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Daily analysis 25.01.2016

25 Jan 2016 13:11|Marcin Lipka

Federal Reserve's announcement will be the event of the week. Publication of the German Ifo was worse than expected. The zloty remains weak to the main currencies, and the EUR/PLN returns to the area of 4.47.

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 have a significant impact on the analysed currency pairs.

Fed is in the centre of attention again

The last week's ECB meeting was quite surprising. Mario Draghi suggested modifications in the eurozone's monetary policy already in March. Now, the market should focus on the Wednesday's announcement from the Fed.

Even though there is practically no chance for hikes in the United States in January, investors will search for elements that could increase the possibility of monetary tightening in March. The market's participants will probably compare the current announcement with the one published in September. It is because the current situation related to commotion in China, reduction of prices on the stock markets, and sale of raw materials, is similar to the one observed in August.

At that time the Fed emphasized that “the events on the market may weaken the economic activity, and cause a further decrease pressure on inflation in a short term”. The Fed claimed that it will “monitor the abroad events”. The events from Summer 2015 caused the FOMC to move the moment of raising interest rates to the forthcoming quarter.

However, it is unlikely that this time such situation will take place. First of all, the monetary tightening cycle itself has just begun. Thus, it is difficult to expect that it will end only 6 weeks after the first increase in interest rates for 10 years.

Second of all, the situation on the American labour market is still good. This fact is very likely to be mentioned in the Wednesday's announcement. Finally, in following weeks the Fed will have many occasions to announce resignation from the monetary tightening in March if needed. Morgan Stanley, cited by the Bloomberg agency, reminded that it may happen during Janet Yellen's testimony in from of the Congress on 10th of February.

Therefore, expectations for a relatively dovish announcement may not be fulfilled. Especially that more hawkish representatives of the Fed local departments gained the right to vote in 2016. Thus, it is possible that the January's FOMC announcement may cause a visible enforcement of the dollar to the majority of currencies, and depreciation on the EUR/USD.

Worse Ifo reading

Today's publication of German entrepreneurs' sentiment was clearly worse than expectations. The Ifo index went down from the level of 108.6 to 107.3 points. This is the lowest reading since February 2015. Also, it is definitely below the expectations of economists surveyed by the Bloomberg agency (the consensus was within the limits of 108.4).

According to the Institute's announcement, the industrial subindex went down to its 12-month minimums mainly due to worse perspectives regarding the export of cars and machines. Rest of the subindexes – construction, wholesale and retail – were also in general weaker. However, these changes were definitely less visible, and it would be difficult to come to credible conclusions basing only on them.

The following PMI and Ifo reading will be quite significant. If they confirm an actual deterioration of the sentiment, some anxieties regarding the German economy's condition may appear. This may also have a negative impact on the Polish indexes.

Nervousness maintains on the zloty

Even a small deterioration in the global sentiment translates quite quickly to a depreciation of the Polish currency. Before the noon the EUR/PLN returned to the area of 4.47. This is only by 0.03-0.04 PLN less than 4-year records of the zloty's weakness. Rest of the indexes also confirm the aversion towards the Polish market.

The CDS quotations came close to the levels which were quoted right after a decrease in the Polish rating, and they are lower than their 2-year maximums. Interesting thing is that if we compare the profitability of the Polish (3.1%) and the Hungarian (3.3%) debt, we will see that the bonus for buying the 10-year Hungarian treasury bonds to the same Polish bonds, is the lowest for at least a decade, and is 20 base case points (pbs). In mid 2015 it was 100 pbs, and in September 170 pbs. With similar perspectives for inflation, this means that the market begins to estimate the Hungarian loan credibility expressed in the local currency in a very similar way as the Polish loan credibility.

Thus, we can still expect that the zloty will quickly lose value when the global sentiment deteriorates. It is possible that the are of 4.51 will be again crossed. This would mean reaching new 4-year maximums and the EUR/PLN pair.

25 Jan 2016 13:11|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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