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Daily analysis 21.12.2015

21 Dec 2015 13:57|Marcin Lipka

Can the elections in Spain clearly disturb quotations of the EUR/USD? Weekend statements from the FOMC members and the Financial Times survey. The zloty is becoming stronger. Today, we should know two, and tomorrow three more candidates to the Monetary Policy Council.

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

  • No macro data which could have a significant impact on the analysed currencies.

Is Spain a danger?

Since morning there are a lot of comments regarding the weekend elections in Spain, which were won by the People's Party of the Prime Minister Mariano Rajoya. However, it received only 123 out of 350 places in the parliament. This means that it will not be able to reign independently. The Socialists came second, and they have 90 mandates.

Fore more than 30 years Spain was ruled by the Socialists, or the People's Party. Before the yesterday's elections the surveys were not giving any bigger chances for this situation to be maintained. Through the past years there were two more political parties which gained popularity – populist Podemos, and central-right party, the Citizens. They received respectively 69 and 40 mandates

Currently there is a question – can the Spanish problems have an impact on the behaviour of the EUR/USD? Right now it is very unlikely, even if there are new elections. The economic situation in Spain is significantly better than few years ago, despite the fact that unemployment there is more than 20%. Thus, there is a small chance that the problems of Madrid would lead to the events observed in 2012.

Additionally, an increase in aversion towards risk does not have to cause a depreciation of the euro, even if it comes from the eurozone. A good example to confirm this concept was a behaviour of the EUR/USD in the times of the Greek crisis. At that time the common currency remained on an unchanged level, or it was gaining.

Right now it may be the same. This is a result of the fact, that by a bigger commotion on the capital market, the Fed would probably cease an increase in interest rates, and on the other hand it would liquidate the carry trade positions on the euro. A return of the capital to the euro, and less hawkish policy of the FOMC would reduce a hypothetically negative scenario from Spain.

When will the Fed make another move?

On weekend the Financial Times published a survey conducted among economists. It regarded the moment of another hike in the USA. According to the FT more than 2/3 of surveyed claimed that another monetary policy tightening in the USA will take place in March. Only slightly more than 20% claims that it will be in June.

On the other hand, the Financial Times study shows that the majority of economists thinks that next year the Fed will raise interest rates the total of two or three times, whilst the median of the FOMC representatives suggests 4 hikes. One might say that in general it is coherent with the market's view, which assumes that the pace of hikes will be maintained or decreased. Acceleration is very unlikely.

During the weekend we also had some statements from the FOMC representatives. John Williams (without the right to vote in 2016) sounded relatively neutral in his interview with Reuters. He claimed that his expectations regarding the hikes overlap with the Fed consensus. He also claimed that the changes can be conducted at every meeting, and not only at the ones ended with a press conference.

Jerome Powell showed a slightly more dovish approach. He is also close to the consensus, and in his interview with the Marketplace radio he claimed that the further hikes will be “very gradual”. Powell would also like to see an increase in salaries and inflation.

Thus, we can claim that in order to keep the pace of 4 hikes next year, good data is required. Probably worse readings from the labour market, slower inflation, or disturbances on the capital market will be used to decrease the scale of monetary tightening. This would give the dollar a chance to generate a longer work off of its recent strength.

Few words about the foreign market

Elections in Spain and recent statements from the Fed representatives, should not clearly disturb the EUR/USD quotations. The base case scenario for the following days should still be a relatively calm trade, and preparations of the market for the new year's macroeconomic data. Additionally, even if the wallet capital creates a volatility in the last days of December without any significant reasons, the quotation would most likely return to the current levels in the first days of January.

Strength of the zloty

Quotations of the zloty were really strong in few past hours. At the beginning of the day the PLN appreciation was supported by higher evaluation of the forint. Currently, however, only the national currency is visibly gaining among the emerging markets currencies. The debt market also behaves well. Despite an increase in profitability of the German bonds, the Polish ones decrease, which causes a further tightening of spread.

This afternoon we will probably know the names of two candidates for the Monetary Policy Council. On the other hand, as the Polish Press Agency informs, until Tuesday we should know three more. This may mean slightly more volatilities on the market, and even a further depreciation on the PLN, if it appears that the candidates are less dovish than it was previously speculated.

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

Range EUR/USD 1.0850-1.0950 1.0750-1.0850 1.0950-1.1050
Range EUR/PLN 4.2200-4.2600 4.2200-4.2600 4.2200-4.2600
Range USD/PLN 3.8800-3.9200 3.9200-3.9600 3.8400-3.8800
Range CHF/PLN 3.9000-3.9400 3.9000-3.9400 3.9000-3.4900

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

Range GBP/USD 1.4950-1.5050 1.4850-1.4950 1.5050-1.5150
Range GBP/PLN 5.8400-5.8800 5.8000-5.8400 5.8800-5.9200

21 Dec 2015 13:57|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.

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