Daily analysis 17.03.2016

Dovish message from the Fed. The FOMC is much more focused on global events. The dollar is significantly weaker on the international market, which includes the zloty. Other PLN pairs remain fairly stable.

• 14.00: Industrial production from Poland (survey: +5.3% y/y).
• 14.00: Retail sales from Poland (survey: +3.2% y/y).

The Fed goes global

Wednesday's result of the Federal Reserve meeting was significantly more dovish than market participants expected. It was confirmed by the dollar move, which slid around 1-2% to most leading DM and EM currencies. There was also a spectacular move on the two-year US bonds. The yields dropped from around 1.00% to below 0.85% just after the macroeconomic projections hit the wires and Janet Yellen's conference was concluded.

It is worth noting, however, that the Fed's statement in the first few paragraphs was fairly optimistic. The FOMC writes that economy, “has been expanding at moderate pace,” household spending, “has been increasing at moderate rate, and the housing sector has improved further.”

Positive developments are also observed in the labour market with “strong job gains.” Moreover, “inflation picked up in recent months; however, it continued to run below the Committee's two percent long-run objective. There is a question of what caused the median Fed fund rate to split into only two rate increases this year. The Fed wasn't able to conclude the balance of risks for the US economy.

Firstly, the FOMC is concerned regarding the global events. They are already included in the Fed statement which points out that the “global economic and financial developments continue to pose risks.” These issues are more broadly discussed in the opening speech, where Yellen claims that “since the turn of the year, concerns about global economic prospects have led to increased financial market volatility and somewhat tighter financial conditions in the United States.”

Beside the threats from abroad, there were a very interesting comments from Yellen concerning inflation. Regarding the most recent CPI reading, the Fed's chairwoman noted that higher prices are in categories that are characterized with volatility. This was probably a suggestion for the market to not draw too much of a conclusion from the recent numbers.

Finally, any hawkish arguments which may have been valid before the Fed's meeting, were dismissed, and the FOMC is clearly focused on global issues. This may also result in some market participants doubting where the Fed can continue the tightening process, even at a subdued pace, because the odds for significant improvement of the global economy are quite low.

It has already been noted in interest rate expectations. Yesterday, the market was pricing the June hike with a 50% probability and today the return to monetary policy tightening is expected for September.

Finally, there is also another important issue. Yesterday's dollar depreciation which was in line with the equity jump, should be regarded as an extraordinary event which is derived strictly from a looser monetary policy. The market will likely return to the previous view that the stock slump is dollar negative and stronger equities are bullish for the dollar.

The dollar is at a 5-month low

The global dollar weakness which was caused by a significant reduction of further rate increases in the US, caused the USD/PLN to drop below the 3.80 level, which is the lowest level in five months. In the morning, there was also an attempt to push the EUR/PLN lower due to looser monetary global conditions, but the attempt failed materialize. Currently, there is a limited possibility that the EUR/PLN may drop toward 4.25 at a fast pace.

During the afternoon session, Polish industrial production and retail sales are scheduled to hit the wires. Despite the fact that these are primary readings from the local economy, they are not expected to change the sentiment on the zloty significantly. Firstly, due to the fact that global events shape the broad basket of EM currencies, and secondly, regarding the most recent neutral Polish MPC stance, the zloty should remain unchanged regardless of the data.