Daily analysis 18.12.2017

18.12.2017 10:26|Marcin Lipka

The growing probability of changes in US taxes improved the sentiment on global exchanges. The zloty at the end of Friday's session pared some of the last losses. Kamil Zubelewicz, member of the Polish MPC, did not reject the possibility that the Council will leave interest rates unchanged until the end of 2019. The EUR/PLN close to 4.21 during the morning trade.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • No macro data that clearly influences the analysed currency pairs.

Change in the US tax system close to finish

On Friday, the American market again beat historical records. The growing probability of introducing tax changes was once again the stimulus. It seems that the compromise arrangements of both Chambers of Congress are one of the most optimal solutions for the market.

Most of all, the lower corporate taxes should enter into force in 2018. The CIT rate will be 21% instead of 20% which was initially announced, however, postponing it until 2019, as was assumed by the Senate's plan, would mean prolonging the waiting period, which is usually not appreciated by investors.

However, 7 tax thresholds will remain (similar to that proposed by the Senate), but they will be more favourable for households than they are currently, which means that an average household should save at least 1k USD per year (1.2k USD according to the Tax Policy Center's calculations quoted by the CNBC).

In turn, according to the data published by The Wall Street Journal, the deficit should be increased by approx. 500 billion USD compared to the scenario without changes. Later, the deficit increase will be slower due to expectations for faster GDP growth and the planned withdrawal from some of the changes, as the plan is not indefinite and ends within a decade.

The increase in the deficit and debt to GDP is a negative element in the long term, but within the next few quarters, it should accelerate the US economic activity. However, as the economy is already growing at a pace close to its potential or even above, this should mean an increase in inflationary pressure.

For now, higher prices are not observed, but if inflation starts accelerating, then investors may return to a more traditional view of the economy, where a clear fiscal stimulus at this business cycle point should lead to an increase in the pace of interest rate increases and therefore, help the dollar. For this scenario to happen, a real acceleration of the price increase (in core term) is needed. On the other hand, if GDP growth accelerates, but inflation does not, the USD does not have to appreciate anymore.

Currently, it still is unclear when the Congress will vote on the agreed tax changes. This should probably be known even today. It is possible that the law may go on Wednesday or Thursday to President Donald Trump's office, so it may enter into force on Friday. This does not necessarily mean an automatic increase in the American currency, but it does, however, increase the chances of such a movement in the coming months.

Interest rates without changes also in 2019?

At the end of last week, the zloty managed to pare a significant part of the recent days' losses. This was primarily the result of exceptionally optimistic quotations on the US market (tax changes more and more probable) and the lack of a clear increase in the yield of the US Treasury bonds (especially those maturing in 5 years or later).

However, it seems that the scenario of a slightly weaker than stronger zloty may still be real. The substantially faster GDP growth rate in the USA with the current condition of the US economy should accelerate inflationary processes and, however, accelerate interest rate growth faster than it is currently expected. In order to implement this scenario (details in the previous paragraphs), a real increase in inflation and wages in the US is needed, which can only be seen in the coming months.

In turn, in the context of national monetary policy, Kamil Zubelewicz's comments for the "Parkiet" newspaper looked interesting. Zubelewicz, a member of the Council who is perceived as a hawkish member, stated in a passage quoted by the Polish Press Agency (PAP) that the interest rates in Poland will not be increased even until the end of 2019 because there is a large tolerance of inflation in the MPC. If these comments really translate into reality, the market will begin to reduce the perspective of interest rate increases from 0.25 percentage points to zero. This would be a really negative factor for the zloty.


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