Daily analysis 25.05.2016

The conditions for the hikes in the USA are becoming better - the data from the real estate market is good, stock markets, as well as value of oil are going up, and profitability of the American bonds are growing. The German Ifo is better than expected. The zloty is calm, but weak.

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.

Will the Federal Reserve receive a green light?

It is possible that yesterday's events in the labor market will open the door for the American monetary tightening. This concerns the nearest increase in interest rates, as well as the matter of the future moves from the Fed.

Tuesday's readings from the American real estate market were a favorable element regarding the economic condition. The amount of newly sold houses in April, was 619k (the reading was seasonally equalized, as well as annualized). This is the highest level of this index in eight years. Moreover, economists' expectations were near the level of 520k. Thus, they were significantly exceeded.

The one-time higher indexes may give the wrong signals (especially if the m/m readings are annualized). However, this data needs to be interpreted as positive. A possible negative element might be the fact that the growth was ensured by one region (the south). An increase in sales has been also observed in the north-east. However, the contribution of this region is relatively small. In general, even if the sales scale is slightly overestimated, it still should be positive information for the Fed.

The next matter is the behavior of the capital market. Tuesday’s session in the USA was positive, despite the fact that the expectations concerning the hikes are increasing. Many times before, the solid macro data did not cause an optimism in the market. This is because some of investors were more afraid of negative effects of the ending monetary stimulation, rather than interpret the macro readings positively.

However, it is possible that this attitude is pushed aside by a more traditional viewpoint. Better economic perspectives are positive for the shares market, even if they announce slightly higher interest rates. If the market begins to go this way, the Federal Reserve will receive a signal that the monetary tightening will not cause the aversion risk to increase. Instead, it would put out the economic growth.

The signals from the economy, as well as from the American floors, were complemented by the debt instruments. The American two-year treasury bonds are beginning to estimate the hikes more bravely. Their profitability exceeded the 0.93% level, while less than three weeks ago they were testing the 0.70% level.

In the end, it is also worth focusing on the oil market. Previously, an increase in the value of raw materials was equal to the capital flow to the emerging markets. This was negative for the USD. However, this approach is beginning to wear-off. An increase in oil prices to their balanced levels, should also mean an increase in inflation expectations. As a result, the appreciation of the WTI and Brent, may strengthen the USD, rather than wear-off the American currency.

In conclusion, practically everything works to the dollar's advantage, as well as a depreciation of the EUR/USD. Of course, we may imagine a sudden deterioration of sentiment because of China. However, this does not seem to be the base case scenario for the time being. A certain element of risk for the buck might be Janet Yellen's testimony in Friday. Nevertheless, a definitely more dovish approach of the FOMC chairwoman would be quite surprising. Thus, it is possible that the main currency pair will find itself in the area of 1.10 before the Fed's meeting in June.

A positive Ifo reading

After better than expected PMI readings, as well as the ZEW readings from Germany, we received stronger Ifo data today. Apart from an increase in the general index, to 107.7 points (this is the highest this year, against expectations at the level of 106.8), the Institute also focuses on estimation of the situation in the constructions sector. It increased to its highest level since 1991.

The Ifo also emphasized that, “the companies are clearly more satisfied with the current situation. Moreover, they are clearly more optimistic regarding the forthcoming months. The German economy is developing at a fast pace.” The other components (production, wholesale and retail sale) have also increased.

Zloty is not willing to work-off the loses

Thanks to a clear improvement in the global sentiment, the zloty worked-off some of the loses against the euro. Currently, the European currency costs 0.02-0.03 PLN less than it did on Tuesday. The situation on the dollar is slightly different. The general strength of the American currency is keeping the USD/PLN near the 4.00 level.

Weakness of the zloty can still be seen against many regional currencies, especially the Hungarian forint. The PLN/HUF is only 2% above its three-year minimum. A rebound on the zloty may be blocked by a clearly stronger dollar. It may have an impact on the Polish currency, even if it appears that there is an agreement within the Constitutional Tribunal, or if the current administration resigns of some of the plans for easing the fiscal policy.

The positive scenario assumes that the EUR/PLN may depreciate to the area of 4.35. However, a clearer depreciation is very unlikely for the time being. This is because of a negative sentiment towards the Polish assets, as well as risk of the hikes in the USA, which is a negative signal for the zloty.