Daily analysis 17.10.2016

The pound’s condition should still be determined by the discussion regarding the Brexit consequences. The FOMC chair’s testimony is relatively neutral in the short-term. The zloty has difficulties in working-off its recent losses. The EUR/PLN is above 4.30.

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

• 15.15: Industrial production from the USA for September (estimations: positive 0.2% m/m).
• 18.15: Stanley Fisher’s testimony.

Situation on pound remains unfavorable

We have received more information, which may become an argument in favor of keeping the pound globally weak. In her interview with BBC, Nicola Sturgeon, chair of the Scottish National Party, said that Scotland may apply for their own trade agreement with the European Union. Taking into consideration Sturgeon’s previous suggestions regarding another independence referendum in Scotland, this matter may become dominating when it comes to changes on the pound.

On the other hand, Sunday Times published an article by Boris Johnson this weekend. Johnson is one of the leading Brexit supporters and the current Secretary of State for Foreign and Commonwealth Affairs. His article was written a few months ago and not published previously. However, the problem is that it mainly contains the arguments in favor of remaining within the EU. The only risks that Johnson mentioned were the danger of Scotland leaving the UK or the loss of access to the EU market. Johnson commented this on Sunday that the article was never to be published and he only sent it to his friend.

On weekend, Angela Merkel said yet again that if the United Kingdom limits migration, it will have a limited access to the EU market. The Financial Times published an article which contains statements from the chairman of the German Association of the Automotive Industry. Matthias Wissmann claimed that Brexit will destroy this sector in the United Kingdom. In his opinion, the hard Brexit would cause the production to move to Poland or Slovakia, “which are very attractive, their labor costs are low and they are the EU members.”

It’s also possible that the government’s views regarding economic matters, will be inconsistent with the views of the central bank. On Friday, Mark Carney said that the BoE will not take instructions regarding their target from politicians. According to Reuters, this was a reply to Theresa May’s critical statement regarding low interest rates.

The pound’s market may remain under strong pressure of internal policy, as well as of increasing risk of the hard Brexit consequences. However, a new wave of the pound’s sale would most likely require a clear deterioration of the current macro data. This could move the pound near the 1.15-1.20 range, as well as move the GBP/PLN to the range of 4.50-4.70.

Neutral Yellen

Despite great expectations regarding Janet Yellen’s testimony, it was more focused on fundamental matters of the monetary policy, rather than the current market situation. Yellen didn’t mention about the condition of the American economy or about the arguments in favor of rate hikes. She preferred to discuss, whether the long-term mild monetary policy after a strong breakdown of a business cycle is favorable or not. This debate may impact the future interest rates (and decrease, rather than increase them). However, it shouldn’t cause changes on the dollar or the two-year treasury bonds.

Today, the market will focus on the American industrial production data, as well as Stanley Fisher’s statement. The FOMC vice-chairman will speak of “low interest rates.” However, it’s difficult to say whether his testimony will be similar to Yellen’s, or will he focus more on the current matters. Fisher is hawkish, but not enough to oppose the consensus. Therefore, we may expect him to present the arguments in favor of rate hikes. This is of course taking into consideration that he will speak of the current matters.

PLN continues to wear-off

The zloty has been wearing-off since the morning. A worse condition of the Polish currency not only can be observed against the euro or the dollar, but against the forint as well. The PLN/HUF went down to the 70.90 level, which is just 2% away from its three-year minimum. Therefore, we can see that a worse condition of the PLN is not only caused by a weak global sentiment, but also by internal matters.

However, we continue to claim that when the global risk aversion decreases, the EUR/PLN will return to the range of 4.25-4.30. The return to this range may also be delayed by negative macro data from Poland, especially the data regarding construction and assembly production. However, even clearly worse readings should not disturb the zloty’s quotations, as long as the MPC maintains its neutral approach.