Daily analysis 18.11.2016

New records on the American currency after yesterday’s testimony from Janet Yellen. Yesterday’s minutes, as well as Draghi’s testimony didn’t change the expectations regarding QE extension in December. The zloty is weak. A clear pressure on profitability of the Polish national debt.

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

• No macro data that could significantly impact the analyzed currency pairs.

Yellen’s testimony

Yesterday’s events in the market were yet again positive for the American currency. Janet Yellen’s testimony had a minor impact on the dollar’s evaluation, despite its suggestion of approaching rate hikes. However, this information has been fully calculated in the market estimations, so this wasn’t a surprise.

The American macro data was relatively positive, especially the jobless claims index, which was at its lowest level in more than forty years. After 4.00 PM, Janet Yellen’s testimony in front of the Congress started. The market was mostly trying to find signals regarding the FOMC potential reaction on changes in fiscal policy.

Yellen was very careful regarding the matter of higher expenses, as well as lower taxes. This was because the majority of these announcements came from Trump’s election campaign. However, the Fed chairwoman claimed that, “the package (fiscal – author’s footnote) may have inflation consequences and the Fed will need to take this into consideration.”

Despite that fiscal stimulation is still just a plan, it seems that the market will need to take it into consideration, at least until there are no signals that would deny this approach. Therefore, the dollar may remain relatively strong in the long-term. Moreover, general weakness of the emerging market currencies, as well as of currencies of developed markets with mild monetary policy, will be positive for the USD.

EBC and Draghi

The EUR/USD near its long-term minimum not only is the result of a stronger dollar, but also of a weaker euro. Yesteday’s minutes from the ECB, as well as today’s testimony from Mario Draghi, suggest that the QE extension beyond March 2017, will occur at the central bank’s meeting in December.

If the QE is extended until the end of 2017, the discussion regarding an increasing difference between future interest rates of the USA and the euro zone may appear again. This is despite the fact that this difference has been present for a long time. This may become a fuel for yet another depreciation of the EUR/USD. If this happens, this currency pair may go below 1.05 this year.

However, it’s also possible that the dollar’s appreciation potential, as well as declines of the main currency pair may exhaust during the forthcoming days. There is a minor chance that a series of additional impulses regarding fiscal or monetary policy would reach the market by the end of this month. This is especially taking into consideration that many FOMC members already weighed in on the current situation. Moreover, Trump’s offers regarding expenses may systematize not sooner than after his pledge. Therefore, it seems we need to wait for next strong impulses until December.

Zloty under clear pressure and a weak debt market

The dollar was above the level of 4.20 PLN this morning. This was a result of the American currency’s strength, as well as of the zloty’s general weakness. Despite that the euro’s global evaluation is low, the EUR/PLN reached the area of 4.46. The situation in the debt market is also disturbing.

Profitability of the ten-year treasury bonds are within the range of 3.70-3.80%. A spread between them and their German equivalent is currently above the level of 3.4%, which is its highest level in more than four years. This suggests a large aversion towards the Polish market and causes increasingly nervous reaction on the zloty.

Moreover, the zloty remains near its approximately three-year minimum against the forint. The Hungarian debt market is doing significantly better than the Polish debt market, as well. This suggests that if the situation on the zloty calms down and calming down of the global sentiment causes a decrease in debt profitability, even slight global disturbances will potentially be extremely negative for the Polish assets. Therefore, the zloty will be weaker, as well as more volatile, in comparison to the lack of tensions within the local economy.