4.42-4.43. Moreover, the franc returned below 4.10. The main reason for the zloty’s better condition is an improving sentiment towards the emerging market currencies. The Polish treasury bonds gained value as well and the profitability of the ten-year treasury debt instruments went down to the area of 3.50%.

It’s also worth noting that the zloty strengthened against the forint. The PLN/HUF is currently near the level of 70.50, which is more than 1% above its minimum from yesterday. It seems that this positive sentiment towards the zloty may be extended by today’s MPC meeting, as well as by tomorrow’s ECB announcement. However, the chances that the euro will go below 4.40 are limited for the time being.

This is because of the risk of a relatively hawkish meeting of the Federal Reserve. However, if it actually results in the increase of the amount of rate hikes for next year (more details in previous paragraphs), the EUR/PLN will most likely not return above 4.50.