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Daily analysis 15.06.2016

15 Jun 2016 13:22|Marcin Lipka

New surveys regarding the British referendum confirm an increasing advantage for the Brexit supporters. The Federal Reserve meeting should be relatively neutral for the American currency. The zloty remains weak against other currencies.

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

  • 15.15: Industrial production in the USA (estimations: negative 0.2% m/m).
  • 20.00: Decision of the Federal Reserve regarding interest rates. Publication of the FOMC announcement. Publication of macroeconomic forecasts.
  • 20.30: Janet Yellen's testimony after the Federal Reserve meeting. The Questions & Answers session.

New surveys

Two more surveys regarding the British referendum have appeared since yesterday afternoon. According to the survey conducted by the TNS, 40% of respondents want the United Kingdom to remain in the European Union, and 47% vote for Brexit. On the other hand, the survey for The Sun made with traditional methods gives a 1% advantage for the EU supporters.

However, if we compare the survey for The Sun with the survey conducted by the same company (ComRes) for Daily Mail/ITV News one month ago, we will see that the change is visible (10% in favor of the Brexit supporters). This is yet another signal that a change in attitude of the Brits is actual (at least to some degree), rather than a result of estimation error.

What is interesting is last night many websites published the survey that showed the advantage for the Brexit supporters. However, it appeared to be forged. The coming days will bring many new surveys. The crucial matter is whether the Brexit supporters will gain a visible advantage in phone surveys. If they do, the risk of Brexit will most likely increase above 50%. This should cause a significant decrease in evaluation of the pound.

Evening with Federal Reserve

Today's FOMC meeting will be a serious challenge for the Federal Reserve. The market is clearly escaping from risky assets. This is confirmed by changes in debt instruments. However, the Fed will probably not want to react on a decrease in the profitability of bonds, as well as in terminal contracts for interest rates. This is because it may cause a stronger capital flow to the dollar, as well as a further increase in tensions in the market.

Thus, the announcement will most likely be relatively moderate. The Federal Reserve will take note of weaker readings from the labor market, as well as emphasize an improvement in condition of the American economy in the second quarter. Retail sales data from May was good. Moreover, the GDPNow model indicates a 2.5% growth in annualized approach for the past three months.

Of course, the market will carefully analyze the dot plot that shows estimations of the particular FOMC members regarding the level of interest rates for the end of the year. In our opinion, the median of the dot plot will not change, and it will continue to show two hikes (0.25% each). The indications should near the area of the median. In March, three members estimated three hikes, and four members estimated four hikes. Currently, it is less likely that somebody will expect a one-percent hike during the next six months.

On the other hand, expectations regarding 2017 will probably be reduced. In March, the median indicated hikes at the level of 100 base case points. Currently, it may be 75 points. Janet Yellen's press conference should be relatively neutral as well. The Fed chairwoman will probably not suggest the monetary tightening in July, especially considering that the risk of Brexit is realistic. Just few weeks ago, some of the FOMC representatives were underestimating it. Considering the market situation, they probably will not do it now.

In conclusion, the FOMC will probably be more hawkish by keeping the perspective of two hikes this year (despite that the market does not estimate any). At the same time, it is likely that it will be more dovish by taking note of the global risks related to Brexit, as well as reducing perspective of the monetary tightening in forthcoming quarters. This should cause the dollar, as well as the pairs related to the American currency, to react calmly. Investors should return to observations of the situation concerning the British referendum tomorrow.

Working-off loses carefully

This morning the zloty continued to be the weakest among the thirty-one currencies of the developed countries, as well as of the emerging markets. The Polish currency lost more than 2.5% in one week. It was even overtaken by the pound. The British currency lost 2.4% against the dollar. However, the global sentiment improved slightly. This caused a minor improvement in the situation of each currencies that are directly or indirectly exposed to the risk of Brexit.

Because today's Federal Reserve meeting will be relatively neutral in our opinion, we do not expect any significant moves on the USD/PLN nor the EUR/PLN. However, if it appears that the Fed is so determined to suggest the monetary tightening in July, the USD/PLN may go to the area 3.97. The euro, as well as the franc, may be more expensive by 0.02-0.03 PLN. On the other hand, if the FOMC shows a milder attitude, there should not be any greater changes on the EUR/PLN nor the CHF/PLN. However, the dollar may decrease by approximately 0.5%.

Participants of the zloty market will probably return to observe information regarding the British referendum quite quickly. The zloty is extremely sensitive to surveys regarding Brexit. If a negative trend increases, the USD/PLN may reach 4.00 before the referendum. Moreover, the EUR/PLN is likely to test the range of 4.47-4.48. In this scenario, the franc may move to the range of 4.15-4.20.

15 Jun 2016 13:22|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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