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Daily analysis 09.05.2016

9 May 2016 13:14|Marcin Lipka

Despite the weaker data from the USA, the Federal Reserve representatives sustain the perspective of a monetary tightening in June, or for two hikes this year. The accumulation of online surveys overestimates the risk of Brexit. Despite the announcement that the MPC was relatively hawkish, the euro remains above the level of 4.40 PLN.

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

  • No macro data that could have a significant impact on the analyzed currency pairs.

Market vs the Fed

Since the Federal Reserve meeting in April, we have received a lot of macroeconomic data from the United States. However, it was mostly worse than expected. Despite this fact, for the past week the Federal Reserve representatives have sustained the perspective of either two hikes, or the monetary tightening in June. Is there a big chance for this to become true, considering the current situation?

We have heard statements from Kaplan, Lockhart, Bullard and Williams before the publication of the report from the American labor market last Friday. Even though Bullard is the only one to have the right to vote this year, the others mentioned can also present their opinions publicly. Moreover, their views are similar to the Committee's consensus.

Kaplan claimed that he, “could support the hikes, if the data improves in the second quarter.” Lockhart said that June is a likely option regarding the Federal Reserve's actions. Williams stated in his interview with CNBC that, “two or three hikes for this year seem reasonable.” And finally, Bullard claimed that he is, “open to the question of whether the data justifies an increase in interest rates in June.”

Theoretically, weaker payrolls from April could change the attitude of some of the FOMC members. The American economy has created only 160k jobs, against the expected range of 200k. Moreover, the data for the past two months has been revised lower by 19k. Also, the index of professional participation decreased to 62.8%. The only positive signal was an increase in salaries. This index was higher than the expectations. However, this argument may not be sufficient enough for a positive interpretation of the data from the Labor department. This is despite the fact that the index is currently scrutinized.

It is interesting that on Friday afternoon, William Dudley, chairman of the New York Federal Reserve, said that he would not focus much on the April report from the labor market. Moreover, in his interview with the New York Times he claimed that it is reasonable to expect two hikes this year. It is worth adding that Dudley is considered the third most important person in the FOMC, and his views are similar to Janet Yellen's views. Thus, this argument was significant for the appreciation of the American dollar, and for a descent of the main currency pair below the level of 1.1400, at the end of the past week.

On the other hand, the market is consequently reducing the probability of the monetary tightening in June. Currently, it is less than 10%. At the earliest, there is a 50% probability of the monetary tightening appearing in December.

It seems that we are yet again at a significant moment. If the American macro data begins to improve, the Fed may start pushing harder for hikes in the coming months. This should visibly strengthen the USD. On the other hand, if the new macro reports indicate a slower than expected pace of the economic growth, pressure on the dollar may return. It is possible that the EUR/USD would reach the area of 1.16. It is also worth remembering the matter of the Brexit in the context of the FOMC.

Risk of the Brexit is becoming more significant for the Fed

Less than two weeks ago, we wrote that a significant decrease in the risk of Brexit was mainly caused by the accumulation of phone surveys within the average of the recent surveys. There was a moment when four out of six surveys were conducted by phone. Since the beginning, the phone surveys gave the Brexit opponents an approximate five to fifteen percent advantage. However, only one or two phone surveys are usually included in the average.

Currently, the situation is different in comparison that of the end of April. Five out of six surveys were conducted online. According to the whatukthinks.org website, the distribution of votes is 50:50. Currently, it seems that the pessimism is slightly exaggerated. Of course, risk of Brexit remains significant. However, considering the fact that the phone surveys were better in estimating the result of the past year's parliament elections in the UK, the risk of the Brexit is smaller than the averages indicate.

Getting back to the Fed, it is worth noting that Kaplan (in his interview with Radio Bloomberg), as well as Lockhart (in his interview with CNBC) has both emphasized that the Fed should consider the risk of the Brexit (the referendum is planned for June 23rd) when making decisions. This may indicate that June (the FOMC meeting is planned for the 14th and 15th of June) is a less likely month regarding the monetary tightening in the USA. On the other hand, the meeting in July may appear to be the best moment for hikes, despite the lack of the press conference. If it appears that the Committee supports this scenario, it should be a positive signal for the USD. This is, of course, if we assume that the United Kingdom remains in the European Union.

Zloty remains weak

The Polish national currency remains weak. Fear of Moody's decision, which will be announced this Friday, is dominant among investors. A portion of foreign capital may continue to withdraw from the assets denominated in the zloty, due to a bigger attractiveness of the raw materials markets. The latter will take advantage of a rebound of oil prices and of industrial metals.

Overvalue of the zloty may be limited by the policy of the Monetary Policy Council. The press conference on Friday did not bring any arguments for a decrease in interest rates. Moreover, Chairman Marek Belka did not exclude an intervention in the currency market, if necessary. Statements such as this may reduce the risk of a further overvalue of the zloty, even if Moody's decides to cut Poland's credibility.

However, we should expect that the zloty will remain weak within the next few days. Clearer depreciation below 4.40 on the EUR/PLN is unlikely. However, if it appears that Moody's has only changed the perspective of the rating, and the general loan credibility of Poland remains at the same level, the dollar, euro and franc may decrease by more than 0.05 PLN.

9 May 2016 13:14|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 05.05.2016

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