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Daily analysis 16.08.2016

16 Aug 2016 13:30|Marcin Lipka

Global overvalue of the dollar is causing further growths of the main currency pair. The pound is supported by a higher than expected inflation in the United Kingdom. General evaluation of the zloty against the foreign currencies remains relatively stable. This does not concern the dollar, as well as the pound. Lower evaluation of these currencies against the zloty is only caused by their weakness.

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

  • 14.30: Inflation in the USA from July (estimations: positive 0.9% y/y; excluding fuel and food positive 2.3% y/y).
  • 14.30: House building permits and initiated new investments in the real estate sector in the USA (estimations: 1.16 million and 1.18 million in annualized interpretation, respectively).
  • 15.15: Industrial production in the USA (estimations: positive 0.3% m/m).

Dollar remains weak

On Friday we took note of serious consequences of weaker than expected retail sales data from the USA. Its pace in the year on year relation, decreased from the 3.0% level in June, to 2.3% level in July. This is a significant change, especially that the Federal Reserve emphasized a strong growth of the households consumption in the previous announcement. The current growth cannot be defined as strong.

This is another argument, apart from weaker GDP readings, for not raising interest rates in September, as well as not suggesting that such move may be made in the following months. The market's reaction from last Friday was not unambiguous. Profitability of the American two-year treasury bonds decreased by 6 base case points to 0.68%. However, a significant part of these losses were worked-off relatively quickly.

Also the EUR/USD exceeded the 1.12 level for a short time. On Monday it returned to the area from before the publication of the retail sales data. However, the situation on the dollar has been clearly deteriorated by behavior of the yen against the American currency. During the Asian session, we could observe a strong depreciation of the USD/JPY. It was not caused by the new data from Japan, but most likely by closeness to the 100 level, as well as a quite small liquidity during the holiday time.

A stronger yen means a weaker dollar. Even though this move not always perfectly translates to other currency pairs, this time it was an impulse for a larger depreciation of the dollar against other currencies. It is most likely that the market participants considered the weaker American data (despite its initially limited reaction) to be an argument for future sale of the dollar. As a result, the EUR/USD went above the 1.1250 level in the middle of the European session, which is its highest result since the end of June.

It is worth focusing on today's data from the American economy regarding the dollar. Basically all of the readings (publications from the real estate market, industrial production and inflation) may be significant, if they appear to be clearly different than expectations. However, the base case inflation parameter (excluding fuel and food) may be the most significant. If it doesn't remain near the positive 2.3% y/y level, the neutral tone of other data may cause a further wear-off of the dollar.

Higher inflation in United Kingdom

The beginning of this week was not favorable for the pound. The British currency was only a few pbs (in the area of 1.28) above its thirty-year minimum against the dollar. Moreover, according to the CFTC data from Friday evening, last week the net amount of short positions (disposed towards depreciation of the GBP) was the largest in at least 10 years.

Weakness of the dollar, as well as slightly higher than expected inflation readings, slightly supported a small rebound of the British currency today. However, a larger than expected growth of prices is mostly caused by an increase in costs of imported products, due to a significant wear-off of the pound during one year. It amounted approximately 25% against the currencies included in the UK trade exchange.

On the other hand, base case inflation was slightly below expectations. The Bank of England may consider this as an argument that confirms an economic slowdown. Thus, despite that today's data has been positive for the pound, we will probably have to wait until the retail sale readings on Friday. If they do not show a decrease in customers purchasing activity, it will even be possible to build an argument for a correction of the pound's recent depreciation.

Stabilization continues

Looking at quotations of the zloty against the dollar, as well as the pound, it is clear that both of these currencies are weaker against the PLN. Currently, the GBP/PLN is in the 4.90 area. This is its lowest level since October 2013. The USD/PLN is at its lowest level since the beginning of June. However, it's worth emphasizing that these moves are a result of weakness of these currencies in the global market (more details in previous paragraphs), rather than of a unique strength of the zloty.

This theory is confirmed by the behavior of the zloty against the euro, as well as the forint. Their quotations are relatively stable. We also should not count on more signals regarding a possible decrease in interest rates by the MPC. It seems that the Friday comments from Professor Żyżyński of the Council, will not be supported by many members of the national monetary authorities (except for Professor Łona). Thus, the scenario of leaving interest rates at an unchanged level, will yet again be dominating on the meeting in September.


16 Aug 2016 13:30|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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