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Daily analysis 20.05.2016

20 May 2016 12:48|Artur Wiszniewski

The currency market is working-off a strong consolidation of the dollar. New comments from the Federal Reserve indicate Summer as a possible moment for the hikes. The zloty remains at a low level, even though the economic data is surprisingly positive.

Friday’s session started with a wear-off of the dollar. After strong increases during the past three days, the American currency has lost value against the euro. However, this move may only be a correction. There was no change in the crucial factor responsible for the behavior of the broad market. This factor is an increasing probability of the hikes at the forthcoming meetings of the Federal Reserve.

The protocol from the FOMC meeting in April, stated that June is a possible date of another increase in interest rates (the previous one occurred in December). The final decision depends on the future economic data. As much as the reports from the first quarter were relatively weak, the data from the second quarter showed a clear improvement.

The scenario of the hikes in June had been strengthened by the statements from the significant FOMC members. They have spoken of at least two possible hikes. This scenario was also included in the testimony from William Dudley on Thursday.

The chairman of the New York Federal Reserve said that the next hike is possible in the Summer (probably at the meeting in June or July). However, the decision regarding increases in interest rates is determined by the future macroeconomic reports. William Dudley estimates that the economy will remain at a sufficiently high level to perform the hikes.

The next FOMC meeting is planned between the 14th and the 15th of June. The probability of the hikes at this meeting are currently estimated for 30% (data: CME Group). The probability of the hikes in the following months is clearly above 50%. A change in the expectations of investors regarding the Federal Reserve's plans, means an increase in a possible consolidation of the dollar in long-term.

Friday’s session also brought better results in the stock markets. Every significant market experienced growths, especially the European stock markets. The DAX grew more than 1%, and the WIG20 grew approximately 0.5%. There was also a rebound in the raw materials market. The quotations of copper and oil are going up, and this supports the raw materials currencies.

Zloty remains under pressure

The zloty did not use the improvement of sentiments in today's session to work-off the losses. The Polish currency remains under a pressure of depreciation.

Andrzej Slawinski of the National Bank of Poland (NBP), estimated that the participation of the central bank in solving the problem of credits denominated in franc, “is something unusual” (source: PAP). This was yet another statement from the monetary authorities that limits the chances for the involvement of the NBP in helping the government fulfill its promises. This factor may have a favorable impact for the Polish financial market in the long-term.

After a favorable decision from Moody's, Poland received negative comments from the International Monetary Fund, as well as the Fitch agency. As a result, the zloty is clearly overvalued. Moreover, the current market sentiments have deteriorated, due to an increasing probability of the hikes in the USA. The Polish currency lost, especially against the pound. The GBP/PLN rate is currently at its highest level since February. The dollar is above the level of 3.93 PLN, and is its most expensive since the beginning of March. Thus, the chance for a strengthening of the zloty is relatively small.

20 May 2016 12:48|Artur Wiszniewski

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.

See also:

19 May 2016 15:47

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