Daily analysis 14.12.2016

The Federal Reserve’s message should be crucial, but macro data may cause some volatility as well. The condition of the Russian ruble is improving. The zloty is giving away the majority of its gains after its strong strengthening yesterday. The euro returned to the area of 4.44 PLN.

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

• 14.30: The American retail sales (estimations: positive 0.4% MoM; excluding fuel and food: positive 0.3% MoM).
• 15.15: The American industrial production (estimations: negative 0.3% MoM).
• 20.00: The American interest rates (estimations: hike to the range of 0.50-0.75%); the announcement and macroeconomic forecasts.
• 20.30: Janet Yellen’s press conference.

Not only the expectations for 2017

We have been taking note that the change in the Fed’s expectation regarding interest rates for 2017 may be one of the most significant pieces of information for the market. Yesterday, we also emphasized that the risk of moving the value of these expectations from 1.1% to 1.4% is relatively large. This is despite the fact that the majority of the leading global financial institutions don’t expect such a change to occur. However, it’s also worth taking note that investors may analyze other hints from the FOMC.

Since September, the Federal Reserve’s announcements have included a phrase stating “roughly balanced.” It’s very likely that the word “roughly” will be deleted. This should be interpreted as a positive signal.

Estimates regarding economic growth for 2017-2018 may also be quite interesting. In September, the Fed members estimated that the GDP growth will be at the level of 2.0% YoY in the two forthcoming years. If this consensus is not modified, this will be interpreted as a dovish signal. Moreover, this will confirm that the FOMC is cautious regarding the fiscal stimulation. However, if the Federal Reserve increases the estimated GDP growth by 0.2-0.3 points (especially in the case of 2018), this would mean that its members are taking into consideration the higher economic growth, despite that no decisions from the new administration have been made yet.

The market will also focus on Janet Yellen’s testimony. We can be certain that there will be questions regarding expected fiscal changes and a stronger dollar. If Yellen’s comments regarding higher expenses and lower taxes are relatively positive, and the Fed chairwoman trivializes the increase of the dollar’s value (just as William Dudley in his interview with CNBC last week), the dollar should strengthen.

In conclusion, we expect that the Federal Reserve will be relatively hawkish. This is especially taking into consideration its consensus, which doesn’t include large changes regarding crucial elements of the Fed’s message. However, if the wide market’s scenario appears to be right, the dollar may clearly overvalue. Moreover, this overvalue may last for a few weeks.

American data and ruble’s strength

We should also focus on today’s macro data from the USA. Higher than expected retail sales (positive 0.4% MoM, excluding fuel and food), as well as the industrial production (negative 0.2% MoM), may improve the dollar’s sentiment. However, this reaction may be dimmed, due to the Federal Reserve meeting.

One of the few emerging market currencies which may consider this year to be as successful is the Russian ruble. Since this year’s beginning, the Russian currency has gained approximately 20% against the dollar and approximately 30% against the zloty. It’s also likely that the USD/RUB will go down to the range of 50-60 soon. This would definitely decrease the scale of the ruble’s crisis, which started in the second half of 2014.

The ruble is supported by increasing oil prices. Another favorable element for the ruble are the improving relations between Moscow and Washington D.C. It’s also worth keeping in mind that the interest rates in Russia are currently at the level of 10%. This may encourage capital wallets to use the carry trade strategy, especially taking into consideration that countries with similar interest rates are less stable for the time being (Turkey, Brazil, the Republic of South Africa).

Return to previous level

The zloty clearly strengthened yesterday afternoon. The EUR/PLN went down to the level of 4.4250 and the franc was testing the level of 4.11. However, this better condition was temporary. Today, the euro, as well as the franc, were 0.02 PLN more expensive. No larger moves are expected until the Federal Reserve meeting. This is despite the fact that the NBP will most likely publish a positive current account data for October (foreign trade exchange balance published by the Polish Central Statistical Office was better than expected).

When it comes to the zloty’s reaction to the Fed’s announcement, we sustain our standpoint from yesterday. A relatively hawkish message may cause the EUR/PLN to return to the range of 4.45-4.50 and the USD/PLN will go above 4.25. However, if the Federal Reserve doesn’t change its forecasts in comparison to expectations from September, and the Fed chairwoman would be concerned with the increasing USD, the euro and the dollar will go down to 4.40 and 4.10, respectively.