Daily analysis 08.11.2017

08.11.2017 12:39|Marcin Lipka

Reports from the US press about the possibility of postponing tax cuts for enterprises until 2019 caused pressure on the dollar and raised the main currency pair quotations. The EUR/PLN pair remained stable and close to the 4.24 boundary. A significant meeting of the Polish Monetary Policy Council for the zloty.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

  • 4:00 p.m.: Publication of November's statement of the Polish Monetary Policy Council. Also includes a range of estimates of GDP growth or inflation from the NBP Inflation Report,
  • 4:00 p.m.: Start of the press conference after the Polish MPC.

Slight pressure on the dollar

Early yesterday afternoon, the EUR/USD pair tested the 1.1550 level. The absence of stronger macroeconomic impulses as well as a draw session in the US, lead to significant falls of the EUR/USD pair, however, the main pair was reduced at the end of the US session. After the session, however, reports of possible delays in the implementation of tax reforms pushed the main currency pair above the 1.1600 boundary.

The Washington Post wrote that Senate leaders are considering postponing the introduction of worth 845 billion USD tax cuts for enterprises to 2019. The journal refers to four people familiar with the legislative process. These reports are, of course, in contradiction with the official Republican leaders' statements of the House of Representatives, who published a detailed plan of tax changes for both enterprises and households last week. They have repeatedly suggested that fiscal changes should take effect beginning next year.

The main problem cited by the Washington Post is the deficit, which is expected to rise by 1.5 trillion USD over the next decade due to lower tax revenues. Some senators, who are more sensitive to indebtedness, do not like this. Also, the fact that the Republicans only have 52 out of 100 seats in the Senate creates the risks of tax changes being blocked.

Therefor, the coming days could be interesting in terms of fiscal changes in the US. The almost empty macroeconomic calendar may cause movements on the dollar to depend on the approaching or distancing fiscal positions of Republican members of both Congressional Houses.

At this point, however, it is difficult to see to what extent the tax reduction is already included in the dollar's quotations. It seems that the actual implementation of the changes should help the US currency, as in an economy that is developing close to its potential, the fiscal stimulus should cause price increases and therefore, also be the argument for the Federal Reserve to rate hikes faster than expected. However, with the "trimming" of the reform by the reduction in companies taxes, a weakening of the dollar can be expected, despite the maintenance of the project to reduce the fiscal burden on households.

The Polish MPC in the spotlight

In the morning, the EUR/PLN quotations are near the 4.24 boundary. In the morning there was an attempt on the euro to return to the level of 4.23 PLN, but this movement was quickly reversed. In general, the quotations of the Polish currency do not differ significantly from what we have been observing since the beginning of the week. However, this situation may change around 4 p.m., when the Polish Monetary Policy Council publishes a message after November's meeting, as well as some forecasts from the NBP Inflation Report. Shortly afterwards, a press conference with the participation of Adam Glapinski will start.

The zloty's behaviour depends on several issues. It is particularly important whether rising inflation and pressure on wage growth will lead to changes in the official MPC statement. President Glapinski's approach to the possible pressure build from higher CPI readings in the coming quarters will also be crucial. If the recent events have not changed the President's approach and he continues to believe that interest rates should remain unchanged in 2018, the message may be considered as dovish and the zloty will weaken.

On the other hand, in a scenario where the Council President is withdrawing from suggestions to keep interest rates at their current levels for more than a year, supported by hawkish signals in the statement and a projection of inflation exceeding by 2.5% the MPC estimates, a noticeable appreciation of the national currency can be expected. This could even result in an attempt move the EUR/PLN pair around 4.20 boundary in the near future.

 


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