Daily analysis 20.06.2017

The dollar was stronger after the FOMC member’s comments stating that halting rate hikes now could be negative for the economy. The zloty lost some value due to the US currency’s appreciation.

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

• 2:00pm: Polish industrial production in May (estimate : 8.6% YOY; previous : -0.6% YOY)
• 2:00pm: Polish retail sales in May (estimate : 9.0% YOY; previous : 8.1% YOY)
• 2:00pm: Polish PPI inflation in May (estimate : 2.9% YOY; previous : 4.3% YOY)

Dudley’s remarks strengthened the dollar

Yesterday was due to be a calm day on the currency market – volatility was limited. However, that changed when the dollar started to gain in value relatively quickly. This was the result of a hawkish comment from one of the FOMC members. William Dudley, the president of Fed Bank of New York, stated that halting the tightening cycle now could have negative implications for the US economy.

Dudley also shared Janet Yellen’s view that a tight labour market would eventually lift inflation higher, which in recent months was surprisingly low. On the other hand, Charles Evans, president of the Chicago Fed, said in a softer tone that, “the current environment supports very gradual rate hikes” and a slow reduction in the Fed’s balance sheet. He added that whether that means “two, versus three, versus four rate increases” (in 2017) is trivial.

The market focused on Dudley comments, though. They caused a swift increase in US treasury yields which translated to a dollar appreciation. The relation of the euro to the dollar (EUR/USD) dropped during the Asian session to as low as 1.114, close to the lower boundary of last month’s range.

Judging by the dollar’s reaction to the previous week’s Fed statement and yesterday’s remarks from William Dudley, it can be subject to increased fluctuation in the short term. The strengthening of the US currency could mean that the market shared the opinion of the Fed members that the improvement in the labour market will trigger higher inflation. Hence, investors will look very closely now at the upcoming labour market reports and inflation data – should they disappoint, the dollar could lose value.

Zloty in a slightly weaker state

In our recent comments, we stressed the fact that there was a risk of the zloty’s depreciation should the dollar markedly gain in value. Yesterday, Dudley’s comments caused a rapid growth of not only the dollar but the US treasury yields. That could cause an outflow of capital from emerging countries and, as a result, weaken the Polish currency. The dollar cost as much as 3.79 PLN while yesterday morning it was 4 gr lower. The zloty was slightly weaker against the euro as well – EUR/PLN rose to 4.22, while it was 0.02 lower only yesterday morning.

Taking into account the zloty’s slightly worse condition, today’s Central Statistical Office (GUS) data could add to the volatility. At 2 pm, GUS will publish May’s data regarding industrial production, retail sales and production inflation (PPI). Investors will probably focus on the first two. Should they significantly deviate (negatively) from the market consensus, zloty could lose in value. A potential positive influence could be limited due to the dollar’s condition – if the US currency continues to strengthen, even solid data from GUS could ultimately have a small impact on the Polish currency.