Daily analysis 25.11.2016

The dollar lost slightly against the euro at the beginning of the European session. The OPEC meeting may appear significant for the dollar as well. The zloty strengthened slightly against the main currencies at the beginning of the European session.

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

• 15.45: Initial PMI data from the American services sector (estimations: 54.8 points).

Return near 1.06

Due to the fact that the American market was closed on Thursday, investors didn’t receive many signals that could extend the dollar’s positive streak. However, there were speculations that the European Central Bank (ECB) may decide not to extend the QE operation in December.

Last evening, Bloomberg cited people who are familiar with this case, that the ECB members are thinking of postponing the decision regarding the QE changes until January. This is because of an increase in profitability of treasury bonds, which decreases the risk of a deficit in debt instruments which would be suitable for purchase (their profitability needs to exceed the deficit rate.)

This information may cause a slight appreciation of the euro, as well as the return of the EUR/USD near 1.06 in the market, which is not receiving any clearer signals. However, it seems relatively unlikely that this decision will be made. The ECB announced that it intends to wait until the end of the year in order to become familiar with new macroeconomic projections. The extension of this period of uncertainty would probably cause more negatives than positives. Moreover, the situation in January may appear to be similar to the current situation. As a result, we expect the QE operation to be extended in December for at least six months.

OPEC and currencies

The next OPEC meeting will start in five days. The Cartel members will make their decision regarding oil production limits. However, the market is still full of speculations regarding the actual agreement. Last night, The Wall Street Journal published an analysis which suggested that the increase in mining may be significantly larger than expected.

In reference to information from people who are familiar with this case, The Wall Street Journal claimed that the Cartel wants the countries outside OPEC (including Russia) to limit their mining by 500k-600k barrels per day. This would mean that the total supply reduction (including the Cartel’s reduction plans) would be at the level of 1.6-1.7 million barrels.

However, Bloomberg is leading in an opposite direction. In today’s publication, the agency took note of dissonances within OPEC. Iran still wishes to increase its production to the level of at least four million barrels. On the other hand, Russia may agree on freezing its production and nothing more. According to Bloomberg information, the Algerian minister of energy will fly to Tehran on Saturday in order to increase the likelihood of an agreement before the summit in Vienna on Wednesday. Let’s keep in mind that Algeria was the country that officially initiated the negotiations.

However, taking into consideration the entire negotiation process, it seems most likely that OPEC will reduce its production by approximately one million barrels per day, for at least six months. This most likely would cause the WTI prices to move to the range of 50-55 USD per barrel, as well as causing a slight deficit in the oil market. This should slowly decrease supplies.

This information should be favorable for oil exporting currencies. Moreover, it may cause an increase in inflation expectations, especially in the USA. Due to the low level of taxes, as well as of last year’s low base, an increase in prices will be relatively easy for customers to notice. This may result in further rate hikes and continue the appreciation of the USD.

Situation of the zloty slightly better

This day started with a slight appreciation of the zloty against the euro, as well as against the dollar. However, the scale of this growth became limited at approximately noon. Moreover, the PLN/HUF increased from 70.00 to 70.30. Next week should be a demanding test for the zloty, especially due to the American data, as well as to the OPEC meeting.

Investors will try to find information that could confirm an increasing likelihood of interest rates in the USA. They will search for these clues in employment data, as well as in inflation data. Reports regarding this data will be published on Tuesday and on Friday, respectively. The decision from OPEC and the American ISM will most likely increase volatility in the currency market. The zloty’s reaction to this data will determine whether the PLN will stabilize, or if it will remain under a strong impact of the dollar.