Daily analysis 20.03.2014

A significant downward pressure on the EUR/USD after the Federal Reserve statement and Janet Yellen conference. The Fed will be a hostage of “6 months”? The zloty is also under pressure after remarks that the FOMC will increase the rates sooner than expected.

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

• 13.30 CET: Weekly jobless claims from the US (survey 325k).
• 15.00 CET: Philadelphia Fed index (survey: 3 points).
• 15.00 CET: existing home sales from the US (survey: 4.6 million).

Hakwish Fed

A few market observers expected such hawkish comments from the Federal Reserve chairwomen. Janet Yellen, who is usually regarded as a dovish Committee member, failed to assure investors that the interest rates will remain near zero till late 2015. It is also worth to mention that she made “kind of mistake” during a conference. Yellen is known from her extremely professional and detailed approach to economic issues, very good forecast skills and spotless career. This time, however, she said a bit too much about the future interest rate condition, which not only causes some market turmoil, but also can have some negative effect to the future monetary decisions.

Let's start, however, from events that were expected. The Federal Reserve reduced its asset purchase by 10 billion USD and the forward guidance message on 6.5% employment was erased. Now the FOMC will be focused on much broader economic indicators “including measures of labor market conditions, indicators of inflation pressures and inflation expectations and readings on financial developments” to determine when withdraw it highly accommodative monetary policy. Both decisions were expected, so nobody should have been surprised. A first more hawkish signal (still relatively mild) was a Federal Reserve members survey where they pick their dates when the policy should be tighten. Comparing it to the December data we can see that less participants expect tightening in 2016 and more in 2015. Much more hawkish impact has the revision of so called “dot chart”. In December, 10 members expected the interest rates to be at 0.75% or lower at the end of 2015 while yesterday it turned out that only 6 of them in the 0.75% camp (the rest sees it higher). Similar situation is also seen in the 2016 expectations, where the rates should reach around 2.25 while in the previous survey they were around 1.75%). The economic projections also show that the FOMC can have more hawkish approach that many had expected (the unemployment expectations were revised downward by 0.2 percentage points on average and the lower bound of inflation increased by 0.1 percentage point for 2014).

After the economic projections were released, it was clearly seen that the economy is heading in a good direction despite some hesitation in the first months. The Federal Reserve seems also to have the situation under control and it is ready to use the monetary policy in a right time. Some, however, expected that the new Fed's chair would bring the expectations down and confirm its dovishness. On contrary, she behaved opposite. In the second part of the conference, replying for the question on “considerable time” (between ending the QE and monetary tightening) from Reuters reporter Ann Saphir, Yellen said that it “probably means something on the order of around six months”. At that time everyone calculated that if the asset purchase ends in October we should expect a first rate hike in March 2015. It is several months earlier than investors anticipated before the today's meeting. Most markets reacted pretty negatively on the news – dollar strengthened, stocks slided (equities benefit from cheap money policy but an economic rebound is also important for stocks so in the longer run the mood should not be negative) and the yields on two-year notes jumped the most since 2011.

Summarizing, the Federal Reserve message and Janet Yellen conference can be a groundbreaking moment for the dollar. Much faster and steeper monetary policy tightening can cause that the dollar will be much more attractive than the euro or yen. The only “hope” for the EUR/USD bulls is an attempt to “repair” the Yellen damage by the other FOMC members and convince investors that the March interest rate rise is not imminent. The bulls can also expect that the US data will be soft and the recovery after a cold winter does not come (low probability).

Lower zloty after the Fed's message

Yesterday I pointed out that a hawkish Federal Reserve can push the USD/PLN toward 3.05-3.07 and EUR/PLN to test 4.22. However, the consequences for the PLN can be much more significant especially regarding the dollar value. In the EUR/USD gets a relatively “mild penalty” and falls to 1.35, the USD/PLN should be traded around 3.13. Moreover, if at the same time the PLN weakens also to the euro by around two percent we can easily reach 3.20 level per the dollar.

Similarly to the EUR/USD the Polish currency can be “rescued” by weaker US data or some clarification from other FOMC members. If it does not happen, then we should expect the mention levels within a month.

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

Expected GBP/PLN levels according to the GBP/PLN rate: