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Daily analysis 10.05.2017

10 May 2017 12:25|Marcin Lipka

The Federal Reserve representatives have sustained their eagerness to continue the monetary tightening. They also took note of economic imbalances. The franc remains fairly weak in the global market. The zloty has strengthened against the euro. The CHF/PLN has reached the level of 3.85, which is its lowest since September 2015.

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

  • No macro data that could significantly impact the analyzed currency pairs.

Federal Reserve has sustained its course

Three of the Federal Reserve members made their public testimonies yesterday. Esther George emphasized that she still expects the labor market to improve, as well as that household expenses would increase. She also took note that the global dangers for the American economy have been reducing. Moreover, George has sustained her previous standpoint regarding a reduction in stimuli of the monetary policy.

Eric Rosengren emphasized yet again the risks related to the overheating real estates market. In his opinion, the apartment prices index is approximately 30% higher compared to the real estates market economic boom in 2007. Moreover, the office building prices index is also significantly higher than in 2007. Even though Rosengren wasn’t referring to the monetary policy directly, the overheating real estates market may be an argument to choose a more restrictive attitude towards interest rates.

Robert Kaplan’s comments have revealed most details regarding the potential moves from the FOMC in the future. Unlike aforementioned members of the Fed, Kaplan has the right to vote this year and his views are considered as consistent with the consensus. In his opinion, the base case scenario includes three rate hikes this year. He also added that risk for the economy have been balanced. However, Kaplan emphasized that the more positive the condition of the US economy gets, the more the Federal Reserve would be able do.

According to Bloomberg, the likelihood of rate hikes in June is currently at the level of 100%. However, the likelihood that this would be followed by a hike in September is at the level of 47.6%. This would cause the Fed’s baseline interest rate to reach the range of 1.25-1.50%. Nevertheless, the market seems to be much more skeptical about this scenario, which has been shown by the profitability of the two-year US bonds (approximately 1.3%). The strengthening of the market expectations regarding next moves from the Fed will most likely be crucial for the dollar.

Likelihood for a weaker franc is increasing

Yesterday, the EUR/CHF went near the 1.10 level, which was its lowest since September 2016. This information is very positive for those who have credit denominated in the Swiss currency. Moreover, the USD/CHF has returned above the 1.00 level, despite the fact that the dollar has been fairly weak.

It’s possible that we have been witnessing a change in attitude towards risk. The likelihood of serious problems within the eurozone has significantly reduced. Therefore, the franc’s significance as a safe haven has decreased. This may cause the EUR/CHF to go above the 1.10 level, which would increase chances for the CHF/PLN to remain below the 4.00 level in the long-term.

There’s another potential scenario, which would be even more positive for those who have credit denominated in the franc. It seems unlikely that the SNB would alter its extremely mild monetary policy in the short-term, for the time being. It’s possible that some investors would begin to use the franc for the carry trade transactions, once the franc’s significance as a safe haven is reduced. This would continue the CHF depreciation, especially taking into consideration that the eurozone’s economic condition would be positive and the chances for a less mild monetary policy from the ECB would increase.

Both zloty and forint are getting stronger

The zloty has increased its value against the euro and the EUR/PLN has returned to the area of 4.21. The situation of both the forint and the Czech koruna improved as well. These currencies have gained 0.4% and 0.15% against the euro, respectively. The zloty seems to have become stable within the range of 4.19-4.24 per euro.

The franc’s global wear-off, as well as the zloty’s fairly positive condition, have brought the CHF/PLN down 3.85. This is its lowest level since January 2015, when the Swiss National Bank unpegged the EUR/CHF exchange rate. Taking into consideration the franc’s global situation and the zloty’s relation against the euro, the CHF/PLN is most likely to remain within the range of 3.80-3.90. Moreover, if the positive tendencies within the eurozone continue, the franc may go even lower.

10 May 2017 12:25|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:

9 May 2017 15:32

Afternoon analysis 09.05.2017

9 May 2017 12:18

Daily analysis 09.05.2017

8 May 2017 15:32

Afternoon analysis 08.05.2017

8 May 2017 12:21

Daily analysis 08.05.2017

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