Daily analysis 21.12.2016

21.12.2016 13:22|Marcin Lipka

The main currency pair returned to the area of 1.04. Relatively hawkish conclusions from The New York Times interview with John Williams. The record capital outflow from the euro zone. The zloty wore-off during today’s session and the EUR/PLN remains above the level of 4.40.

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

  • 16.00: Home sales in the USA in the secondary market (estimation: 5.5 million, negative 1.8% MoM).

Interview with John Williams

Yesterday, we took note that if there is no increase in the future interest rates (related to higher profitability of the treasury bonds), appreciation of the dollar’s index (DXY) may be stopped. This is exactly what has happened – currently, the DXY is approximately 0.5% below its maximum from yesterday.

However, a slight correction on the dollar should not be interpreted as a chance for a clear work-off of the USD recent growths. This is especially taking into consideration that the interview with John Williams for The New York Times (NYT) confirmed increasingly hawkish attitude from the FOMC.

Despite the fact that Williams’ views are considered as relatively similar to the FOMC consensus, it is worth noting two of his statements to the NYT. Primarily, he claimed that his decisions at the previous FOMC meeting were based on improving data. Moreover, he was not taking hypothetical changes in fiscal policy into consideration.

Secondly, asked for the Fed’s baseline of three hikes for 2017, Williams said that, “my underlying view for next year is broadly consistent with the central tendency of the Committee.” This statement may simply suggest that Williams’ estimates may simply be consistent with the consensus of three rate hikes. After all, this is the mentioned central tendency.

This interview confirmed what we have been emphasizing repeatedly. An increase in expectations regarding the future interest rates is comfortable for the Federal Reserve, especially until this does not deteriorate the share market, nor does it wear-off the credit demand. Therefore, if the market estimates a higher inflation, the Fed should follow this path. Moreover, this way three rates hikes will actually become the baseline.

Capital outflow from the euro zone

Today’s issue of The Wall Street Journal (WSJ) focused on the largest capital outflow in the history of the euro zone (497.5 billion euro for the period of twelve months which end in September). This is mainly a result of implementing extremely mild monetary policy by the ECB, which causes the capital to go to regions with higher interest rates.

However, we should keep in mind that the euro zone has been experiencing an increasing surplus of the current account (329 billion euro for the period of twelve months which end in October 2015). This surplus was at the level of 344 billion euro during the recent twelve months (before October), which is slightly more than 3% of the GDP.

The capital flow is significant for currency exchange rate in the short-term, as well as in the mid-term. Therefore, the WSJ made a right conclusion that this phenomena is supportive for the EUR/USD being pushed down. However, positive balance of the current account is a fundamental argument in favor of the euro. If the ECB withdraws from the QE program before 2018 or 2019, the euro zone’s economic situation would begin to improve, hence the capital would return. This, along with a surplus of the current account, will be a strong argument in favor of the euro’s strengthening.

Zloty’s wear-off

The euro reached the level of 4.41 PLN at approximately 12.00 AM. This is approximately the same level as yesterday. However, the sentiment towards the emerging market currencies was relatively positive in the past few hours. As a result, the PLN/HUF lost approximately 0.2%.

Lower pressure on the capital flow towards the dollar has been visible since yesterday evening. Moreover, there will be no more macroeconomic data that could support the dollar this year. Therefore, we sustain our scenario that the EUR/PLN may finish 2016 below the 4.40 level.



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