Daily analysis 22.06.2017

A probable pause in quarterly interest rate hikes in the US does not allow the dollar to strengthen. Uneven impact on the oil price changes on the EM currency. The zloty remains weak and depended on the global sentiment.

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

• 14.00: June “minutes” from the Polish MPC,
• 14.30: Weekly jobless claims from the US (survevy: 240 tys.).

Shallow rate path in the US

After a relatively hawkish Fed’s meeting and mixed comments from the FOMC officials keeps the overall USD valuation remains low. The dollar index (DXY) is only one percentage above 8-month lows recorded in early June.

Falling inflation (both the PCE and CPI) combined with disappointing retail sales and industrial production are the main reasons behind the low dollar levels. Below expectations economic data is also affecting the future interest rate path. The probability of 25 bps hike in September is only 25 percent while the same move till the end of the year is priced at 43%. The full 25 basis point increase in the Fed funds rate is priced in September 2018. Contrary, the June median projection from the FOMC suggests a total move of 75 bps in the next five quarters.

The market also carefully listens to the FOMC members comments on possible pause of the tightening of the policy. Yesterday the Financial Times published an interview with Patrick Harker. The Philadelphia Fed president comments were regarded as dovish (question mark on the inflation) but he also mentioned that according to his sources wage inflation may be building. He also suggested that the price pressure could quickly accelerate as it was seen in the pas.

Overall, however, as long as the market believe in very muted interest rate path (25 bps in 5 quarters) the odds for stronger dollar remain limited.

The oil and EM currencies

Yesterday financial media reported that the oil dropped to the bear market as the crude slumped more than 20 percent since the latest peak (February 23rd). It is, however, worth noting that the low energy commodity valuation has a selective impact on the EM currencies.

The rouble depreciated almost 6 percent since the beginning of the month. On the other hand the Mexican currency rose around 2.5 percent to the dollar. The peso is supported by less fears on US trade restriction and relatively hawkish central bank stance. It outweighed the negative oil impact.

A fairly weak sentiment is seen both on the Polish zloty and Korean won (down around 2 percent in June), although lower oil prices should be beneficial for this countries. In general, however, the global sentiment and the fact that low commodity valuation may suggest to some investors a muted growth perspective is more important reason to sell the currency than more favourable trade balance. Additionally both currencies are still much stronger than at the beginning of the year.

The zloty remains fairly weak.

In the morning the EUR/PLN has been traded around 4.26. It was the highest level since two months. The Polish currency was also weak in the relation to its Hungarian counterpart. The PLN/HUF fell to 72.6 which was the lowest value in 10 weeks. Since the beginning of June the zloty lost more than two percent to the dollar which is 4th weakest result among 31 developing and developed currencies.

The relatively low PLN valuation is mainly due to global increase in the risk aversion to some emerging currencies (more in the previous paragraphs). It also confirms our view that the zloty appreciation in the H1 was mainly due to favourable global environment (rising equities, falling US yields). Solid data from domestic economy had limited positive impact on the PLN. In the following hours, however, the zloty should remain close to the current levels and the odds for retest of 4.26 on the EUR/PLN should be fairly limited.