Daily analysis 14.08.2017

Both the yen and the franc are losing value due to a reduction in geopolitical issues. Lower odds for further interest rate hikes in the US. The illusion of Japanese economy turnaround. The zloty on new 7-month lows to the forint. The EUR/PLN is traded close to 4.28 level.

The most important macro data (CET - Central European Time). Surveys of the macro data are based on the information from Bloomberg, unless noted otherwise.

• 14.00: Core inflation from Poland (survey: 0.0% m/m and 0.8% y/y).

Tensions easing

The opening of the European session on the FX market shows that some of the geopolitical tensions have eased. The yen to the dollar weakened about 0.5 percent despite a higher than expected GDP reading from Japan. The South Korean won gained to the greenback 0.6 percent, which means the KRW regained around 1/3 of the most recent slide.

Lower risk aversion was also observed on the franc. The EUR/CHF is traded above 1.1400, resulting in it being only 100 pips away from the most recent highs. A similar situation is seen on the EUR/USD which is quoted around the 1.1800 mark.

It is worth noting, however, that the main currency pair has also been affected by the overall dollar weakness. Friday's data from the US showed limited prices pressure (0.1% m/m vs 0.2% expected). In many categories, a fall in prices was seen - clothes, new cars, accommodation. The whole services category (which account for 60 percent of the inflation basket) rose only 2.4% y/y and 0.1% m/m. On the yearly basis, it was the lowest reading since May 2015.

The lack of inflationary pressure translates also into the Treasuries market. Yields on the 5-year US government bonds fell to 1.73% which was the lowest reading in 3 months. Currently, the market probability of the December hike is only 36 percent while on Thursday it was 43 percent. The full hike, according to the market, is not priced until November 2018. It shows that the expectations for tightening have been muted, so the dollar rebound scenario remains limited.

Japanese GDP

Investors were surprised today by the Japanese GDP readings where the growth rose to 4.0% (Q/Q, annualized) while the consensus was at 2.5%. Additionally, the growth was revised upwards for the Q1 from 1.0% to 1.5% Q/Q.

Readings look fairly solid also on the yearly basis. The economy grew, comparing to the Q2 2016, by 2.0%. Moreover, the main components also look optimistic - private consumption with the growth at 1.8% y/y and investments at 5.8% y/y. Unfortunately, we are only witnessing a cyclical acceleration of the economy.

July's central bank data (BoJ) continue to show that the potential GDP growth remains below 1% per year and hasn't exceeded this value since more than a decade. In the last 10 years, the average yearly growth was 0.5% while during the recent 20 years it was 0.8%. The most recent 5-year Japanese economy experienced 1.1% growth but it was combined with extremely accommodative monetary policy and cyclical rebound. So far, there is very low probability that the growth may exceed 1.0% on the yearly basis.

Zloty remains fairly weak

The EUR/PLN fall to the 4.28 level and CHF/PLN slide towards 3.75 may suggest that the PLN is regaining some value. However, the PLN/HUF did hit new 7-month lows in the morning below the 71 level. It means that the relative PLN value in the region remains subdued due to a high level of uncertainty concerning internal political issues. The recent geopolitical events only deepened this issue.

The global macroeconomic calendar is empty today. In Poland however, the central bank is scheduled to publish core inflation. Market consensus is between 0.8% and 0.9% price appreciation. There is a high level of probability that the real publication will be within the range. Readings at or above 1.0% may slightly strengthen the PLN but the odds for an upward surprise are limited.