Daily analysis 19.11.2015

October minutes were fairly neutral for the currency market. More comments from Peter Praet may suggest further monetary loosening in December. The złoty remains stable but weak before the domestic data publication.

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

• 13.30: Minutes from October ECB meeting.
• 14.00: Industrial production from Poland (survey: +2.5% y/y).
• 14.00: Retail sales from Poland (survey: +0.4%).
• 14.00: Minutes from November MPC meeting.
• 14.30: Weekly jobless claims from the US (survey: 270k).

Fairly neutral message from the Fed

Minutes from October’s Fed meeting published yesterday fulfilled the main goal – clearly suggesting that an interest rate hike should be expected in December. This message, however, has already been discussed by several FOMC officials and has been largely priced in. But which elements during the latest Federal Reserve meeting may be bullish and which dovish for the dollar?

The situation on the financial markets described by the central bank official improved – volatility lessened, stocks pared most losses and the global turmoil didn't significantly affect US stability. It may give a signal to investors that issues from overseas are not as important as the Fed suggested in September.

The description of the US economy was also fairly good. “Household spending and business fixed investment increased at solid rates in recent months, and the housing sector improved further”. There was also a substantial discussion on the job market. “Several participants observed that the recent employment reports had increased the uncertainty about the outlook for the labour market”.

It is worth noting, however, that at the end of October the most recent US employment report had not been published yet. Most of the concerns presented by the FOMC members (whether softer employment is transitory or not) are not actual as the November publication showed strong payroll gains, a drop in unemployment and faster than expected wage growth.

An interesting paragraph in the minutes described the communication in a low interest rate environment “if the outlook for economic activity were to weaken to a degree that seemed likely to undermine continued progress in labor market conditions,” it might be prudent “for the Committee to consider options for providing additional monetary policy accommodation”. It may mean that the Fed can be looking for a solution to implement the QE as a standard tool, if the situation warrants such a decision. In the longer term it might be a dollar negative message especially when the macroeconomic situation worsens across the pond.

Overall, the October meeting was neutral for the dollar. Clear communication regarding the December interest rate hike has probably been mostly priced in and caused only for the short term a fairly shallow dollar appreciation. For further greenback gains investors will have to wait for the interest rate path and some more hawkish comments.

More Praet comments

A few days ago, we wrote about comments from Peter Praet. Today, the ECB Governing Council member and chief economist was again in the media commenting on the economic situation and monetary policy. He said that “further interest rate cuts are part of the toolbox”, “downside risks prevailing”, and that “the ECB must be ready to act in uncertain conditions”.

Praet again suggests that markets should be prepared for the forthcoming ECB meeting of the governing council to include a push for both the interest rate cuts and further monetary easing. If the central bank uses both tools heavily, it can push the euro significantly lower.

The foreign market in a few sentences

Stable but on weak levels

The zloty remains fairly weak to leading currencies and especially to the pound and the dollar. Additionally, when looking at the PLN/HUF cross, the Hungarian currency has appreciated by more than 1% to its Polish counterpart in the last few days. It is still the result regarding the uncertainty on the domestic fiscal policy and new MPC members.

In the incoming hours, readings on industrial production and retail sales might bring some attention to market participants. If the publications turn out to be significantly better than estimates (at least one percentage point above the consensus) there is a chance for some slight appreciation on the PLN and a drop on the EUR/PLN below 4.25. On the other hand, in a scenario of negative nominal retail sales or industrial production growth below 1.5% y/y the weakness of the Polish currency may persist in the following days.

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

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