Daily analysis 23.05.2016

The PMI is near the consensus. However, the description of indexes suggests a slower growth. Her Majesty's Treasury weighs in on a decrease in value of the pound in the Brexit scenario. A survey from the Financial Times regarding an increase in the American interest rates. The EUR/PLN is near 4.45, and the dollar is above the level of 3.95 PLN.

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

• No macro data that could significantly impact the analyzed currency pairs.

Mediocre tone of PMI

At first sight, today's PMI readings were barely different from the ones published during the past few months. The index of the future activity of industry, as well as of services in eight of the biggest euro zone countries, only decreased 0.1 point. Its current level is 52.9 points.

However, the situation looks worse after looking at descriptions of the particular components. Chris Williamson, the chief economist of Markit, claims that, “the accelerating indexes suggest that the growth will weaken, instead of become stronger. The new orders index showed the lowest increase in almost one-and-a-half years. Moreover, the optimism regarding the perspectives in services went to its lowest levels since July 2015.”

It is also worth noting that the future growth of economic activity outside the core of the euro zone (France and Germany), wore-off to its one-and-a-half year minimum. Williamson also wrote that, “the PMI indexes suggest a weak economic increase in the euro zone (0.3%) for the second quarter.”

Her Majesty's Treasury on pound's wear-off

A short analysis concerning a hypothetical impact of Brexit on the expenses of a four-person household, appeared at the official website of Her Majesty's Treasury (HTM) this weekend. According to the HTM, if the UK leaves the European Union, in 2018 a British family would have to spend 221 pounds more on food and clothes.

However, the information concerning a possible wear-off of the pound in the case of Brexit, seems to be the most significant in the entire report. Previously, British authorities were avoiding presenting any specific estimations. However, the HMT document states that, “multiple internal studies estimate that leaving the European Union will cause an average 12% decrease in the pound's value.”

We can assume that the market will accept the above scale, if there is a change in the surveys. For the time being, the recent studies show a decrease in the risk of Brexit. Thus, the above estimations are of a small significance. The whatukthinks.org website shows that the average result of six surveys (three of them were conducted via phone) is 54% for staying in the European Union, and 46% for Brexit.

Moreover, the recent online surveys by YouGov indicate a slight increase in advantage for the Brexit opponents. The survey from May 17th gave them a 4% advantage. Two weeks before, it was only 2%; and on April 26th, it was the Brexit supporters who had 1% of advantage. Of course, these are small changes. However, even a small decrease in the advantage of Brexit supporters in online surveys shows a decreasing risk of Brexit.

The market prepares for June or July

In the Daily Analysis from May 13th, after testimony from Eric Rosengren (considered as relatively dovish) from the Fed, we took note that he presented many arguments for a near increase in interest rates. Currently, the market is practically estimating the next hike for the beginning of the second half of 2016.

Economists take a similar course. According to the Financial Times survey published on the weekend, more than 50% of the leading economists claim that the Fed will raise interest rates in June (32.1%) or July (18.9%). A significant fraction estimates that it will happen in September (35.8%).

A few testimonies from the FOMC representatives are planned for this week. However, some of them have already shared their views. Thus, their opinion will be analyzed to a smaller degree. The discussion at the Harvard University featuring Janet Yellen on Friday, should theoretically be the most significant. Its topic is “Building the economy of welfare and equality.” It does not say whether the discussion will be preceded by Yellen's testimony regarding the current monetary policy. However, a discussion under #radday16 is planned. Thus, it is possible that there will be some questions about the decisions regarding interest rates.

A few words about the foreign market

Considering a quite poor reading of the PMI from the euro zone, as well as the suggestions from the FOMC representatives regarding the forthcoming hikes, the EUR/USD quotations should be pushed by the stronger dollar. However, it is possible that some investors will want to wait for Friday's comments from Janet Yellen, in order to get a confirmation of the monetary tightening at the beginning of the second half of 2016.

Zloty continues to lose value

Today's overvalue of the Polish national currency is related to a general deterioration of the sentiment in the emerging markets. This theory is confirmed by a weaker condition of the forint, despite the fact that the Fitch rating agency has raised Hungary's credit evaluation from speculation level to investment level.

On the other hand, it is worth noting that the zloty gains whenever the sentiment improves; and it clearly loses when it deteriorates even slightly. This shows a general weakness of the PLN, which is a combination of the local situation, as well as the global situation. Additionally, the EUR/PLN reached the 4.45 level today. This is its highest level for more than three months.

There are no elements in sight that could change the negative attitude towards the zloty in the short-term. Moreover, if the quotations of industrial metals, as well as of oil, affect the emerging markets negatively, and investors become increasingly convinced that the monetary tightening in the USA will happen during the next two months, the EUR/PLN may test the area of 4.50 quite quickly, and the USD/PLN may climb clearly above 4.00.