Daily analysis 10.02.2016

The goals of the Federal Reserve chairwoman during today's testimony on Congress. Is it possible that the dollar would wear off and the stock markets would increase at the same time? The zloty takes advantage of a possible milder monetary policy in the USA.

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

• 14.30: Publication of Janet Yellen's testimony in front of the Financial Services Committee of the House of Representatives.
• 16.00: Janet Yellen’s testimony in front of the Financial Services Committee of the House of Representatives.

Yellen's goal

Today's session event is Janet Yellen's testimony in front of Congress. This should be a good moment for the Federal Reserve chairwoman to calm down nervousness on the market. The reaction on the currency and capital market will mainly depend on how this task was fulfilled.

Most of all, the FOMC chairwoman will probably try to present the American economy in a favorable way. In order to do this, she should mention the very good condition of the labor market. She needs to emphasize the fact that the unemployment rate is now below 5%, which practically means a full employment, and also that a faster increase in salaries has been noted.

Just as it was predicted in the recent announcement from the Federal Reserve meeting, Yellen may also take note of a moderate increase in investments and the consumers' expenses, and also a “further improvement in the real estate sector”.

In order to stabilize the market situation and show that the Federal Reserve has the situation under control, Yellen will probably suggest that the growth of inflation is slower than expected. However, this fact is a result of a decrease in prices of energetic resources, industrial metal, and a wear off on the emerging market currencies, rather than the weakness of the American economy. This will cause the United States to import deflation.

There can be some difficulties regarding the matter of the global situation. If Yellen emphasizes the worldwide slowdown too much, it may translate to a further deterioration on the capital market. On the other hand, a “watchful observation” of global events may be interpreted as an underestimation of the internal situation, just as it was in the announcement. This increases the risk that the Federal Reserve may not estimate the weaker external perspective, or even try to sustain the strategy of hikes presented in December's announcement.

Wear off on the dollar and growth on the stock markets?

For the time being, the attempt of a definite improvement in the sentiment, based on an increase in stock market indexes, as well as a wear off on the American dollar, would be a perfect solution for the markets. Recently, however, we are dealing with an opposite move – depreciation on the stock markets mean a weaker dollar, and the vice-versa.

However, it is theoretically possible that due to proper arguments this correlation can be at least broken temporarily. To do so Yellen can use, for example, an excerpt from the testimony from March 2015. At that time, the market was getting ready to increase interest rates in September, and the Federal Reserve chairwoman described the strategies of normalizing the monetary policy.

Janet Yellen then claimed that, “the current path of the policy will develop along with the economic situation, and the policy of tightening may accelerate, slowdown, stop, or even withdraw depending on current and expected events”.

The reminder of this fact, along with emphasizing deflation import, could cause a wear off on the American dollar, as well as growths on the American floors. This would inform the market that the Federal Reserve is not only ready to stop the tightening, but also does not exclude a decrease in interest rates. This could help to stabilize the situation on the capital markets, as well as sustain, or even increase the recent wear off on the USD.

The EM currencies are gaining

Today, the zloty gained a slight value while anticipating on Janet Yellen's testimony, as well as other currencies from the emerging markets. Thus, if investors interpret Yellen's words as an announcement of no changes of interest rates for a few forthcoming meetings, a further appreciation of the national currency is possible. The EUR/PLN can go to 4.40, and the USD/PLN below 3.90.

On the other hand, if the market finds this message unclear, we can expect a significant deterioration in the global sentiment. In this scenario, it is possible that the dollar will remain below 3.95 PLN, and the euro will cost clearly more than 4.45 PLN.