Daily analysis 20.07.2016

The likelihood of rate hikes in the USA is increasing. The lira has tested its historic weakness record. The zloty's reaction on a decrease in retirement age was calm. The euro is 0.02-0.03 PLN above the 4.40 PLN level.

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

• No data that could significantly impact the analyzed currency pairs.

Dollar on tidal wave

The Federal Reserve meeting will be held next week. There are practically no chances for rate hikes this time. However, the chances for a monetary tightening during the coming months are clearly increasing. This causes the dollar to grow against the currencies that are included in its commercial trade, to its highest levels since March.

A larger possibility of rate hikes is confirmed by the behavior of the American treasury bonds as well. Profitability of 2-year debt instruments of the United States are currently at the 0.70% level. This level is only a few base case points below the level that was observed before Brexit.

It is also possible that the Federal Reserve is feeling more comfortable, seeing how little negative Brexit-related effects are there for the time being. The American stock market is reaching new peak almost every day and the economic data is improving. Apart from a positive report for June, we recently received strong retail sales data, a rebound of industrial production and continuation of positive trends in the real estate market.

Getting back to the recent statements of the Federal Reserve representatives, it is worth noting that the majority of members of the Fed's regional departments suggested one or two rate hikes. This was even before the positive data series, as well as new record on the New York floors. The hawkish FOMC members were also supported by a relatively high reading of the CPI base case inflation that should cause it to approach its 2% target.

If the above economic and market trends continue, the interest market will begin to evaluate the monetary tightening in September to a larger degree. Currently, it is estimated for 20%, even though two weeks ago it was only 0%. If this index moves to the range of 30-40% (the level observed in the break of May and June), should clearly push the EUR/USD below 1.10.

Lira is near to its historic weakness record

Yesterday afternoon, we could see a clear depreciation of the lira. The USD/TRY increased from 2.98 to 3.06 and by this tested historic weakness record against the dollar. The direct reason for this information was probably the information that the authorities in Ankara dismissed approximately 1500 deans, as well as chancellors of universities. What's interesting, the decision concerned employees of the national, as well as private universities.

Taking under consideration a very unstable internal situation, increasingly difficult geopolitical conditions and significant capital needs of Turkey (a deficit on the current account), a further depreciation of lira remains the base case scenario. The profitability of 10-year treasury bonds exceeded the 10% level today.

Theoretically, the statements from the Turkish minister of economy may calm down the situation. Nihat Zeybekci said that, “the lira will suddenly gain value during the forthcoming days.” Moreover, he added that, “I do not expect a negative decision from Moody's.”

When it comes to the first of these matters, the government, as well as the central bank have a possibility to support their currency in the short-term. This phenomena could be seen in Ukraine, even in the moments of the largest tensions. However, Ankara's impact is very limited when it comes to the decisions of rating agencies. In our opinion, the rating will be downgraded below investment level by the end of holidays, if the situation does not improve significantly.

Decrease in pension age

Yesterday, the Council of Ministers gave a positive opinion about a decrease in retirement age, to 65 years for men and 60 years for women, without an additional demand regarding job seniority. The government's recommendation basically determines that the presidential project will be implemented.

This information is generally disadvantageous for the Polish economy. With reducing supplies of workforce, extending period of life and very low fertility rate, it will lay serious weight on the public finance in the coming years. Moreover, it will decrease the potential of the Polish economy.

It is worth noting that according to the calculations of the current Ministry of Finance, included in the Convergence Program, as a result of a decrease in retirement age, the expenses will increase by 10.2 billion PLN in 2018 and by 11.9 billion PLN in 2019. This means that in comparison to the base case scenario presented by the minister of finance in April, the deficit will increase by 0.5% against the GDP each next year.

Accumulated impact on the debt, as well as the GDP in the coming years, will be at the level of few percentage points. Taking under consideration how negative will this idea be for the economic processes, a risk of a downgrade by Moody's during the review of Poland's loan credibility in September is increasing.

A certain, although a small consolidation, may be the fact that the changes will be implicated in October 2017. As a result, the impact on very tight next year's finance will be relatively small. New pensioners will only receive their benefits for the last quarter of the year. This will limit the costs from 8.6 billion to most likely approximately 2 billion PLN.

The above information is also fundamentally negative for the zloty in the mid-term, as well as the long-term. However, the fact that it did not depreciate immediately, is a result of positive global sentiments, as well as a positive feedback for an unchanged rating. In general, the market received yet another reason for the Polish currency to become weaker and more volatile than it was in the past.