Daily analysis 15.01.2016

Next stage of increase in aversion towards risk. Was James Bullard slightly more dovish than it could be expected? This time intense sale of the zloty had a local source. Doctor Chrzanowski, the new Monetary Policy Council member, is careful about the possible modifications in the Polish monetary policy.

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

• 14.30: Retail sale from the USA (estimations: minus 0.1% m/m; with exclusion of fuel and cars +0.4%).
• 15.15: Industrial production from the USA (estimations: minus 0.2% m/m).
• 16.00: Sentiments of the American consumers examined by the University of Michigan (estimations: 92.2 points).

Strong correlation is maintained

The dollar is still strongly dependent from the condition of the American stock market. Yesterday's increases in the USA caused a significant appreciation of the USD, and a depreciation of the EUR/USD. On the other hand, when the situation on the Asian stock markets began to deteriorate and the renminbi started to wear off, the main currency pair returned to the area of 1.0900.

Additionally, the currency market is completely ignoring the signals from the ECB (including the fact that yesterday's minutes were relatively dovish). Also, the Fed representatives' testimonies do not make a big impression on the investors. Thus, only the capital market matters. However, because it is very unstable and at the same time it causes strong impulses, it is difficult to estimate the consequences of other factors' impact when the stock market indexes end the period of increased volatility.

Was Bullard more dovish?

James Bullard made his testimony yesterday afternoon. He is a member of the Fed who has a right to vote this year, and is a moderate supporter of hikes. However, information from the Bloomberg agency could appear interesting. According to them, “it may take a little more time than previously expected for inflation to reach its target”, due to a decrease in oil prices. This could mean that one of the hawkish members is suggesting a slowdown of the monetary tightening cycle.

However, other statements from Bullard in the questions&answers session and the presentation itself, make this concept doubtful. Bullard expects an acceleration of increase in salaries, and sustains the opinion that the American economy will be developing at a pace of 2.5-3.0%. Also, according to Bullard the situation in China did not change since January 1st.

Materials shown by Bullard really show that the general level of inflation can decrease. If price of oil decreases to 20 USD per barrel, the CPI may decrease in July even to minus 1%. It would not reach the area of 2% until mid 2017. On the other hand, the area of inflation target would be reached already in 2016, if cost of oil is in the area of 40 USD.

However, there is a question can we assume that oil will really cost 20 USD? Presented by Bullard decrease in long-term inflation expectations along with depreciating oil, is difficult to explain by even himself.

In conclusion, the Fed will have quite difficult tasks. It is mostly making a connection between the monetary tightening an a decreasing inflation, which will probably appear in mid 2016. Will the Fed try to act coherent with the rules of monetary policy, and look beyond the matters of raw materials and focus on the base case inflation? Or will the situation on the capital market along with lower prices of raw materials will postpone its decisions, as it was in September?

Few words about the foreign market

Today we will receive a lot of macro data from the USA – retail sale, industrial production, and consumers' sentiments. However, the market will probably more dependant on the sentiment of the investors from the USA, as it was during the past days. If it is better, the EUR/USD should return below 1.09. On the other hand, the main currency pair will probably remain above the mentioned level, if the strong depreciation of oil maintains, and the stock market indexes decrease by more than 1%.

Sudden wear off on the zloty

Last afternoon was very significant in the context of the zloty's condition. The national currency is clearly losing its value despite an improvement in the global sentiment. It can be observed on the zloty's relation to the forint, on which we have been focusing for the past few weeks. Only yesterday, the zloty lost more than 1% to the Hungarian currency. Additionally, after Thursday's session a strong reduction of the PLN price increased to more than 3% from the beginning of the year. Due to the fact that the forint historically reacts on a global increase in aversion similar as the zloty, we can assume that the 3% loss of the PLN to the main currencies, has its source in the local affairs.

The disturbed market is also ignoring the signs from the future MPC members. Today, the Polish Press Agency (PAP) published an interview with doctor Chrzanowski, a new member of the Council. He said that “currently we should observe the situation in our economy and its sorrounding more carefully, analyse information that we receive, and approach the decision about possible cutting of interest rates very carefully”. Chrzanowski also claimed that “apart from stability of prices we may want to consider recently wearing off rate of the Polish currency in our decision making process. It is strongly impacted by changes in interest rates”.

Doctor Chrzanowski's statements indicate that if weakness of the zloty maintains, the chances for cutting are small. Additionally, other nominated by the Senate members are also sceptical about decreasing the cost of the money. This fact should stabilise the PLN, after nervousness on the market decreases. However, in short term pressure on a wear off on the zloty remains. Thus, reaching the 4-year maximums and the area of 4.45 per euro is possible.