Daily analysis 13.01.2016

An improvement in sentiment on the global markets supported by the Chinese data, causes an appreciation of the American currency. The majority of the new Monetary Policy Council's members are dovish. However, the decision regarding cutting of interest rates is still not a foregone conclusion.

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

• 14.00: Data from the Polish balance of payment (estimations of current account: minus 230 million euros; trade account balance: +350 million euros).

Better information from China support the dollar

Recent hours brought a visible improvement in the global financial market. The European stock markets are increasing, contracts for the American indexes are showing a higher opening in the United States, and the news from China are definitely calmer than it was during the past days.

First of all, Beijing managed to stabilise the situation on the renminbi. The Chinese currency is no longer wearing off to the dollar, and additionally the difference between quotations from the continent (CNY) and Hong Kong (CNH) decreased practically down to zero. Earlier this year the difference between the CNH and CNY exceeded even 2%. This caused an intense speculation activity on the market, and also an increasing fear that China is not handling the economy's transformation.

Second of all, situation of the renminbi on the interbank market in Hong Kong also improved. Today, the overnight HIBOR rate decreased to 8% from 63% recorded yesterday. This may mean that liquidity has been delivered by the central bank, and it should be a sign of the return of stabilisation.

Moreover, the Chinese authorities are communicating with the market to a bigger degree than before. The Wall Street Journal cited the statement from Han Juna, vice-chairman in a “Leading Group for Financial and Economic Matters” by the Central Committee of Communist Party of China. At a briefing in the Chinese consulate in New York, he said that “the attempts of playing on the renminbi's depreciation will not be successful”. With this he suggested that the authorities will make the speculation activities more difficult.

It is also worth noting the data from China published at night. Export for December expressed in the renminbi increased by 2.3% y/y, whilst economists surveyed by the Bloomberg agency expected it to decrease by 4.1%. Data regarding import was also better. However, due to a decrease in prices of raw materials, it remained on a negative level. It decreased by 4.0% with the consensus on the level of minus 7.9%.

In December, surplus on trade account remained at its historically high level of 60 billion USD. As a result, the whole year's trade account was approximately 600 billion USD (approximately 6% of the GDP). From a fundamental point of view this fact should help to stabilise the renminbi.

To end this stream of good information, it is worth to cite the Fitch's opinion. The rating agency expects an increase in the Chinese GDP to be 6.5% in 2016, and 6.0% in 2017. This is coherent with the wide market's expectations, and should also calm down the situation.

Of course, there is a danger that the stock market from Shanghai or the renminbi's behaviour will cause again an increase in the global aversion towards risk. However, today's data as well as the actions of the Chinese authorities reduce its probability in comparison to the situation which was observed during the past days.

Few words about the foreign market

An improvement in the global sentiment is a positive factor for the American currency. It decreases a chance to stick to the cycle of the monetary tightening presented by the Fed in December. Additionally, pressure on the EUR/USD can come from the euro. This is because if the situation continues to improve, we can expect a rebirth of the carry trade on the European currency.

Today, it is worth noting the testimony of Eric Rosengren and the Beige Book. Rosengren is more dovish than the Federal Reserve's consensus, and this may slightly wear off the USD appreciation will in short-term. On the other hand, the description of the American economy's condition from the Beige Book, should show rather positive trends regarding development in the USA, and by this slightly support the dollar.

The future Monetary Policy Council is less mysterious

According to the Bloomberg agency, professor Gatnar said that interest rates are an instrument which can still be used by the central bank. The agency also informed that dr Chrzanowski claims that “the central bank can support the economic increase when the prices are stable”, and professor Lon thinks that the monetary authorities “should be elastic” in their policy.

There are slightly more doubts regarding the opinion of professor Kropiwnicki. However, according to the Bloomberg agency, during his testimony in the parliament today at noon he said that he is sceptical about reviving the economy by interest rates. He also emphasised that “Poland should be careful about changing interest rates”. Thus, these statements can prove that Kropiwnicki is against decreasing the cost of money.

Thus, it is currently impossible to evaluate the chances for decreases. However, the market's evaluation which suggests cutting of rates on the level of 40 base case points within the following 6 months seems overreacted. It is because there is a risk that only one out of three candidates suggested by the parliament and the president will be neutral. This will determine that there will be no decrease in interest rates. If this concept is confirmed, we can expect an enforcement of the national currency by even 0.05 PLN.