Theoretically, today is an important day regarding the central banks but the market will mainly be focused on the Fed. EM currencies have taken advantage from commodities rebound. The zloty is slightly weaker, but the base case scenario is to remain under the 4.25 mark.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30: Weekly jobless claims from the US (survey: 274k).
- 20.00: “minutes” from the last Federal Reserve meeting.
The Fed should be the focus today
Today, the currency market might be prone to generate more volatility. However, both the Bank of England (BoE) and the “minutes” from the ECB won't give too many hints regarding the future monetary policy. The MPC members from Frankfurt or London are expected to look at the Federal Reserve decision. Additionally, the base case scenario is that the Fed will make the first move regarding interest rates.
As a result, the BoE message should remain unchanged comparing to the previous meeting and still 8 out of 9 policy makers would like to keep interest unchanged. We also expect the ECB to be less dovish than in the most recent comments from Mario Draghi or Ewald Nowotny. The central bank will open its doors to more, longer easing, but no significant discussion regarding this issue should be presented in the September discussion. Consequently, the effect on the market may be muted.
Finally, in the evening “minutes” from the Fed are scheduled to be published. Because the discussion on keeping/hiking interest rates was probably pretty tense, many arguments are set to be in the “minutes”. However, the fact that interest rates have remained unchanged doesn't mean that it should be really dovish. Still, 13 out of 17 officials would like to hike the benchmark by the end of the year.
Moreover, the message from the Fed can be muted especially if many FOMC members would like to hike due to the fast improvement on the job market. After the most recent Labour Department report this reason looks a bit bleak. So, the minutes can be regarded as slightly outdated, even after fairly hawkish comments from Williams.
The rebound on commodity currencies
Since last Friday the Russian rouble, Indonesian rupiah and Malaysian ringgit gained 6%, 5.5% and 4.5% to the dollar respectively. It is still not much taking into account its deterioration in the last 12 months . The Brazilian real dropped almost 40% in the last year, and the Malaysian ringgit slumped 25%.
The main reason behind the recovery is the rebound on the commodities including crude oil, which is currently 7% higher than at the end of last week. The WTI and Brent increase is mainly a result of slower production in the US.
However, in the most recent EIA report the agency clearly doubts the production capacity in Iraq. In Q3 Baghdad increased the oil output to 4.2 million barrels a day from the 3.28 million barrels recorded last year.
The EIA writes that “there is considerable uncertainty regarding Iraq's ability to sustain its higher production and export levels, particularly in light of budgetary constraints that have prompted the Iraqi government to request international oil companies operating in the south to reduce spending plans next year.
The cut from Iraq may lessen the impact from Iran production increase in the wake of unwinding the sanctions. Additionally, in 2016 the US is expected to produce around 400k barrels a day less than EIA expected in July. As a result, the market will be balancing faster than expected and a fairly quick rise towards 60 USD is more and more probable.
On the other hand, the jump to levels over 60 USD is not the base case scenario. At that level, shale oil is getting more profitable and new rigs would be established which can markedly decrease further appreciation of the oil. Finally, in the context of EM currencies there is still room for a further rebound and slide on the USD/RUB towards 55-60 range.
The foreign market in a few sentences
A slight risk aversion increase pushes the dollar a bit lower, while some depreciation of the pound to the euro also pushed the EUR/USD higher to around 1.1300 at the beginning of the European session. Taking into account the base case scenario regarding central bank communication the appreciation of the main currency pair should not be continued.
Some pressure on the PLN
The zloty is softer at the beginning of the session due to some weaker global sentiment and another set of disappointing data from Germany. Besides, negative readings of trade data, which were published earlier, both from factory orders and industrial production also surprised on the downside. Export dropped in August by 5.2% m/m, which was the deepest reduction since January 2009.
Currently, however, the base case scenario for the zloty is still trading between 4.23-4.25 level. After Tuesday's fairly hawkish comments from the Polish MPC it would be hard to speculate on interest rate hikes and the significant deterioration on the global capital markets is not the base case scenario. A similar situation is expected on the Swiss franc, which in the following days should remain below the 3.90 mark.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate: