Daily analysis 11.10.2016

Higher dollar decreased the EUR/USD. Increasingly weaker condition of the pound is worsening because of its overvalue against the majority of currencies. The zloty remains stable. The EUR/PLN is near 4.27 and the franc costs approximately 3.90 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 significantly impact the analyzed currency pairs.

Oil, debt and dollar

The EUR/USD was near the level of 1.12 yesterday morning. Today, the main currency pair is descending to the area of 1.11. However, this move was not caused by a visible wear-off on the euro or the comments from the FOMC members. This is rather a consequence of the events in the oil market.

Theoretically, an increase in oil prices should be unfavorable for the global economy, as well as for the countries which import oil. However, the market looks differently at this matter. The return of the WTI and Brent to the range of 50-60 USD per barrel, may support investment in mining sector. This refers to the emerging markets, as well as the USA. Moreover, this decreases the risk of a worldwide economic slowdown, as well as problems of countries, which are dependent on oil export. Therefore, we can claim that a moderate increase in oil prices is a positive thing.

An increase in oil prices should also translate quickly to inflation. Theoretically, the FOMC should make decisions, which are based on the base case inflation, rather than inflation containing raw material and food prices. However, higher oil prices also impact the core PCE or the CPI (transport services, for example). Therefore, the market tries to evaluate these elements by instruments, which show the future level of interest rates.

These instruments include treasury bonds with a relatively short purchase period. The American debt market was closed yesterday (Columbus Day). After it’s opening last night, profitability of two-year debt instruments increased by four base case points and since the month’s beginning, it has been the total growth of approximately 15 base case points, to the level of 0.87%. This is its highest level since June. Moreover, this move overlaps with an increase in oil price, which increased by approximately 10% at that time.

An increase in the market expectations regarding the future interest rates, makes the decision regarding rate hikes easier for the Federal Reserve. The dollar market is trying to evaluate this element in advance and this is the reason behind appreciation of the American currency. This time, however, this move was clearly provoked by the oil situation.

Further overvalue of pound

The GBP/USD went below 1.23 today. This is its lowest level in more than thirty years, not counting last Friday’s flash crash. Of course, this move has partially been caused by the recent worldwide appreciation of the dollar. However, the general weakness of the pound is quite clear.

Since the beginning of October, the pound lost 5% of its value against the currencies, which are included in the United Kingdom’s trade exchange. Moreover, counting since the Brexit referendum, overvalue is now higher than 17%. These are very strong moves for a developed market currency. The likelihood for working-off at least a portion of these losses is limited for the time being.

This is because the pound’s depreciation does not impress representatives of Theresa May’s administration. Yesterday, the Minister of Brexit, Dave Davis, said that, “the pound’s overvalue is partially negative, but it also has some positive consequences.”

Davis probably meant the support of export. However, the United Kingdom may have problems with keeping its access to the EU market. Moreover, it is planning to limit immigration, which increases competitiveness of the British professional services sector abroad. Therefore, comments like the one from Davis, prove that the government representatives prefer to accept a weak pound, rather than make attempts of changing their policy. This leaves perspectives of the British currency negative.

Calm zloty

The zloty is relatively calm. The EUR/PLN is within the range of 4.27-4.28. We may say that this still is the range, which reflects the global, as well as the local situation. It shouldn’t be disturbed clearly by the inflation data for September, especially that it will most likely be consistent with its initial readings.

There are slightly more changes on the currencies with a less stable situation. Today, the pound went down to the level of 4.7150 PLN and the dollar is currently exceeding the level of 3.86. However, these moves shouldn’t impact stabilization on the euro or the franc, because the global sentiment is relatively stable as well.