Daily analysis 12.10.2015

The currency market ignores the signs from the crucial representatives of the Federal Reserve, regarding the monetary tightening in the USA. JP Morgan reviews downwards the prognoses of an economic increase for Poland due to China and the Volkswagen crisis.

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

• Tomorrow at 04.00: Balance of the Chinese foreign trade (estimations: a surplus on the level of 48 billion USD); a percentage change in comparison to September last year (estimations: minus 6% in export; minus 16% in import)

Currency market ignores the Fed consensus

Since Friday four members of the Federal Reserve have spoken publicly about the future monetary policy in the United States. Apart from Charles Evans, who is considered as one of the greatest doves, the other members of the American monetary authorities have a decisive impact on the interest rates on the other side of the ocean.

Dennis Lockhart said on Friday that he expects the interest rates to be raised in October or in December. It is despite the fact that he is “slightly less convinced” about this decision than 6 weeks ago. The chairman of Atlanta's Federal Reserve also underlined that the weaker reading from the American labour market can be a one-time event. He also added that the average amount of new workplaces in the non-agricultural sector for this year's third quarter “is still not enough to satisfy the growing trend of the workforce”.

William Dudley spoke in a similar tone. In his interview with the CNBC, he sustained the base case scenario of starting the monetary tightening this year. He also claimed that an increase in the amount of workplaces to the range of 120-150k per month is enough to decrease the level of unemployment.

The same view on the monetary policy was presented by Stanley Fisher in his short interview with CNN, as well as his official testimony in Lima. Vice-chairman of the Federal Reserve underlined that during the recent meeting 13 out of 17 members of the FOMC expected the hikes to be performed this year. He himself is also among this group.

Stanley Fischer, who is very often considered as a Fed expert regarding global events, said that the international matters are becoming more and more important for the American central bank. However, they should not disturb the cycle of monetary tightening.

Apart from the headlines quoted by the media which analyse the context of statements of particular FOMC representatives, one can come to the conclusion that the interest rates on the other side of the ocean are most likely to be raised in December. That is unless nothing unusual happens in the global economy, and the macroeconomic situation in the USA develops according to the consensus of prognoses.

The American central bankers also suggested that apart from the labour market related matters, the data regarding consumption in the following weeks will be very important to them. Thus, one can expect that the retail sale and the consumers' sentiments will be very carefully analysed and the investors reaction will be more intense than usual.

However, there is one question. Why is the dollar still so weak if the Fed is willing to perform the hikes and does not assume a postponement to 2016 in the base case scenario? One of the explanations is the big rebound of the emerging markets currencies to the USD. The second, and maybe even more important, is the fact that a percentage of market participants does not believe the assumptions of the Fed representatives because they were misguided when the monetary tightening was supposed to begin firstly in June and then in September.

This second reason can be soon questioned by the signs from the debt markets. Profitability of two-year-old treasury bonds from the USA increased in the past days to 0.65%, which is practically the area recorded before the weak reading of the payrolls on October 2nd. At that time the EUR/USD was below 1.12. This may mean that the bond market believes the Fed, and the FX does not. However, it is the latter which should begin to adjust.

Few words about the foreign market

The currency market can continue to ignore the signs from the Federal Reserve, which may cause the weakness of the dollar, and increases in the EUR/USD. However, the closer we get to the end of the year and if the data from the USA does not disappoint, the harder it will be to maintain the trend of the weaker dollar. Especially that the bond market among others, gives different signs. In the short term, it is worth noting the data from China. The smaller the decrease in import and export to the prognoses, the bigger chance for a stronger American currency.

Lower prognoses for Poland

Stabilisation of the situation on the EUR/PLN remains the base case scenario, and it is most likely for the majority of transactions on this currency pair to occur within the range of 4.22-4.23 in the following hours. The event from the outside of the market that is worth noting is one of the first downward revisions of an increase in the national GDP for 2016.

Due to the expected worse condition of Germany and China, and also the scandal regarding Volkswagen, JP Morgan decreased the perspective of the Polish economic growth from 3.5% to 3.2%. This is not a dramatic decrease in expectations. However, we are getting closer and closer to the area of 3%. This value could be a good excuse for the new, probably more dovish Monetary Policy Council, to cut interest rates. However, it is still too soon for the market to consider this fact.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: