Daily analysis 20.08.2015

Minutes showed that the Federal Reserve had been more dovish than the market expected during July's meeting. Emerging market currencies sell off. The zloty's depreciation was pushed by external issues.

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

• 14.00: minutes from the latest Polish MPC meeting.
• 14.00: jobless claims from the US (survey: 271k).
• 14.30: existing home sales in the US (survey: 5.43 million, data annualised, seasonally adjusted).
• 16.00: Philadelphia Fed manufacturing index (survey: 6.5 points).

More dovish minutes

In line with our expectations the most recent Fed meeting was more dovish than the market expected. It was also confirmed that investors focused on the subjects we listed in our analysis yesterday.

Firstly, there was quite a lot of discussion about China. The FOMC noted some negative consequences from slower economic growth in China. This subject has enjoyed an intense discussion recently due to the yuan devaluation which was mainly regarded as the weakness of the largest Asian country.

The FOMC members also discussed further dollar appreciation in the event of monetary tightening. According to the Fed, a stronger dollar can lengthen the selling pressure on commodities and export weakness.

A strong discussion was also observed regarding inflation: “some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating the firming of the policy”.

Currently, there is a major question to whether the most recent minutes markedly reduce the September rate hike. Not really. Other economic indicators look quite solid for the Fed. The jobs market, housing market and retail sales have improved. Currently, the scenario for the Fed hike in September should be the base one. But, it does not have to be the issue that supports the dollar in Q4 and Q1 next year. Next month, the Fed's macro projections may show that the gap between the first and second hike can be 6 months long. As a result, the following months can be negative for the dollar despite the monetary tightening from across the pond.

Turmoil on EM currencies

We have discussed for a long time the strong selling pressure on the lira. Today, our expectations were fulfilled and the USD/TRY pair tested the 3.00 level. The sell off continues on other commodity currencies after it turned out yesterday that crude inventories in the US had risen markedly. The dollar is worth over 67 roubles.

In the morning, the Kazakh tenge was devalued more than 20%. The Kazakhstani currency adjusted to the Russian rouble depreciation and falling crude price, which is the main export product of this Asian country.

The WTI is approaching 40 USD levels while Brent is testing 46 USD per barrel. There are still no signs that might stop the slide. Only the probability of a slight correction is rising but any upside move is expected to end fairly quickly.

The foreign market in a few sentences

Due to the yesterday's publication of July's Fed minutes the dollar significantly weakened to many major currencies and especially to the euro. There is, however, a slim probability that such a strong appreciation trend on the EUR/USD can continue especially that the September hike has not been crossed out.

Speculations on interest rate cut

There are some rumours on the market that Polish MPC may cut interest rates. This move cannot be excluded, if Poland resumes to import deflation due to falling commodities prices and further currency depreciation of our trading partners. However, currently such a scenario is not the base one which is confirmed by comments from Elzbieta Chojna-Duch for PAP.

The MPC member who is regarded as being close to the consensus claims that “the Polish economy remains in balance and the current interest rate stabilizes the Polish financial market. The stabilization declared by the MPC remains valid. Any discussions about changes in the policy may undermine its credibility”.

Today's zloty weakness to the euro is mainly caused by the euro appreciation on international markets. What is worth noting is that the PLN depreciation was much slower than on other EM currencies and will probably be quickly corrected. The EUR/PLN should not be traded above 4.20 for a long time. Today, there is also the publication of July's minutes from the Polish MPC. No arguments should be seen which may support the interest rate cut.

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

Anticipated GBP/PLN levels according to the GBP/USD rate: