Daily analysis 16.12.2016

Yesterday, we saw that the dollar reached records. However, the recent trends are being clearly corrected today. We should not expect any dovish suggestions from the FOMC representatives. The zloty and the other emerging market currencies are working off their recent losses against the euro, as well as against the dollar.

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

• No macro data that could significantly impact the analyzed currency pairs.

Decrease in recent records

The EUR/USD fell below its fourteen-year minimum yesterday - near 1.0450. Moreover, there was another wave of demand for the dollar yesterday evening, which brought the main currency pair down to the level of 1.0370. This has also been confirmed by the new records of the dollar index (DXY), which exceeded the level of 103.5. It’s worth noting that the DXY increased 2.5% since the moment that the Federal Reserve announcement and new macroeconomic forecasts were published. Moreover, this index increased 8% since its low after the American presidential elections. Taking into consideration the differences between the other developed market currencies of a similar credibility level, these changes are huge.

However, the above mentioned moves from yesterday evening have not been confirmed by an increase in expectations regarding the future interest rates. Yesterday at 12.00 AM, the profitability of the American two-year treasury bonds reached their level of 1.3%. However, at approximately 6.00 PM, their maximum level was 1.28%. Let’s keep in mind that the dollar was reaching new records at that time. The current value of this index is lower by three base case points, which supports correction tendencies on the USD.

It’s also possible that the Christmas period will limit more serious changes. The lower activity level of institutional investors may cause any clearer deflections to be corrected at the beginning of next year. Of course, the behavior of the debt instrument market will remain the main catalyst of change. The higher the level of future interest rates, the larger the chances of USD appreciation against the euro, as well as against the other currencies.

Comments from Fed

There are only two testimonies from the FOMC representatives left this year. Jeffrey Lacker will speak today at the conference concerning the economic matters. The Richmond Fed representative won’t have the right to vote in the matters regarding the monetary policy until 2018. Moreover, he is one of the most hardcore hawks within the Federal Reserve. Therefore, his expectations regarding the future interest rates are most likely above the consensus. We should not expect his evaluation to have a significant impact on the market.

Moreover, Janet Yellen’s testimony at the University of Baltimore is scheduled on Monday. However, it’s difficult to expect that it will cause any dramatic changes in the market. The Fed chairwoman is to be granted with a special distinction from the University, and her testimony will most likely be a courtesy of character. Moreover, there will be no Q & A series.

However, we can’t exclude that no other FOMC representative will appear in the financial media by the end of the year. Comments from the Fed members will most likely be widely analyzed. However, we don’t expect them to drastically change the recent message from the Federal Reserve. If eleven out of seventeen representatives had claimed that it’s for the best to raise interest rates by 75 base case points in 2017, they will most likely stick to this decision. Moreover, the current situation is more comfortable for the Fed. Therefore, the Federal Reserve will most likely remain hawkish, until the market clearly won’t begin to interpret the monetary tightening negatively.

Calmer zloty

A slight correction of the profitability of the American debt, as well as the global work-off of the dollar’s growth, caused the USD/PLN to go below the level of 4.25. Moreover, the EUR/PLN behaves relatively well. Due to the tightening of the global monetary conditions, yesterday’s growths were limited. When the pressure on the emerging market currencies began to decrease, the EUR/PLN reached the range of 4.32-4.33. This is a sign that depreciation pressure on the zloty against the euro, as well as against the franc, may be limited even in the case of a stronger dollar.

The forthcoming days should be relatively calm for the zloty, as well. However, on Monday, the data from Poland may introduce some more volatility. If it appears that the pace of a decrease in the building sector remains above 20% YoY and the change in industrial production remains negative, this would increase the risk of a weak GDP reading for the fourth quarter. Nevertheless, the risk of larger moves on the euro or the franc remains limited in the forthcoming hours.