Daily analysis 16.03.2016

Alternative scenarios for today's Federal Reserve meeting and the hypothetical impact of this meeting on the dollar. Data from the USA. The zloty became slightly weaker in the few past days. Eryk Lon, the new MPC member, spoke about factors which may reduce interest rates in Poland.

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

• 13.30: CPI inflation from the USA (estimations: negative 0.2% m/m, positive 0.9% y/y; excluding fuel and food: positive 0.2% m/m, and positive 2.2% y/y).
• 13.30: Permission for residence construction in the USA (estimations: 1.2 million).
• 13.30: Initiated investments in the real estates sector (estimations: 1.15 million).
• 14.00: Base inflation from Poland (estimations: 0.0% m/m, and positive 0.1% y/y).
• 14.00: Change of employment in Poland (estimations: positive 2.4% y/y).
• 14.15: Industrial production in the USA (estimations: minus 0.3% m/m).
• 19.00: Macroeconomic projections and the announcement from the Federal Reserve.
• 19.30: Start of Janet Yellen's press conference after the Fed's meeting.

Alternative scenarios

In yesterday's analysis, we took note of the base case scenario for the Federal Reserve meeting today. It assumes that the FOMC will leave interest rates unchanged, and the monetary tightening will be at the level of 75 points by the end of the year.

A modification of the announcement, regarding risk for the American economy, determines whether the meeting will be received as hawkish or dovish. If the prognosis is “near balanced” or “balanced”, it will probably have a positive impact on the American currency, and increases the expectations regarding hikes in June. The same description as at the previous meeting will, on the other hand, be considered dovish. However, what can the alternative scenario look like?

First of all, an increase in interest rates would be a significant surprise. This solution is anticipated by only four out of the ninety-eight economists surveyed by the Bloomberg agency. If the perspective of four hikes this year is sustained, it would also be considered hawkish, even it interest rates remain unchanged today.

This would mean that the Fed is determined to tighten the monetary policy visibly. There are suggestions that inflation may increase in the forthcoming years, even though only a few weeks ago there were opinions about a risk of deflation.

On the other hand, if we would like to define a more dovish announcement, it should limit the expectations towards two hikes this year. The strengthening of this message would also include anxieties regarding the global situation, and negative effects of a strong dollar. These matters would probably be emphasized during Janet Yellen's press conference. A development of this type of situation would clearly be a negative signal for the USD.

However, chances for a clear deflection from the consensus are currently relatively small. Since the beginning of the year, we had strong disturbances in the financial market, and the Federal Reserve will most likely want to avoid creating a greater uncertainty with their decisions. Thus, we expect that the base case scenario will be fulfilled, and will also include a slightly hawkish element in the form of the return of the economic perspective to “near balanced”. This should be a positive scenario for the USD.

Series of the American macro data

Apart from the Federal Reserve meeting, we should also focus on today's macro data from the USA. Even if it does not cause a clear reaction (investors will be waiting for decisions of the Federal Reserve), it may change the perspective of some of investors, or increase reaction of the market right after the FOMC publications.

The index of the base inflation is the most important reading. In January, it increased to the level of 2.2% y/y, which is its highest since 2012. Expectations for this month are also at the level of 2.2%. However, if it appears the CPI (with the exclusion of fuel and food) increased in February to 2.3% y/y, the result from April 2012 would be equalized. Also, both readings would be the highest since 2008.

It is also worth taking note on how the real estates market and the industrial production from the USA will look like. If the readings are good, and our base case scenario for the FOMC meeting fulfils, the reaction on the dollar may be stronger.

Weaker zloty

The zloty loses approximately 0.02-0.03 PLN in comparison to yesterday afternoon. It is mainly caused by a deterioration of the global sentiment on Tuesday, and a rebound after recent appreciation of the PLN. The base case scenario is stabilization for the national currency, except for the USD/PLN pair (today it may test the area of 3.90, if it appears that the Fed is more hawkish).

The scenario of the zloty's stabilization, should be supported by the message from the MPC. In his statement today for Bloomberg, Eryk Lon suggested that only a deterioration of the economic situation of Poland's main trading partners would be a sufficient enough argument for an increase in expectations regarding a decrease in interest rates.