The minutes from the Federal Reserve meeting in September were not surprising. Not only is the EUR/USD under pressure from a stronger dollar, but it is also under pressure from information from the ECB. The zloty is losing its value due to a deterioration of the global sentiment.
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: 253k).
Minutes are consistent with FOMC sentiment
Usually, while commenting on the minutes from the Federal Reserve, we focus on particular quotes which show a potential change in the FOMC attitude. In the case from the minutes from December, it was clear that the Federal Reserve has announced rate hikes. We have known about this since the end of last month.
If fourteen out of seventeen FOMC members were expecting monetary tightening by the end of the year, it seems clear that the minutes would reflect this situation. Therefore, it’s difficult to be surprised by statements which suggest that the moment is near (“rate hikes should occur relatively quickly,” for example).
However, a strong division to the dovish and the hawkish factions within the Fed remains visible. This will be significant for next year. The FOMC personnel will change in January. Therefore, Rosengren, George or Mester, who voted in favor of monetary tightening in September, will no longer decide interest rates. In 2017, they will be replaced by Kaplan, Evans, Kashkari and Harker. Only the latter has hawkish views, so there will be a turn in vote proportions of the regional members of the Fed. Dovish governors will limit pressure on rate hikes.
The minutes have confirmed that the Fed’s dovish faction still thinks that the labor market is at full employment level. The same members are most likely convinced that inflation pressure remains limited. Moreover, a risk that the monetary tightening would occur too soon may cause more problems for the economy than sustaining an accommodative monetary policy slightly longer.
Therefore, we can claim that rate hikes in December are basically certain. However, there’s still a chance that the scale of monetary tightening in 2017 would be lower than 50 base case points. It also seems that the debt market came to the same conclusion. Profitability of the two-year treasury bonds went down from 0.87% to 0.85%.
ECB and China
The minutes appeared favorable for the EUR/USD, but only for a short time. However, the main currency pair might have been under pressure of previous reports from Reuters. With references to anonymous people who are familiar with the problem, the information agency stated that the ECB will discuss changes in technical parameters of assets purchase next week. However, the final decision regarding this matter is to be announced no sooner than December.
Recently, some of the market participants began to wonder whether the ECB will start to reduce the assets purchase in the second quarter or not. Even though this scenario was very unlikely, it had a positive impact on the euro. However, if the ECB prepares for the modification of the QE conditions, this will suggest that the entire operation will be extended. This makes expectations regarding the limits in scale of assets purchase groundless.
The global sentiment has been deteriorated by Chinese data. Export expressed in yuan decreased by more than 5% and export expressed in dollars decreased by 10%. There are cases in which the Chinese data is exposed to one-time events (the New Year, for example). However, it’s difficult to find any unusual events this time. This data may also be proof of a negative demand, which is generated by the global economy and has a negative impact on the global sentiment.
Zloty continues its losses
The zloty continues to lose value. However, this is not the result of the FOMC minutes. This is more than likely a consequence of an increase in risk aversion, which is related to weak data from China. Pressure on the emerging markets can also be seen on other currencies. The forint lost approximately 0.4% against the euro and the Turkish lira reached historical records against the dollar today.
If depreciation pressure on the emerging market currencies continues, there will be small chances for the EUR/PLN to reach the range of 4.25-4.20. However, the euro should return relatively quickly to this range in the case of the opposite scenario.