Daily analysis 20.01.2017

Janet Yellen’s testimony was relatively dovish, but the market mainly anticipates Donald Trump’s oath ceremony this evening. The zloty will most likely react to this event as well. The EUR/PLN is near the level of 4.37.

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

• 18.00: Donald Trump’s oath ceremony.

Mnuchin, Yellen and Trump

Recently, the main currency pair had some serious difficulties to leave the 1.06-1.07 range. Yesterday’s message from the ECB was dovish, just as we expected it to be. This definitively decreased speculations regarding sooner fade out of the QE program, as well as depreciated the EUR/USD.

Yesterday evening, Steve Mnuchin made his testimony in front of the Senate. The former Goldman Sachs banker, who has been designated to be appointed the US Secretary of the Treasury, was asked about the matter of the dollar’s evaluation, among others. This matter has become an element of the market discussion after Donald Trump’s interview with The Wall Street Journal, in which president elect took note that the USD is too strong against the Chinese yuan. However, we emphasized, when discussing this statement, that it remains unclear whether he only meant the USD/CNY, or the entire dollar basket.

It seems that Mnuchin managed to sort out this matter to a certain degree. The Financial Times informed that in his opinion, Trump’s comments reflected the short-term negative impact on the trade, instead of the long-term perspective. Mnuchin said that, “the long-term strength (of the dollar – author’s footnote) over long periods of time is important. And again, I believe that’s a reflection of, I believe, we have the most attractive investment environment in the world.”

However, the dollar wore-off slightly due to the new testimony from Janet Yellen. This time, it had a form of a definitively wider analysis, which emphasized the economic uncertainty in the USA and abroad. Moreover, the long-term trends (low factor of professional participation in the USA, low global growth, the GDP growth, low productivity) have been negative for the USD. However, changes caused by this testimony had a relatively limited range.

This was most likely caused by the anticipation for Donald Trump’s oath today. The market remembers that Trump’s victory has changed the market situation completely, by causing significant growths in the dollar’s value. Nevertheless, during his recent meeting with journalists, Trump repeatedly referred to the protectionist trade policy, instead of focusing on economic matters. This was negative for the dollar.

It’s very difficult to foresee the scenario of tonight’s events. However, it’s difficult to expect that they will be as ambiguous as Trump’s statement from November 10th. At that day, he said that, “We have a great economic plan. We will double our growth and have the strongest economy anywhere in the world. At the same time, we will get along with all other nations willing to get along with us.”

Therefore, we can expect that the ceremony will consist of many inconsistent signals for the dollar, both positive (lower taxes, infrastructural expenses) and negative (suggestions of a more protectionist vision of the foreign trade). Nevertheless, it’s possible that there will be some references to a wider cooperation, in order to create a consensus regarding the economic policy with the Congress. Republicans have the majority in the Congress and their plans are similar to Trump’s. This is why such scenario would eventually strengthen the dollar and make the perspective of fiscal stimulation more realistic (especially regarding lower taxes for households and companies.)

Positive data from Poland and anticipating for Trump

Yesterday’s solid readings from the Polish economy have not been reflected in the zloty’s evaluation, for the time being. However, clearly lower decline of the building production (from negative 12.5% YoY to negative 8% YoY), suggests that the biggest slowdown is behind us. This should improve the general economic sentiment and translate positively to the GDP growth. With time, this will cause the MPC to speak more boldly about rate hikes. This should support the zloty.

Trump’s testimony will be the most important element for the zloty within the next few hours. If he focuses on the economic matters and the tax reform, the dollar should clearly gain value and may even return to the area of 4.15. However, the reaction on the EUR/PLN, as well as on the CHF/PLN should be calmer. The base case scenario is that these currency pairs will remain near their current levels.