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Daily analysis 21.03.2016

21 Mar 2016 13:25|Marcin Lipka

The first part of the European session was calm in the markets. Statements from the Fed, as well as from the ECB representatives can be a foundation for the future moves of the dollar, as well as for the euro. Good global sentiment is stabilizing the zloty at stronger levels.

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

  • 15.00: Sale of houses in secondary market (estimations: 5.31 million).
  • 16.40: Testimony of Dennis Lockhart of the Federal Reserve regarding the American economy.

Statements after the Fed and the ECB meetings

The situation in the currency market was relatively calm at the beginning of the European session. Milder global monetary conditions which were created in the past weeks by leading central banks, are also causing the emerging markets and raw material exporting currencies to sustain their recent increases.

However, it is worth noting that during the past few days, we had a few testimonies of the ECB, as well as of the Fed representatives. Despite the market's evaluation, their statements do not suggest a clear abandoning of a perspective of increasing interest rates by the Federal Reserve. Moreover, they show that the European monetary authorities continue to consider a further decrease in interest rates.

On Friday, the chairman of the St. Louis Fed, James Bullard, said in Frankfurt that, “the labor market is near normal, and inflation with exclusion of the fuel shock, is near its goal.” The FOMC representative also claimed that, “a reasonable policy suggests moving interest rates, as well as the balance towards more normal levels.”

This is slightly opposite to the statements that Bullard presented a few weeks ago. At that time, he widely described a decrease in inflation expectations. On the other hand, the market situation normalized significantly from the beginning of the month, and the base inflation increased to its highest level since 2012.

Jeffery Lacker spoke a lot of inflation expectations and their measurements. During his testimony in Paris today, the Richmond Federal Reserve representative said that, “inflation is low because of two factors: decreasing price of oil, and increasing strength of the dollar.” However, further on, Lacker evaluated that inflation should return to its 2% target, when the price of oil ceases to depreciate, and the dollar ceases to grow.

On one hand, statements from the euro zone monetary authorities position themselves in an opposing direction. On Friday, chief economist and member of the ECB board Peter Praet, claimed that, “deposit rates can be decreased if necessary.” Today, on the other hand, another member of the ECB board, Benoit Coeure, also said that the decision made on 10th of March proved that, “we do not lack tools.” This may be interpreted as a suggestion for further actions in order to ease monetary conditions, if necessary.

However, for the time being, irrespective of statements from the central bank’s representatives, the market continues to live a significantly more dovish-than-expected message from the Fed, and a lower likelihood of the ECB cutting deposit rates. Thus, we are going to need more positive data from the American economy (especially the one sustaining the trend of increase in inflation), in order for the market to be convinced that it may “force” at least two hikes this year.

When it comes to the ECB, a chance for a further easing of monetary conditions is relatively small. However, if the dollar increases and the EUR/USD depreciates, the market may recall that the monetary policy in the euro zone is extremely mild, and it will not be tightened for the forthcoming years. This could also be a catalyst for weakening the euro.

When it comes to the forthcoming days, the situation is unlikely to clearly change. Changes in the market regarding expectations, as well as regarding real positions, were recently too big to be withdrawn without a significant reason. Thus, investors are likely to consider that the central area of 1.12 on the EUR/USD is the base case scenario, before macro publications and new statements from the central bank’s representatives.

Zloty remains strong

The EUR/PLN pair is already testing the area of 4.25. However, in order for the euro to decrease to the range of 4.20-4.25, a clearer improvement of the global sentiment is needed. This would be, for example, a further increase on the American floors. It is also worth noting that if sentiments deteriorate, a work-off of the recent decreases can be significant. The situation is similar when it comes to the American currency.

Tomorrow’s readings from Germany (Ifo, ZEW, and initial PMI publications) may theoretically cause slightly less volatility. However, even if they are slightly weaker, they may partly reflect the pessimism which lasts from the beginning of the year. Thus, irrespective of the scenario, they may be received as positive or as neutral, so they probably will not cause a greater volatility on the zloty.

21 Mar 2016 13:25|Marcin Lipka

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:

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Afternoon analysis 17.03.2016

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