Daily analysis 12.05.2016

A strong increase in the oil market yesterday was not favorable for the dollar. Quotations of the EUR/USD have moved to the area of 1.1450. What kind of scenario regarding the rating is currently estimated by the market? The EUR/PLN remains above the level of 4.40.

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

• 14.30: Weekly jobless claims from the USA (estimations: 270k).
• 17.45: Testimony of the Boston Federal Reserve chairman. It should be concerning current economic matters.

Positive information for oil

Yesterday, we took note that if the API data regarding an increase in oil supplies is confirmed by the EIA data, the WTI and Brent will be able to continue their overvaluation. However, the weekly EIA report was favorable for oil in many ways.

First of all, the American oil supplies decreased by 3.4 million barrels, instead of increasing by 3.45 million barrels as suggested in the API data. Fuel and distillates (products of oil's processing) have also decreased by 1.3 million and 1.6 million barrels, respectively. This happened during the week ending on May 6th.

It is also worth noting that the daily oil mining in the USA continues to decrease. During the past three weeks, it has decreased by 150 thousand barrels per day. This indicates a reduction by 800 thousand barrels per day if we compare it to the production peak reached by the United States in mid-2015. The mining decreased to the level of 8.8 million barrels.

Due to a faster perspective of limiting the worldwide oversupply of oil, the WTI is near the area of 47 USD per barrel. This is approximately a 70% increase against the minimum from the beginning of this year. This caused an increase in the evaluation of raw materials currencies, as well as the capital flow from the American dollar to the rouble and the Canadian dollar. This was also one of the reasons that the EUR/USD went towards the area of 1.1450.

Today, the International Energy Agency (IEA) published its monthly report. According to this publication, it is possible that the demand for the entirety of 2016 will be revised up. This may be caused by the fact that the demand for oil in the first quarter increased by 1.4 million barrels per day in comparison to the same period of 2015.

Similar to the prior month’s situation, the Agency took note of a strong increase in demand for oil in India. In the first quarter, it was increased by 400 thousand barrels in a y/y relation. According to the IEA, India may be the main element of an increase in the worldwide demand for oil in the future.

It is worth observing, when the market will notice that higher oil prices may visibly raise inflation in the USA. This argument would support the monetary tightening in the United States, as well as increase the chances for appreciation of the USD. Previously, the dollar was mainly losing due to high prices of the WTI and Brent. These prices, on the other hand, were caused by the capital flow from the USD to the increasingly valuable currencies of countries which export raw materials.

One of the most significant events of the following hours will be the testimony of Eric Rosengren (chairman of the Boston Federal Reserve), scheduled for 17.45 (5:45 pm). Even though his recent statements were less dovish in comparison to the ones from the past few months, the USD may positively receive Rosengren's opinion regarding two hikes this year, especially because Rosengren has the right to vote this year.

What are the market's estimations?

The zloty remains weak against the main currencies, as well as against the forint. The market is clearly anticipating Moody's decision on Friday. However, it is worth thinking, which scenario is currently estimated by investors. This is the main factor which determines the reaction on tomorrow's announcement.

Considering the January decision of Standard & Poor's, as well as statements from Moody's representatives in the past few months, as well as economists' expectations, the market should estimate the reduction of the loan credibility perspective, or downgrading of the rating with a neutral perspective. These scenarios should cause a depreciation of the EUR/PLN below the limit of 4.40, and an increase in the area of 4.45, respectively.

The more negative scenario (downgrading of the rating with a negative perspective) assumes an increase to the area of 4.50, while it could go towards the area of 4.10. A rather strong overvalue of the zloty would mainly be a confirmation of Standard & Poor's opinion. Moreover, it would cause investors to think that another downgrading is ahead.

On the other hand, if Moody's leaves its rating at the current level (this is the most optimistic scenario), we can expect that the EUR/PLN will to go down to the range of 4.32-4.35. However, it is unlikely that this scenario will cause a large appreciation of the zloty. As we emphasized in the past few weeks, the sources of the recent weakening of the zloty are the changes in capital of the developing economies and the capital flow to the raw materials countries. Due to the recent increase in oil prices, as well as industrial metals prices, the risk in these countries decreased. Moreover, their treasury bonds are offering significantly higher return rates.