Daily analysis 12.10.2016

Last night’s information from the British government caused a visible rebound of the pound. The minutes from the Federal Reserve, which will be published this evening, are today’s main event. The zloty is slightly weaker against the euro. Due to strong global growths of the dollar, the USD/PLN went up to the area of 3.90.

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

• 20.00: The minutes from the Federal Reserve meeting in September.

Pound’s rebound

The GBP/USD went below the 1.21 level yesterday. The pound also lost clearly against the zloty and reached the area of 4.69. However, a strong turn occurred at approximately midnight, which caused the pound to gain approximately 2% within just a few hours.

The initial assumption was that this rebound was mainly a result of a relatively low liquidity, as well as exhausting depreciation potential. However, there was a different reason behind this. Investors started assuming that Theresa May’s government would at least slightly soothe its standpoint regarding “the hard Brexit.”

Shortly after midnight, Bloomberg agency informed that, “the prime minister agreed a discussion regarding the Brexit strategy within the parliament.” This discussion will begin today.

However, it’s worth emphasizing that the parliaments opinion doesn’t have to be significant for the British government. Moreover, it may also not impact the procedure of the United Kingdom leaving the EU. However, a wide discussion regarding Brexit may cause Theresa May’s cabinet to slightly soothe its standpoint.

It’s possible that overvalue of the pound will stop. Today’s rebound may be extended, as long as some of the Tories show a more moderate attitude towards the Brexit conditions than Theresa May and Dave Davis. On the other hand, if the attempt of soothing “the hard Brexit” is not successful, it will become very likely for the GBP/USD to go below 1.20 and for the GBP/PLN to return below 4.70.

Hawkish expectations before the minutes

Yesterday, we wrote much about the connections of the oil market with the American debt and the USD exchange rate. Today, we would like to focus on the minutes from the recent FOMC meeting. The publications is expected to be relatively hawkish. However, it most likely won’t be hawkish enough to extend the recent appreciation of the USD.

The market knows that the FOMC was relatively close to perform the monetary tightening in September. Three out of ten Fed representatives who have a right to vote, voted for rate hikes. Last weekend, the Federal Reserve vice-chairman, Stanley Fisher, said that the hikes were very close.

On the other hand, yesterday Charles Evans brought back the fact that eight out of twelve chairs of the regional departments voted for an increase in discount rates in July. In his opinion, “this suggests their preferences regarding monetary tightening.” Taking into consideration that currently the FOMC consists of seventeen members (twelve regional members, including five who have a right to vote, plus five governors), we may estimate that more than half of the FOMC will vote for rate hikes.

Therefore, the minutes may appear quite hawkish in its large portion. However, the market may change its attitude after its first reaction. Investors would begin to notice that rate hikes in December are basically certain, but the path of monetary tightening alone is mild. Moreover, it has basically been revised down over the past few years.

There are also certain mid-term dovish arguments. Inflation remain below its target, neutral interest rate is below its previous estimations and there is still no full employment in the market, despite the low unemployment. Therefore, the minutes don’t have to extend the appreciation of the American currency, despite its initial hawkish tone.

Zloty is slightly weaker

The EUR/PLN was relatively calm this morning (4.28). However, the zloty wore-off clearly at approximately 12.00 AM (approximately 4.30). The forint also lost its value, but to a lesser degree than the Polish currency.

However, no unusual information appeared over past few hours. The Polish debt market has also been relatively stable. Therefore, it’s possible that some of investors are becoming anxious before the potentially hawkish minutes. Not only may this document impact the dollar’s strengthening, but also cause a wide depreciation of the emerging market currencies. However, we claim that the minutes will not contribute to a faster appreciation on the USD. Therefore, we also don’t expect the EUR/PLN and the USD/PLN to significantly exceed the level of 4.30 and 3.90, respectively.