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Daily analysis 13.12.2016

13 Dec 2016 13:08|Marcin Lipka

The dollar wore-off slightly before the Federal Reserve meeting tomorrow. What are the chances for a hawkish message from the FOMC? Slight growths on the zloty. However, the Polish currency remains weak.

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

  • No macro data that could significantly impact the analyzed currency pairs.

Dollar’s slight overvalue

Tomorrow, we will know the result of one of the most important Federal Reserve’s meeting recently. After recent growth of the dollar, as well as of profitability of the American treasury bonds, we observed a work-off of the recent trends. The EUR/USD was testing the area of 1.0650 and the USD/JPY went below the level of 115.00. Nevertheless, the dollar regained a portion of its value before noon. However, investors don’t seem convinced to the scenario of a relatively hawkish message from the FOMC.

This is partially a result of the fact that the majority of investment banks don’t expect any larger changes in Fed’s announcement. Bloomberg took note that BNP, JPMorgan and Morgan Stanley expect the scatter plot (the Fed members estimations regarding the future interest rates) will remain approximately the same.

On one hand, relatively limited expectations regarding modification in Fed’s message may cause that the demand for the dollar will be relatively limited as well. On the other, if the Federal Reserve changes its attitude to more hawkish, the reaction on the dollar may be strong. This would cause the EUR/USD to reach the area of 1.0500, which is near its approximately fifteen-year minimum. We think that the risk of a scenario which is alternative against the consensus, is relatively high.

Arguments in favor of hawkish Fed

In March, the Fed expectation median showed that interest rates should reach the level of 1.9% by the end of 2017. This value was decreased to 1.6% in June and then to 1.1% in September. Meanwhile, the Federal Reserve members were saying that there is a need for the fiscal policy actions, in order to revive the economic growth, as well as to increase productivity.

However, this is the first time in many years that the economy may actually receive a strong fiscal support. There is a large chance that the Republican administration will at least implement a portion of Trump’s postulates from the presidential campaign (decrease in taxes for enterprises and wealthy households, decrease in regulations, increase in infrastructural expenses). According to the OECD studies, this could increase the economic growth to 3% in 2018. This is 1 percentage point more than the Fed estimated in September.

However, it’s worth noting that not only the announcement of fiscal actions speaks in favor of hawkish Fed. The base case inflation nears the Federal Reserve goal, the labor market shows that the American economy is basically at the moment of full employment, accelerating indexes (ISM for services, as well as for industry) and the consumer sentiment index is at its maximum (according to Conference Board, as well as to the University of Michigan). This goes to show that the economy is currently developing according to its potential and that a strong fiscal support may increase the risk of a slight economic overheat.

We can currently ignore the arguments of the strong dollar, as well as of high financing costs that could wear-off the economic growth. The dollar’s strength is a result of positive economic trends (perspective of higher economic growth), instead of negative crisis tendencies, as well as of the capital’s escape to safe coasts. Worse conditions for enterprises should be compensated with higher incomes from increasing income.

We must also keep in mind that higher interest rates give the Federal Reserve space for creating the future monetary policy. This is a good moment to take advantage of this situation and suggest a more steep path for interest rates. This is especially taking into consideration that the market basically demands it (the recent increase in profitability of treasury bonds).

In conclusion, we think that there is a large chance for a suggestion of three rate hikes (by 25 base case points each) in 2017 by the Federal Reserve. Even if this doesn’t happen, there will be some hawkish elements in this meeting, which will suggest a more restrictive approach in the future. This should be a positive signal for the dollar for the forthcoming weeks.

Slight growth on zloty

The zloty’s value increased slightly at noon. The EUR/USD went down to the area of 4.44 and the dollar is below 4.20 PLN. Slight growth was also observed on the PLN/HUF. The trade on the zloty should be relatively calm in the forthcoming hours, due to the fact that investors will most likely avoid larger moves before the FOMC meeting.

If the FOMC message is relatively hawkish, this may be unfavorable for the zloty. The EUR/PLN would return to the range of 4.45-4.50 and the USD/PLN would reach the range of 4.25-4.30. However, we don’t expect the EUR/PLN to remain above the 4.45 level for long. Moreover, if the Fed sustains its dovish attitude, the EUR/PLN and the USD/PLN may decline to 4.40 and 4.10, respectively.

13 Dec 2016 13:08|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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