Daily analysis 22.02.2017

The largest difference between profitability of American and German treasury bonds in seventeen years, is pushing the EUR/USD towards the area of 1.05. The minutes are significant, but it’s worth keeping in mind Jerome Powell’s testimony. The zloty is stable against the majority of currencies. The euro is near the level of 4.30 PLN.

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

• 19.00: Jerome Powell’s testimony about expectations regarding the economic situation, as well as the monetary policy.
• 20.00: Minutes from the Federal Reserve.

Euro wears-off against dollar

This morning, we received new positive data from Germany. The Ifo index reached the level of 111 points, which was by 1.5 points better than expected. Moreover, German entrepreneurs are more positive regarding the current economic situation (118.4 points).

A significant improvement has been quoted in the industrial sector, as well as in the wholesale. However, the perspectives for the building sector were negative, despite that evaluation of its current situation is very positive. Today’s data (combined with the PMI data from yesterday) proves that the situation of German companies is very optimistic.

However, positive data from the euro zone has been ignored recently. The EUR/USD tested the area of 1.0500 this morning. On one hand, this may be a result of anxieties regarding the forthcoming elections in the euro zone countries. On the other, the reason behind this may be increasing expectations regarding rate hikes in the USA.

This is very well pictured by the behavior of bonds. Profitability of the American two-year treasury bonds are near the level of 1.23%, which is only by 7 base case points below their highest level since 2009. However, profitability of the German two-year treasury bonds are at their historically low level (negative 0.9%). Therefore, the difference between them is at its largest level in seventeen years (more than 2.10%).

Minutes and Jerome Powell

Today, investors will mainly focus on those fragments of the minutes which concern the discussion regarding inflation (its distance from inflation goal), changes in fiscal policy (how can it impact the economy) and the Fed balance (is the moment of its reduction near). The general message from the minutes will most likely be hawkish and will sustain the perspective of rate hikes at the forthcoming meetings. Moreover, the document may also contain opinions that the potential risks (chances) may cause a faster GDP growth.

However, a hawkish message doesn’t have to cause a strong increase of the American currency. Since Monday, the dollar’s index has increased 0.7%. This may partially reflect hawkish suggestions from the FOMC.

Jerome Powell’s testimony may be interesting as well. Taking into consideration Daniel Tarullo’s resignation, as well as two previous resignations, Powell is one of four FOMC governors (next to Brainard, Fisher and Yellen). Governors have the largest impact on the monetary policy, because they have the right to vote during their entire term of office.

Moreover, Powell has not published any testimony since the Fed’s meeting in December and his views are considered as neutral. His testimony is scheduled for one hour before the publication of the minutes. Therefore, this may be a significant event, which may impact interpretation of the minutes.

Zloty is calm

The zloty is relatively calm. The EUR/PLN is making attempts to go below the 4.30 level. However, this is mainly a result of the globally weaker euro, rather than of the zloty’s strength. The Polish currency remains stable against the forint and the PLN/HUF is near the 71.50 level.

The most recent statements from the FOMC members may suggest that they’re trying to sustain the chances for rate hikes in March. The minutes may send a similar message. However, it’s worth noting that a portion of these expectations is included in the dollar’s current evaluation. This is because this opinion is quite popular in the market. Therefore, even if the message from the Fed is hawkish, the USD/PLN shouldn’t clearly exceed the 4.10 level. However, the euro, as well as the franc may slightly gain against the zloty, but they shouldn’t go too far from the level of 4.30 and 4.05, respectively.