Daily analysis 21.12.2017

Changes in US taxes wait for President Trump's signature. The weaker franc, yen and the pound were observed during the morning trade. The decision from Czech monetary authorities. The zloty remained stable. Minutes from the last MPC meeting should not disturb zloty quotations.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:00 p.m.: Publication of December’s MPC meeting minutes.

Pacing currencies

The final version of the tax bill was approved by the US Congress yesterday. Now, it is waiting for President Trump's signature (probably on January 3rd or through the Christmas/New Year period). In the context of the expected fiscal changes, no surprises will likely be noted. Currently, the market will try to assess how they will affect investment, consumption, inflation and, finally, the monetary policy of the Federal Reserve. Theoretically, higher yields on US government bonds and a stronger dollar should be observed.

The theory does not always correspond with practice for the short term. Rising yields on government bonds in the USA and the absence of higher movements on analogical instruments in the eurozone do not translate to EUR/USD increases. On Wednesday evening, the difference between yields in the US Treasury bonds maturing in 10-years as well as German bonds reached almost 210 basis points (2.1 percentage points). This has been the highest since April, yet the main pair has continued to appreciate. Sometimes, similar market disturbances occur at the end of the year, but it is unlikely that the dollar would depreciate in the long term, given the growing expectations of future increases in interest rates by the Fed.

Weaker franc, yen and pound

The relatively strong euro, combined with the absence of prospects for a faster tightening of the monetary policy in Switzerland (negative for the franc) means that the EUR/CHF pair has grown to almost 3-year highs. For example, the 1.1740 level, which also translates into more significant drops of the CHF/PLN pair and whose quotations have been approaching the lowest values since a black Thursday in mid-January 2015.

The situation on EUR/JPY is also interesting. No prospects for a monetary policy change in Japan (maintaining the yield on maturing in 10-year treasury bonds close to 0.00% by the central bank) coupled with rising expectations of global rate hikes, the yen became the main victim of such hikes (apart from the franc). The yen should be weaker against the dollar than the euro, but the recent trade disturbances in the European currency are more likely to translate into further increases in the EUR/JPY pair than in the USD/JPY. However, this does not change the fact that the current environment is negative for the yen and the franc.

The reasons for the pound's weakening are different: the internal problems of Theresa May and Brexit governments. However, they are also partially connected with a slightly higher chance of increasing global interest rates. On the other hand, due to the political risks associated with Brexit, the economic situation is worse than that of the global economic cycle, and therefore the Bank of England's monetary policy may remain relatively accommodative. Therefore, the pound is also weakened.

The Czechs decide on interest rates. Stable zloty

The Czech National Bank (CNB) will decide on interest rates in the early afternoon (1:00 pm). The consensus indicates leaving them unchanged, although economists' decisions are not unanimous. This is due to the fact that the pressure on interest rates for our southern neighbour have been strong.

The Czech Republic's GDP increased by 5% YOY in Q3. Core inflation exceeded the central bank's target of 2%. In addition, wages increased at a pace of 7-10% YOY (substituted in the last three quarters according to Eurostat data). This shows that the Czech economy is growing well above its potential, and the lowest unemployment rate in the European Union (2.7%) suggests that it is starting to overheat and maintaining above parameters will be very difficult for the long term.

As a result, the CNB is actually forced to tighten monetary policy. Due to recent moves, it will be made during the second session. Therefore, it is not excluded that interest rates will remain unchanged today, but they are likely to rise by 0.75 to 1 percent (to 1.25-1.50%) in 2018. The Czech koruna may strengthen its position in relation to the Polish currency or the forint in the coming months given the quite dovish attitude of the monetary authorities in Warsaw or Budapest.

When it comes to the Polish currency, yesterday's EC decision did not cause any major changes for the zloty. This is probably due to the fact that investors have gotten used to the Brussels-Warsaw conflict. The impact is likely to remain limited as long as it does not have financial consequences or deter foreign investment. The relatively good economic sentiment in the eurozone also makes the aforementioned problems less noticeable than if, for example, the discussion of the single currency area's disintegration had been carried out.

In the afternoon, December's MPC meeting minutes will be published. A breakthrough is not expected, although it will be interesting whether views of a more hawkish MPC have been more noticeable than they were in previous months. However, even if the view for the tightening of the monetary policy is somewhat more visible, the consensus maintaining a neutral stance on interest rate changes so far seems to be strong and this information would rather be omitted by the market. Therefore, the core scenario that the EUR/PLN pair is keeping close to the 4.20 boundary remains.