Daily analysis 18.09.2014

The “considerable time” remains but overall the Federal Reserve meeting was mixed what was mainly used to strengthen the dollar. Swiss Central Bank more committed to protect the floor but reluctant to introduce negative interest rates. Less excitement before the Scottish voting. The EUR/PLN broadly unchanged. Industrial production consequences.

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

• 14.00 CET: Polish MPC minutes from the last meeting.
• 14.30 CET: Housing starts in the US (1.038 M seasonally adjusted annualized numbers).
• 14.30 CET: Building permits in the US (1.053 M seasonally adjusted annualized numbers).
• 14.30 CET: Jobless claims from the US (survey: 305k).
• After 23.00 CET: Results of independence Referendum in Scotland.

The Fed. SNB. Voting

Expectations before the Federal Reserve meeting were quite high. It was supposed to give an answer whether the chairwoman Yellen is getting closer to the Committee consensus (leaning a bit toward more hawkish stance) or keeps her dovish approach despite the Fed's recent hints (July's minutes, Jackson Hole speech, San Francisco Fed paper) on possible earlier rates hikes.

The Federal Reserve managed for yet another time to run the meeting in a way that both sides found phrases that supported their theories and therefore lessened the market reaction.

For supporters of keeping interest rates close to zero for longer (at least until mid 2015) it was important that both “considerable time” (Hilsenrath was right!) and “significant underutilization of labor resources” remained in the statement. As a result we had rapid, but short-lived bounce seconds after the message hit the wires.

On the other hand, we received more hawkish economic projections form the Federal Reserve members. The median expectation for the interest rate level at the end of 2015 was raised from 1.125% (in June) to 1.375%. Even more significant change was made for 2016 expectations, where the numbers were revised upwards from 2.50% to 2.875%. The new unemployment (lower) and inflation (a bit higher) figures were also a bit more hawkish, however, the future cost of credit made it to the headlines.

The hawkish message also came from two dissenters (Plosser and Fisher). They both would like to see rather sooner than later rate hikes which, in their view, is supporter by “improved outlook for labor utilization and for general price stability”. Actually Fisher may feel a bit tricked after July's meeting when he thought that the Fed is getting a bit more hawkish.

It is also worth noting how Yellen skilfully softened the “considerable time” phrase. For a few minutes she was explaining that the Fed's decisions are not “calendar based” but depend on the incoming data. She also confirmed a view that if economy accelerates and inflation moves toward the target faster the committee may start hiking interest rates sooner and quicker than expected. As a result the “considerable time” significantly lost its meaning and probably will be scrapped either in October or December.

After the Federal Reserve meeting the markets were directed by their long/medium-term trends. The dollar, government bonds and equities rose. However, only in case of the “greenback” the move was pretty steep and we dropped below 1.2850 on the EUR/USD.

The Swiss Central Bank (SNB) didn't introduce the negative interest rates today which pushed the franc a bit higher. But the message was overall pretty grim for the CHF. Firstly, both the GDP expectations and inflation projections were revised significantly lower. The growth in 2014 was cut by 0.5 percentage points to 1.5% while inflation expectations for 2015 were trimmed from 0.9% to 0.5%. The SNB also strengthened its message toward keeping the EUR/CHF floor at 1.2000 claiming that “if necessary, it will take further measures immediately”. Concluding we should expect that the EUR/CHF floor will be kept at least for several more quarters.

After 11:00 pm CET the market will receive the first estimates on Scottish voting. The most recent polls (including published yesterday Panelbase and Ipsos) are showing that unionists still have a lead around 2 to 5 percentage points. It is in line with the market expectations so the GBP/USD is pretty stable. In a resolution confirming the broad based view should give around 100 pips boost to the GBP/USD. On the other hand, if we surprising data the scenario of massive drop of the “cable” is still actual.

Summarizing, the Federal Reserve manged to balance between fairly hawkish economic projections and quite dovish signals in the statement. The task was completed with a high degree of success which was confirmed with fairly muted bonds and stock market reaction. A bit more nervousness was observed on the dollar but it was rather caused with some unfulfilled expectations (considerable time was left unchanged but the SEP on interest rate pace were hiked). After 11.00 pm CET we should expect more volatility, especially if the results are not clear at the beginning. Actually the odds are pretty low that we will see an independent Scotland so the GBP/USD should be higher on Friday morning.

Fairly stable. Production

The Polish currency is fairly stable after the Federal Reserve decision and most transactions are made between 4.18-4.19 per euro. More volatility was observed on USD/PLN which rose above 3.25 and is slowly approaching the goal around 3.30.

The industrial production data from Poland significantly increased the probability of interest rate decrease by 50 bps but it will not happen this October. A steeper cut will be probably decided in November when the MPC is scheduled to receive new Economic Projections and more data are set to be available (for example Q3 GDP). It can be a perfect moment for more bold decision. If nothing changes markedly we may see a reference rate at 1.75% in two months.

In a short term the EUR/PLN should be pretty stable. More volatility is expected on GBP/PLN which in case of Scottish “no” should rise toward 5.35 and in scenario of independence we can even see a drop toward 5.00. The first scenario is much more probable.

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

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