Daily analysis 25.05.2017

Minutes from the Fed without a breakthrough, but perhaps the pace of exiting from the QE will be somewhat slower than market participants expected. The ECB does not want to modify the exit strategy. The zloty is benefiting from a positive global trend on emerging market currencies rather than good news from the domestic economy.

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

• OPEC meeting in Vienna: details on extending the agreement on limiting oil production. Press conference at 5 p.m.

The market reacts on the data selectively

Both the description of the US economic situation presented by the Fed's economists and FOMC members did not surprise in yesterday's "minutes". The Q1 GDP growth slowdown was identified as transitional and the US economic activity is expected to accelerate.

Members of the FOMC primarily noted the strong jobs growth and falling unemployment. Household spending has risen at a moderate pace, but the Fed maintains view that consumption will be strong. Theoretically positive in the context of the US dollar and the US economy was the fact that investment increased in the first quarter after it had grown slowly over the past two years. The Fed stressed that both the overall level of inflation decreased in March and was slightly below 2 percent.

In general, however, majority of members said that if economic information would come in line with expectations it would soon be appropriate for the Committee to take another step to reduce monetary accommodation. This is practically a sign of an interest rate hike in June.

The market, however, after the publication of "minutes" pushed the dollar lower, as the Fed's staff (economists not members) proposed a more gradual than expected reduction in the balance of the Federal Reserve. Earlier market participants were expecting that the pace would be similar to the pace of maturity of the fixed income instruments.

Most likely the staff suggestions on the slow pace of QE widening moved the treasuries. Yields of 5Y instruments fell by about 4 basis points. It also pulled down the dollar and supported the currencies of developing countries. In general, however, the combination of interest rate hikes and the Fed's reduction in monetary policy means that monetary policy becomes more restrictive, which in the longer term should cause the opposite movement - the strengthening of the dollar and higher yields on government bonds.

In the context of monetary policy, but formulated by the ECB, it is worth noting yesterday's speech by Mario Draghi. The head of the central bank rejected speculations about raising interest rates before the QE program ends. The dovish message, however, failed to spur any weakness to the euro.

Concluding, the market is clearly looking for arguments that support the current weakening of the US dollar while ignoring the message that is positive for USD or negative for the euro. This clearly supports the main currency pair. Such approach, although it may continue for weeks, however, is posing a greater risk of reversing the trend, even on the basis of fairly trivial news.

Favourable conditions from the zloty

The current conditions on the broader market are virtually ideal for the currencies of developing countries. Slower than expected, the Fed's departure from a mild monetary policy coupled with further historical records on the US indicies and a commodity market situation has led many EM currencies to gain value relative to major currencies.

This positive trend does not omit the zloty either. The EUR/PLN is currently traded near the lowest levels for a year and a half. The dollar today is only a fraction above the lowest level since October 2015. It is also worth noting that aside from the global sentiment, the zloty is also supported by the stabilization of the political and economic situation in the euro area.

What may be surprising, however, the zloty is only marginally supported by good data from the Polish economy. The Ministry of Finance yesterday published robust readings on the budget for the first 4 months of the year, and the favourable labor market situation combined with consumer optimism suggest good prospects for growth for at least the next two/three quarters. The zloty, however, have remained virtually unchanged in relation to the Hungarian forint or the Mexican peso since last months, showing that most of the moves are generated by the aggregate global capital approach to emerging markets.