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Daily analysis 19.08.2015

19 Aug 2015 13:34|Marcin Lipka

Data about American inflation and publication of the July's meeting of the Federal Reserve should set the sentiments on the dollar. The lira and the rouble were significantly overvalued, but the reasons for these depreciations are completely different. The zloty is stable before the series of data from Poland.

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

  • 14.00: Industrial production from Poland (estimations: +4.6% y/y).
  • 14.00: Retail sale from Poland (estimations: +2.9% y/y).
  • 14.30: Consumers' inflation from the USA (estimations: +0.2 m/m and +0.2% y/y; excluding fuel and food: +0.2% m/m and +1.8% y/y).
  • 20.00: Record from the recent meeting of the Federal Reserve.

Inflation from the USA and minutes from July's meeting

Yesterday the American currency enforced slightly thanks to better data from the real estate market and depreciation of the EUR/USD below 1.1050. Today, however, at the beginning of the European session we saw it return to the middle ranges of 1.10. This state of stabilisation will probably not last for long, especially that two important “figures” from the other side of the ocean will be published today.

First of all, the CPI inflation is worth noticing, and especially its base case reading. It is the one with exclusion of more variable elements like fuel or food. Despite the fact that the Bloomberg estimations median shows an increase in prices by 1.8% y/y, according to the estimations of the economists we may receive a publication which will be slightly higher than the consensus. This could help the American currency before the evening publication of minutes.

Publication of the recent meeting of the Fed may definitely be more complicated. First of all, according to previous announcements, the Federal Reserve will probably not announce their future decisions in advance. Thus, nuances will matter.

Hints can be found for example in reference to a strong dollar. Does it still have an impact on the relatively weak condition of the American industry? If it does, it will be considered as a dovish sign. The discussion regarding a slight change in July's announcement can be the second important matter. At that point, the Fed emphasised that some improvement on the labour market is needed in order to raise the interest rates. The number of the Fed members willing to know more or less clear hints, will determine whether the FOMC will be closer to the September or December date.

It is also possible that the minutes will show a relatively wide discussion regarding inflation, especially in the context of the decreasing prices of raw materials. If the message of the Fed members suggests that it may also translate to the base case readings, the reception should be dovish.

However, currently references to the global situation, especially to China, will probably be most significant. In June's minutes the Fed only once referred to China in the context of a danger regarding economic increase. If the suggestions are clearer now, combined with the recent devaluation of the renminbi, they may confirm the anxieties of those members of the Fed, who previously indicated China as a more serious danger. This also should be considered as dovish.

Even if none of the above mentioned matters will come true, publication of July's meeting will probably be received as a mild one. It is because there is a small chance for the Fed to announce hikes in interest rates in September, which is expected by some of the market participants. However, if Yellen and her colleagues announce the hikes in September, the dollar has a chance for clear appreciation, and the EUR/USD could even go to the area of 1.09. In our opinion, this is not the base case scenario.

Lira and rouble under serious pressure

Currencies of Turkey and Russia are under serious pressure. What is interesting is that the reasons for overvalue of the TRY and RUB are completely different. The lira depreciates due to at least four reasons. First of all, the economy continues to deal with over 5% of deficit on the current account. In the situation of withdrawal of the wallet capital from the emerging markets it generates the necessity to use the currency reserves.

Second of all, Ankara is facing a serious political crisis. It seems that the party of President Erdogan will not be able to create a coalition, and earlier elections will be organised in early autumn. However, it is also not certain that they will bring a breakthrough. This, combined with terrorist danger and military operations close to the Turkish borders, creates an unpleasant mixture, especially in the context of future investments.

One can also not forget that the Turkish central bank leads a relatively mild monetary policy (high inflation is not balanced by higher interest rates), which is under public pressure of the economists related to Erdogan. All these reasons put together cause the lira to be historically cheap to the euro, as well as to the dollar.

When it comes to the rouble, the main reason for its depreciation is a decrease in the price of oil, which should be advantageous for the lira. Additionally, there are of course geopolitical matters, but their impact is definitely less significant than the breakdown in the prices of basic energetic resources. Perspectives for both currencies remain negative. The USD/TRY pair will probably quickly cross 3.00, and the USD/RUB should remain in the range of 65-70.

Few words about the foreign currency market

Today, the investors will mainly observe the readings of inflation from the USA, and will contemplate nuances from July's record of the Federal Reserve meeting. It is more likely that the minutes will be more dovish than a significant part of the market expects. Thus, if the inflation data don't cross the estimations, the dollar should end the day at slightly lower levels.

Readings from Poland

Even though the currency market will mainly observe the inflation data from the USA and record of July's meeting of the Federal Reserve, the national publications should also be important, especially that the reading of the Polish GDP for the second quarter was slightly below economists' estimations.

However, considering the solid publication of the PMI from July, and also the strong increase in import and export in June, the industrial production may be slightly above the economists' consensus, which is in the limits of 4.5% y/y. In order to cause an enforcement of the zloty by 0.01 PLN, the data needs to be by at least one percent higher than the prognoses. A similar difference would have to appear in the reading of retail sales.

Thus, the base case scenario should still be the zloty remaining by 0.01-0.02 PLN above the level of 4.15 per euro. When it comes to the dollar, significant changes and a depreciation in the area of 3.75 PLN can only be seen in the case of more dovish minutes.

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

Range EUR/USD 1.1050-1.1150 1.0950-1.1050 1.1150-1.1250
Range EUR/PLN 4.1500-4.1900 4.1500-4.1900 4.1500-4.1900
Range USD/PLN 3.7400-3.7800 3.7800-3.8200 3.7000-3.7400
Range CHF/PLN 3.8400-3.8800 3.8400-3.8800 3.8400-3.8800

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5550-1.5650 1.5450-1.5550 1.5650-1.5750
Range GBP/PLN 5.8400-5.8800 5.8200-5.8600 5.8800-5.9200

19 Aug 2015 13:34|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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