Daily analysis 22.12.2015

The lowest Brent oil prices since more than a decade increase the pressure on many currencies. Dennis Lockhart explains what “gradual” means to him. Smaller odds for interest rate cut in Poland.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30: Third, final GDP reading from the US (survey: +1.9% q/q, annualized).
• 16.00: Existing home sales from the US (survey: minus 0.2% m/m).

What does it mean gradual?

Yesterday we presented some slightly dovish comments from Jerome Powel, Fed's governor, who was talking about “very gradual” rate path. Moreover there were also comments form Dennis Lockhart which were published in the afternoon.

The Atlanta Fed's president, who loses voting power in 2016, is considered as neutral in the FOMC said in the WABE radio that “moving up gradually means to every meeting in all likelihood”. This comments can be regarded as slightly hawkish. There are 8 meetings in a year so not every meeting might mean even 7 hikes and the rates might be raised even to 2.0% at the end of 2016.

However, other Lochkart comments seem to be much closer to the consensus. The Atlanta Fed president sad that “U.S. is closer to full employment but not there yet” and “we're still substantially below 2% inflation goal”. Finally Lockhart also said that “gradual” may mean that “the rate of rising interest rates will be more like every other meeting. But the really important point is it's going to depend on how the economy actually performs”.

Currently, the Fed's core wants to keep suggestions on four hikes next year. The market, however, is expected to follow the data really carefully. If they tend to worsen the expectations about the hike are set to lessen. Also the hypothetical change in macroeconomic situation should change the view inside the FOMC and the discussion about slower pace may begin.

The Azerbaijani's manat looses 1/3 of value in one day

Almost 70% Brent oil depreciation since mid 2014 and eleven year lows on the creating significant turmoil on the currency markets. It is especially visible on the countries heavy relied on oil export.

We have written many times about the Norwegian krone, Russian rouble and just a few days ago we noted record low levels on Canadian dollar and Mexican peso. However, the Azerbaijan's manat (AZN) situation is the closes to the situation observed on the Kazakh tenge (analysis on November 10th 2015).

Since 2011 the manta was pegged to the dollar. The USD/AZN rate was below 0.8. The situation have started to be complex at the beginning of 2015 when the oil slide reduced the revenue from exporting energy related commodities. The export of oil and its products accounts for more then 90% goods in the economy

At the end of February there was a first devaluation around 25% and the USD/AZN rose to 1.05. However, further oil slide and the drop in other regional currencies, particularly the Russian rouble, created expectations of further devaluation. But during the TV interview governor of central bank said, according to Bloomberg, on September 25th that there is no need for further devaluation.

Finally the situation on the oil and currency created a need for further devaluation. The USD/AZN rose in one day from 1.05 to 1.55. It means that in a matter of one day the local currency lost more than 1/3 of tis value. Finally in 10 months the dollar value in AZN almost doubled.

There is of course a question who is next in the line. It seems that Middle East oil exporting currencies are fairly well secured especially in UAE and Saudi Arabia. The currency resrves are plentiful and their economic situation is much better than in former Soviet Union countries. There is much more threat regarding for example Nigerian niara (NGN). The country is also almost fully dependent on the oil export and the currency devalued only 20% since the oil began its slide. After the manat devaluation the pressure on NGN may even deepen.

The foreign market in few sentences

Limited liquidity on the EUR/USD may cause that during the holidays it is possible we can observe some chaotic movements on the pair. Today there is a final publication on the US GDP for Q3 but no major changes are expected in comparison to previous estimate. There is also a slim chance that existing home sales may change expectations regarding further FOMC moves.

Lower odds for a cut

Some speculations regarding the candidates for the MPC members are confirmed. Yesterday in late evening the current administration proposed prof. Ancyparowicz and prof. Łon. On Monday evening during TV Trwam interview prof. Ancyparowicz said, according to PAP, that there is no need to move the monetary policy.

Today in the morning three more candidates were proposed: prof. Gatnar, Kropiwnicki, and Chrzanowski. The most recent comments from Gatnar, who has been the central bank board member, were in April this year. At that time Gatner commented some appreciation move on the zloty to euro (EUR/PLN was around 4.00. The NBP official didn't want, however, to comment on interest rates.

In recent days market participants also noted that odds for interest rate cut have diminished. FRA 9X12 contracts which show how the 3M WIBOR may be shaped in 9 months suggested at the beginning of December almost two cuts. Currently it is less than one. This element might have also helped the zloty to gain some value in the recent days.

Another MPC candidates are expected to be officially presented at the beginning and at the end of January. Since that time the market is expected to wait for comments from current candidates. If most of then are against the rate cut the EUR/PLN may even drop to around 4.20.

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

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