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Daily analysis 15.12.2016

15 Dec 2016 13:14|Marcin Lipka

The EUR/USD is at the lowest level in fourteen years. Hawkish message from the Federal Reserve has caused very serious changes in treasury bonds. The zloty is at its lowest level against the dollar in fifteen years. The American currency costs 4.27 PLN. However, the reaction on the EUR/PLN was relatively calm.

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

  • 14.30: CPI inflation from USA (estimations: 0.2% MoM, 1.7% YoY; excluding fuel and food: 0.2% MoM, 2.2% YoY).
  • 14.30: Weekly jobless claims (estimations: 255k).
  • 15.45: Initial PMI data from the American industry (estimations: 54.5 points).

Strong reaction of market

For many days, we have been taking note that the Federal Reserve meeting in December will be significant, even despite the fact that basically the entire the market has been estimating rate hikes. We have also been suggesting that the FOMC message may be relatively hawkish and one of its crucial elements will be moving the future interest rates expectations upward. However, due to the fact that the majority of leading investment banks expected “a hawkish hike”, the market’s reaction to the hawkish message was very strong.

Yesterday, the profitability of the two-year treasury bonds increased by 15 base case points (to 1.29%) and reached their highest level since the second half of 2009. The reaction on the five-year bonds was even stronger. They were at the level of 1.88% before the FOMC announcement. Currently, they reached the level of 2.10%.

It’s also worth taking note that the interest rates market is currently estimating the likelihood of the 25 base case points rate hike in March for more than 40%. Moreover, there is an increasing chance that interest rates will be within the range of 1.00%-1.25% in September (two rate hikes since today). Serious changes occurred in the currency market as well. The USD/JPY is above the level of 118.00 (a more than 2.5% growth). Additionally, the EUR/USD tested its fourteen-year minimum (below 1.0450).

Expectations from the Fed members

Modification of expectations regarding the future interest rates was the most significant element of the Federal Reserve announcement. Currently, eleven out of seventeen FOMC representatives estimates that there will be at least three rate hikes in 2017 and only six of them estimated this scenario in September. This is a significant change, because the Fed has only been revising these estimations downward, over the past few quarters. Therefore, this increase not only is of financial significance, but also of symbolical. This is because this suggests openness to a less accommodative monetary policy in future.

It’s also worth noting that this modification must concern the voting members of the Federal Reserve as well. Moreover, two out of five Fed governors may be among those, who support three rate hikes. However, perspectives for inflation, as well as for the economic growth, have not been clearly modified yet. Therefore, if stimulative elements are implemented gradually, the chances for maintaining the steepness of the current path (or increasing it) will grow.

The Fed’s hawkish attitude may be sustained by the fact that the current situation is beginning to become increasingly comfortable for the Federal Reserve. This is basically the market that estimates higher interest rates for the future and the central bank follows these expectations. Moreover, this gives the monetary authorities a larger space to react to a potential business cycle slowdown in the future with more conventional methods, rather than with monetary easing.

In conclusion, that the Fed will continue to raise interest rates according to its suggestions from yesterday, if the economy develops as expected. This should sustain the dollar’s strength. However, if the macro data begin to exceed the market consensus while the new fiscal policy crystallizes, the dollar may continue to achieve its new records in 2017.

Dollar at its fifteen-year maximum

The Federal Reserve message strengthened the American currency, just as we expected. Due to the fact that we have been dealing with the zloty’s general weakness, the USD/PLN exceeded the level of 4.27. This is its highest value since July 2001.

However, it’s worth noting that the reaction on the EUR/PLN was relatively calm. This pair continues to move within the range of 4.45-4.46. This situation is also consistent with our expectations that the dollar’s appreciation will not cause significant growths on the EUR/PLN. This is a result of a mild monetary policy from the ECB.

The forthcoming hours may calm down this situation. However, we also can’t exclude a test of the 4.30 level on the USD/PLN, especially if today’s inflation data from the USA is above the market consensus (2.2% YoY in the base case interpretation).

15 Dec 2016 13:14|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.

See also:

14 Dec 2016 16:40

Afternoon analysis 14.12.2016

14 Dec 2016 13:20

Daily analysis 14.12.2016

13 Dec 2016 16:35

Afternoon analysis 13.12.2016

13 Dec 2016 13:08

Daily analysis 13.12.2016

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