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Daily analysis 26.01.2016

26 Jan 2016 13:41|Marcin Lipka

Do the strong volatility on the oil market and reduction of prices on the Asian stock markets increase the chances for the dovish announcement from the Fed? The good GDP reading has been covered by a worse global sentiment and the announcement from the Moody's rating agency. The euro is close to 4.50 PLN, and the dollar to 4.15 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 have a significant impact on the analysed currency pairs.

Will the Federal Reserve be frightened?

After last week's increases on the stock markets, and a 20% rebound on oil, the fear returned to the market. Depreciation of oil became again a good reason for reduction of the American and Asian indexes.

The stock market in Shanghai lost more than 6% of its value, and went down to the lowest levels since December 2014. Also, the value of the WTI oil was again clearly below 30 USD at the European opening. Additionally, oil lost approximately 10% of its value since the Monday's peaks. This also shows the market's nervousness, and a significant change in the global capital's sentiment within barely 24 hours.

What is also important, the market is following oil's behaviour to a great degree. However, it now concerns more the lack of sufficient enough demand, instead of oversupply. Additionally, the demand which is hypothetically lower than expected, is interpreted as an accelerating sign for the global economy. So far, however, there is no data which could show a decrease in demand for oil.

In the report of the International Energy Agency (IEA) published on January 19th, in comparison to 2015 the daily supply for oil is supposed to increase by 1.2 million barrels in 2016. These estimations have not been changed. Thus, automatic interpretation of decrease in prices and a danger concerning an increase in the GDP, seems making things too simple. At least in the case of oil.

However, the main question for the currency market remains: how will the Federal Reserve behave now? In yesterday's analysis we took note that the Fed will probably avoid clear suggestions about a pause in the hikes.

Even if the FOMC already doubts the necessity of 4 hikes this year, it is probably not a good time to announce this fact. Withdrawal of the basic scenario after just 6 weeks, could show too nervous reaction from the Fed. They were already criticised for such last summer. At that time, a similar situation postponed the moment of monetary tightening to the next quarter.

Thus, the Federal Reserve will probably not suggest the possibility of keeping interest rates unchanged on the meeting in March. This should happen despite reduction of indexes, a decrease in the American treasury bonds' profitability, and a visible overvalue of oil. These factors may have a negative impact on inflation for the forthcoming months.

However, if there really is such a necessity and the market situation forces the Fed to leave interest rates unchanged in March, Janet Yellen and her associates will have six more weeks to announce this matter properly. This will protect them from decreasing their field with a too intense message in tomorrow's announcement.

In our opinion, tomorrow's meeting will probably be favourable for the American currency, due to the fact that expectations for the Fed to be dovish will not be fulfilled. This on the other hand, can even take the EUR/USD below the area of 1.0750.

The GDP covered by the global situation and the Moody's announcement

The initial GDP reading for 2015 published by the Polish Central Statistical Office (GUS), appeared to be slightly above the consensus of economists surveyed by the Bloomberg agency (+3.6% vs +3.5%). Not only the publication itself was better than expectations, but also the GDP components can suggest that the positive trends will be continued.

According to the GUS analysis published in “Information about the country's social-econimic situation in 2015” section, “the main increase factor was the national demand, focused to a greater degree on consumption rather than investments. The net export, unlike the year before, had a positive impact on the GDP growth”. It is also worth noting that apart from reviving consumption, the gross outlay for durable goods increased at pace of more than 6% y/y. This was the third best reading since the 2008/2009 crisis.

However, the zloty hardly reacted to this data. First of all, the sentiment in the morning was weak. Thus, the national publication was dimmed by anxieties of the future condition of the global economy. Second of all, announcement from the Moody's rating agency also appeared before the noon.

Moody's expects the deficit for 2015 and 2016 to be respectively 3.2% and 3.1% of the GDP. However, in last year's convergence program these indexes were respectively 2.7% and 2.3%. According to the Bloomberg agency, Moody's also takes note of “a further easing of the fiscal policy in 2017”, and a risk of a decrease in salaries. The latter would happen due to a deterioration in the “investment climate” and “business trust”, related to “the recent actions in institutional and legal sphere”.

According to Moody's (quoted after Bloomberg) “deflection from the deficit for 2015 and 2016, is negative for Poland's loan credibility”. Due to Moody's comments, the EUR/USD went close to 4.50, and the USD/PLN tested its 13-year peaks within the limits of 4.15. Concidering the current situation, there is a risk that if the global situation continues to deteriorate, we may see the new maximums on the dollar, as well as on the euro. They may exceed the level of respectively 4.20 PLN and 4.55 PLN.

26 Jan 2016 13:41|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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