Daily analysis 17.03.2017

The dollar remains relatively weak, although the appreciation of the euro after ECB’s Ewald Nowotny comments was rather exaggerated. Even wider discussion regarding Scotland’s independence. Forecasts before today’s macroeconomic data from Poland could prove too optimistic. Zloty continues to be relatively strong.

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

• 14.00: Industrial and construction production in Poland(estimates: +2.7% YoY and -0.1% YoY respectively).
• 14.00: Retail sales in Poland (estimate: +8.3% YoY).
• 15.00: University of Michigan’s Consumer Confidence (estimate: 97 points).

Questionable appreciation of the euro

The dollar index (DXY) is currently 2% below last week’s levels. It’s mostly the result of a less hawkish than expected tone that came from the Federal Reserve. However, it’s also partially the result of an appreciation of the euro, which is visibly reflected in the EUR/USD pair trading at its highest level since the beginning of February.

The higher trading level of EUR/USD after the elections in the Netherlands was a natural result of diminished fear for the stability of the eurozone. However, yesterday’s increases after Ewald Nowotny’s interview for Handelsblatt have relatively feeble basis. To a question about the possibility of rate hikes before QE’s end, he answered that not every kind of interest rate has to be increased at the same time.

Nowotny’s suggestion about the possibility of a hike in the deposit facility rate before the QE ends caused EUR/USD to go up by around 50 pips and to test the 1.0770 level. However, Peter Praet was quite prompt to relate to Nowotny’s comments for the Bloomberg agency. EBC’s chief economist stated that the Governing Council “is very clear on sequencing and has a strong logical basis”. Praet also appealed to last week’s ECB statement. The first two sentences state that “the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged” and expects “the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

It’s also worth noting that the reaction on the interest rate market was definitely calmer than that on the currency market after Nowotny’s comments. The market expects a hike of 10 basis points in 2018 (from -0.4% to -0.3%), while on Wednesday it was just 8.2 basis points. The differences are microscopic, so yesterday’s reaction on the currency market was probably too substantial and could be undone relatively quick.

More and more discussion regarding Scotland

The matter of Scotland’s independence has been starting to attract more and more attention. After yesterday’s ITV interview with Theresa May in which she suggested a lack of consent for a Scottish referendum, Alex Salmond, the former first minister of Scotland, said to Financial Times that Scotland could embrace its own currency. Earlier, Salmond wanted to still be able to use the British pound in the case of Scotland independence.

It’s also worth noting that the independence polls start to reach a point where the final result could be burdened with ever increasing risk. Three of the recent polls ( Survation/Scottish Daily Mail and YouGov/Time Times) indicated that the majority of respondents still wanted to remain inside the United Kingdom. The intensification of the dispute between the Scottish National Party and Theresa May government in the midst of commencing the procedure to exit the EU could prove to be a negative signal for the pound and generally for the economic sentiment in Great Britain.

Too optimistic forecasts

Zloty, supported by a very good sentiment in relation to emerging countries’ currencies, has continued to appreciate. Just before midday, EUR/PLN tested the 4.30 boundary and the dollar traded just below the 4.00 PLN level. The franc was close to the dollar level, which could mean that the Swiss currency could test the lowest levels since the beginning of November – since the moment of the U.S. presidential election came to a close.

Besides the global matters, it’s important to turn the attention to the Polish macroeconomic data as well. One can acknowledge the median of expectations at 2.7% YoY as relatively balanced. However, economists’ expectations regarding the retail sales growth at 8.3% YoY, while there was one day less in February than one year ago, could be too optimistic and prove hard to achieve. We are also sceptical as to the construction production change in February being close to zero. An unfavourable calendar make-up and yet another very low inflow of EU’s funds (the capital account in the balance of payments) suggests that today’s reading could be negative.