Daily analysis 16.03.2017

The Fed increased interest rates, but the majority of its forecasts remain unchanged. No surprises from the SNB. The pound is anticipating the Bank of England meeting. The zloty, as well as the other emerging market currencies, is gaining value. However, the chances of the Polish currency’s further appreciation are quite limited.

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

• 13.00: Announcement and minutes from the Bank of England meeting.
• 13.30: Weekly jobless claims from the US (estimates: 240k).
• 13.30: Building permits and new investments in the US real estate market (estimates: 1.268 million and 1.264 million, respectively).
• 14.00: Poland’s balance of payments (estimates: current account balance positive 332 million euros).

Fed is less hawkish, but yet not dovish

The American currency has clearly worn-off after yesterday’s Federal Reserve meeting. The dollar’s value against the yen and the euro decreased by approximately 1%. However, this doesn’t mean that the Fed has withdrawn from its previous suggestions regarding rate hikes. The Fed’s announcement alone consisted of many relatively hawkish suggestions. However, they were not included in the headlines.

We should begin with the elements that caused the dollar’s wear-off. Primarily, the median expectation regarding the future interest rates didn’t change as it is still at three rate hikes (including yesterday’s) for 2017 and at three rate hikes for 2018 (0.25 percentage points each). A few investors were speculating that the estimates for 2017 may increase. However, yesterday we wrote that this move would be too aggressive.

Another surprise was the fact that Neel Kashkari voted against the rate hikes. He claimed that he finds that leaving interest rates unchanged is a more favorable scenario. Even though Kashkari isn’t one of the crucial FOMC representatives, the fact that Janet Yellen hasn’t managed to build a full consensus may have had an impact on the interpretation of the entire message as less hawkish by the market.

However, we can’t ignore the matters that show the FOMC’s determination to accelerate monetary tightening. Currently, fourteen of the seventeen FOMC members claim that the optimum interest rate level is at the median (or even higher) expectation level. Previously, it was eleven members. Moreover, the median expectation could have been moved to four hikes in 2018, if it weren’t for just one vote.

During her press conference, Janet Yellen claimed that hypothetical changes in the fiscal policy have not been included in the macroeconomic forecasts. This may be a hint that the implementation of both the lower taxes and an increase in expenses, may result in a more restrictive monetary policy.

The Fed’s announcement alone can be interpreted as relatively optimistic and quite dovish. According to the American monetary authorities, the labor market keeps improved its strong opinion regarding the investment component. Inflation is near its 2% goal, whereas it was below this level in February.

Even though the FOMC message was less hawkish than the market had expected, this does not suggest a slowdown in monetary tightening. Moreover, judging from the scatter plot, it seems that only a minor modification is required to increas the preferred path of rate hikes. However, this is a potential scenario for the FOMC meeting in June. Currently, the market will continue analyzing both the macro data and economic plans from the American administration. It will be difficult for the dollar to go towards its new maximum.

SNB and BoE

At 9.30, we received the announcement from the SNB meeting. The Swiss monetary authorities have not changed their message. This means that interest rates remain unchanged and, according to the SNB, the franc is strongly overvalued. Therefore, the Swiss central bank hasn’t ruled out an intervention in the currency market in order to wear-off the CHF. However, the perspective for this year’s inflation has been increased from 0.1% to 0.3%. Nevertheless, the path of consumer price growth is currently more stagnant than it was. The SNB message should have a minor impact on the franc.

At 13.00, we will know the result of the Bank of England’s meeting. However, we will not receive macroeconomic forecasts at this time, nor will there be a press conference. Nevertheless, the minutes may be quite interesting, especially considering the evaluation of the United Kingdom’s economic condition regarding the current data, as well as Brexit. After the Fed meeting, the GBP/USD increased approximately 60 pips. Taking into consideration how strong the dollar’s wear-off was, this is a very poor result.

Zloty benefits from Fed’s message

A strong increase in the American floors, a decrease in the profitability of the American debt, the dollar’s wear-off and a positive sentiment towards the emerging market currencies – all of this has created perfect conditions for the zloty to strengthen. Today, the dollar went near the level of 4 PLN and the EUR/PLN tested the area of 4.30. However, the zloty is slightly weaker against the forint. This goes to show that the Hungarian currency benefits more from the global increase in the risk appetite.

The zloty’s condition shouldn’t change until the end of the week. However, taking into consideration that the dovish interpretation of the Federal Reserve’s message is a rather temporary reaction, the perspectives of the PLN may appear unfavorable. This is mainly due to the dovish attitude from the Polish monetary authorities.