Daily analysis 19.02.2016

Incoherent signals from the Federal Reserve increase the dissonance of opinions inside the FOMC. An interesting example of the Mexican peso. The zloty remains relatively stable – the euro is below 4.40, and the franc costs less than 4.00.

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

• 14.30: The CPI inflation from the USA (negative 0.1% m/m; positive 1.3% y/y; with exclusion of fuel and food positive 2.1%).

Unexpectedly hawkish Williams

In Thursday's analysis we wrote a lot about James Bullard. The St. Louis Fed representative was relatively dovish, regardless of suggesting an earlier tightening of the American monetary policy, he was considered hawkish for a few months. Today, we should focus on a testimony of John Williams, who on the other hand can currently be considered hawkish, despite presenting a previously neutral/slightly dovish approach.

The chairman of the San Francisco Fed mainly emphasized a good condition of the American economy, and took note of a full employment in the USA and increasing salaries. He also emphasized the fact that a lower inflation is mainly a result of a decrease in raw materials, and the stronger dollar. Williams also said that he is convinced, “we are on a good way to reach the inflation goal”.

Williams also noticed that, “the economy is not a stock market”. He also underestimated the external dangers, claiming that, “we managed to survive the Asian crisis in the 90s”. Summarizing his testimony, the FOMC representative said, “I still expect the American GDP to increase on the level of 2.25% in 2016. I still expect the unemployment to drop to the level of 4.5% by the end of the year. And I still see the inflation going towards our 2% goal within the following two years”.

The testimony of John Williams increases the uncertainty regarding the future moves of the Federal Reserve. Yesterday, we wrote about Bullard becoming increasingly dovish, and with that, the other members should also be less willing to raise interest rates. However, this pattern might not be valid, and the FOMC meeting in March may be less dovish than the statements of some of the Fed members could suggest. It is a paradox that this fact does not have to be interpreted as an element, which strengthens the dollar. An exceptionally hawkish message may spoil the global sentiment, and cause sales on the capital market. They, on the other hand, may pull the USD down.

The Mexican case

Since the beginning of December, interesting things are going on regarding the Mexican peso (MXN). For two and a half months, this currency lost more than 15% of value against the dollar. What is worth emphasizing, is that the dollar was not gaining in the global market at that time. There were also no significant reasons for anxiety in the real economy.

Unemployment is near its lowest levels since the crisis (4.4%) in 2015. The GDP increased by 2.5%, retail sales increased by 5.7% y/y, and the industrial production in December increased by 2.5% y/y. The PMI is also above the level of 52 points, and suggests a further development of industry.

The fact that Mexico is a producer of oil was a certain danger for the peso. However, throughout the past years the country's dependency from the raw materials prices clearly weakened. Currently, the export of oil is approximately only 10% of the Mexican trade. It was expected that the American revival will have a stimulating effect on the Mexican economy and currency.

The monetary policy was also relatively predictable. At the beginning of December, the central bank increased interest rates by 25 bp, to 3.25%. That way, the difference between interest rates of Banxico and the Fed remained at the level of 3%. So what could cause such significant depreciation of the Mexican currency, and a decision of a sudden increase in interest rates by 50 bp, on an unplanned Wednesday meeting?

The peso is used by global capital as an indicator of an increase/decrease in aversion towards risk, due to its significant liquidity. Thus, at time when the global situation was deteriorating, the currency lost value. We can also not exclude that the speculation capital took advantage of the commotion on the market. It is most likely that it contributed to a record low exchange rate of the MXN against the dollar, and a rapid depreciation pace.

Immediately after the hike, the MXN gained approximately 5%. The central bank also announced that it may intervene in the currency market, in order to stabilize the exchange rate. Considering a significant wear off on the peso, a strong involvement of the central bank, and still relatively stable economic perspectives, it is possible that the recent actions could prevent the further overvalue of the MXN, especially if the global situation is not clearly deteriorating.

A relative stabilization

The zloty should remain dependent on the situation of the global market. Growths on the developed countries stock markets, should cause the euro expressed in the zloty to become cheaper. Moreover, any signals which increase the likelihood of a greater monetary stimulation in the euro zone, should also support depreciation on the euro as well as the franc.

Thus, we still cannot exclude that the EUR/PLN will go below 4.35. It is also becoming increasingly possible that the CHF/PLN will go below 3.95 in March, especially if the SNB remains dovish and does not allow the franc to grow at the moment of extending the QE, or allows a decrease in the interest rates in the euro zone.