Daily analysis 18.03.2015

Fierce discussion regarding the Fed's decision. What is the probability that the Federal Reserve gets tricked by weaker data? Currencies depended on the oil price are again under pressure. The zloty remains stable, but some pressure is observed before the FOMC meeting. Polish data should not have a major effect on the PLN.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.00 CET: Industrial production from Poland for February (survey +4.1%).
• 14.00 CET: Retail sales from Poland (survey 0.0%).
• 19.00 CET: Statement after the Federal Reserve meeting.
• 19.00 CET: Fed's macroeconomic projections (inflation, GDP, unemployment).
• 19.30 CET: Janet Yellen conference after the Fed's decision.

The alternative scenario is getting more attention

Yesterday we presented some alternative scenarios which may push the dollar markedly lower. However, some market participants are still looking for reasons which may keep the USD under pressure, but not only for a few sessions but for few months.

A fairly higher level of attention was brought by chart generated by Federal Reserve Bank of Atlanta projecting in real-time the GDP for current quarter. The system analyses the most recent data and estimate the economic growth. The model shows that the growth has recently dropped by 1 percentage point to 0.3% on the annualized basis.

The number looks pretty scary but we have to look at some detail to derive conclusions. Firstly, the model only takes into the account data from January and part from February. The other half have been missing. Moreover, the current readings are mostly affected by the weather conditions and the port workers strike at the West Coast. Probably in March the data would catch up.

As a result it is a slim chance that the Fed would focus on transitory factors. The Federal Reserve have been preparing for moving toward monetary policy normalization for months and should not be tricked by one chart.

But the market leaves its own life and some of the dollar bulls might have been frightened and decided to close the long “greenback” positions. Additionally, the schedule of the Federal Reserve announcements may have impact on the volatility and regardless to the overall perception the dollar can have periods with significant weakness and strengths. As a result the best idea is to stay on hold during the unpredicted moves and look at the market when the dust settles.

Crude oil and commodity currencies

The WTI has slided to new 6-year lows in the recent days at around 42 USD per barrel. The major reason which stands behind the crude weakness is still oversupply and growing stockpiles. Currently they are at historically high levels above 450M barrels (70/80% full) and the peak probably still hasn't come as it usually appears in April or May.

Additionally, there is also an expected agreement with Iran. Teheran is supposed to withdraw from its nuclear plans in exchange for fewer sanctions. The deal may push the Iranian crude export by up to 1 million barrels per day in a few months period. It is another argument which pushes the oil lower.

Traditionally, when the crude slumps, commodity currencies also encounter selloff. Currently the mostly affect are Canadian dollar and Norwegian krone. Regarding the NOK there is additional pressure for more easing at tomorrows central bank meeting. If the Norges Bank decides to lower the rate by 50 bps then the USD/NOK should soar toward 8.50.

A similar situation is observed on the CAD. Canada is currently not expected to cut rates in April but monetary easing is the simplest way to increase the revenue for oil when its price in USD drops. As a result the future depreciation is expected at the target should be at least 1.30 level.

The foreign market in a few sentences

In the recent days we presented some alternative scenarios for the Federal Reserve. Usually during highly anticipated events the moves are pretty random. So if we don't have highly sophisticated strategy it is better to stay on hold and open a position when the dust settles.

Local data will be probably ignored

Today the Polish statistical office is scheduled to announce industrial production and retail sales data from February. There is a slim chance that it would have any impact on the domestic currency. The market is mainly focused on Federal Reserve meeting and only a significant deviation from the consensus may produce more volatility.

The EUR/PLN pair is expected to end the Wednesday's session close to the current levels. The Fed would have to stay really dovish (keep the patience) to push zloty higher against the euro or get really hawkish (higher median dot, suggestions on June hike) to generate some weakness on the zloty toward the euro.

The situation should look differently regarding the USD/PLN. The USD is expected to be really sensitive to any news in the statement. As a result the volatility on the range on the dollar may be widened to 3.85-3.95.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: