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Daily analysis 26.02.2016

26 Feb 2016 14:09|Marcin Lipka

The dollar is enforced by an improvement of the global sentiments and an increase in oil. However, this move is limited, and partly disturbed by the matter of Brexit for the time being. The zloty remains stable, despite arguments for a slight appreciation.

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

  • 14.00: Initial data about the German inflation from February (estimations: positive 0.1% y/y).
  • 14.30: PCE inflation from the USA from January (estimations: 1.1% y/y; base case 1.5%).
  • 14.30: January expenses and incomes of Americans (estimations: respectively positive 0.3% m/m, and positive 0.4% m/m).
  • 14.30: Revision of the American GDP for the fourth quarter of 2015 (estimations: +0.4% q/q, annualized reading).

Clear improvement of sentiments

As the negative sentiments on the market start to fade out, the American index began to grow yesterday. The S&P 500 exceeded the level of 1950 at the end of the American session. This means that it is only approximately 8.5% below its historical peaks. Also, a strong increase in oil began in the evening of the CET. Within few hours, the WTI went up 7%, and reached the area of 33.5 USD before noon.

The increase in oil prices were supported by yesterday's comments from Alexander Novak. According to the Bloomberg agency, the Russian minister of energy said on Thursday, that the freezing of production, established with Saudi Arabia, “should last for a minimum of 12 months in order to sustain the prices.” However, this fact may cause Saudi Arabia to not change its production during the summer. This means that the production will be lower than one year ago. Thus, it will be an actual limit.

What is still not clear, is what the next move will be from Iran and Iraq. Their production is likely to increase. Chairman of the Iraqi national organization SOMO, which deals with the matters of oil, said on Wednesday that his country is ready to cooperate, “in the matter of limiting the production.” On the other hand, Novak said that the matter of Iran, which is planning to increase its production, “will be examined separately.”

The oil market is also focused on American mining. According to the latest data of the American Energy Information Administration (EIA), the USA produces 9.1 million barrels per day. The EIA projections for the future quarter assume a decrease in production to an average of 8.81 million. If these expectations are fulfilled, or supply of oil from the United States decreases faster, we may see pressure on higher prices.

The global investors are also slightly calmer about China's condition, due to the comments from the chairman of the central bank. The Financial Times wrote before the meeting of G20, Zhou Xiaochuan said that, “China still has some space in the monetary policy, and many instruments to address the possible negative hazards.” He also added that the renminbi remains relatively stable to the currency basket, and there is no reason for its “constant depreciation.”

But how does this information translate to the currency market? Theoretically, it should strengthen the American currency. An improvement in sentiment is a bigger chance for hikes in the United States. Recently however, the quotations of the EUR/USD were also disturbed by the fear of Brexit, which would be negative for the euro. Thus, the general improvement of the market conditions, slightly decreased the anxieties of the pound's condition. This, on the other hand, caused an appreciation of the euro.

Thus, it is possible that this unclear situation on the EUR/USD will last for the following days. The meetings of the ECB and the Federal Reserve in March may be a stronger argument for an overvalue of the main currency pair.

Today, the market may focus on information from the USA. The second GDP reading for the fourth quarter, may be slightly weaker than the initial projections, and the base case PCE inflation does not have to be as positive of a surprise as the previous CPI. This may also be one of the reasons for a cautious attitude of the participants of the dollar market. Thus, the area of 1.10 on the EUR/USD will remain the base case scenario for the short term.

EUR/PLN remains above 4.35

The euro still costs more than 4.35, although there are more reasons which should support the national currency. First of all, chances for modifications of the monetary policy are very small, considering the statements from the news, as well as from the remaining members of the Monetary Policy Council. If the ECB eases the monetary conditions, this fact should attract the wallet capital to the Polish assets.

The national currency can be also supported by another element, which is a change in attitude of the Hungarian Central Bank. If it begins to ease its monetary policy, the difference in interest rates should be advantageous for the PLN against the HUF. The biggest threat for this scenario is a very clear deterioration in the global sentiment, which would cause a mass outflow of capital. In any other case, especially if it appears that the ECB actions in March fulfill the market's expectations, the chances will remain for the EUR/PLN to go into the range of 4.30-4.35.

26 Feb 2016 14:09|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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