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Daily analysis 26.09.2016

26 Sept 2016 13:46|Marcin Lipka

Positive data from the German economy gives an optimistic signal for the coming months. In the short-term, the situation in the oil market depends on the producers’ meeting in Algeria. Changes within the Fed will probably be dovish. The zloty is under pressure of the local events, but the risk of a larger overvalue is rather limited.

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

  • 16.00: Sale of new houses in the USA (estimations: 600k).

Positive data from Germany

We received data from the German economy this morning. The Ifo index has reached its highest level since May 2014 (109.5 points against the estimated 106 points). Each sector experienced a significant rebound in comparison to their results from August. However, industry’s condition was most improved. The pace of its growth was the fastest since the financial crisis.

The situation has also improved within other sectors. The building sector is achieving record high levels. Moreover, wholesale, as well as retail sales, are returning to their recent medians after weak readings from August. In his data summary the Ifo Institute, Clemens Feust, wrote that, “a golden autumn” is ahead of the German economy.

Today’s data also confirms our suggestions from Friday, stating that a decrease in the German PMI may slightly overestimate real dangers for the German economy. Better data from Germany is also positive information for Poland. However, we may see its effects reflected in real data no sooner than the beginning of 2017.

Meeting in Algeria

A three-day International Energy Forum in Algeria starts today. This event has been used to refresh the discussion regarding a possible freezing of oil production or limiting mining. Recently, we heard many statements from multiple oil exporters’ representatives, as well as a meeting between representatives of Saudi Arabia and Iran, which was held in Vienna.

The latter event did not result in any specific decision. However, Riyadh’s offer for Tehran seemed relatively favorable. It stated that Saudi Arabia would decrease its production, whereas Iran would leave its production at the current level. However, Iran’s authorities wish to increase its mining from the current level of 3.6 million barrels per day, to at least 4.0 million.

Moreover, the Wall Street Journal informs that apart from matters of production, there was an argument regarding statistics that would be used in order to achieve a hypothetical agreement. Iran wanted the agreement to be based on the official government estimates, while Saudi Arabia claimed that it should be based on estimates made by independent institutions.

In general, it seems that the status quo would be the most likely solution, especially considering that the argument not only concerns Iran, but Nigeria, Libya and Iraq as well. These countries also have significant potential to increase their production and most likely wouldn’t want their mining to be frozen at its current level.

The official announcements will probably state the discussions which will be continued in the future. This should overvalue oil this week, especially now that the expectations before the meeting in Algeria are quite high. On the other hand, it’s worth keeping in mind that the official OPEC summit in Vienna will be held in November. Therefore, the OPEC members could return to the discussion relatively quickly, in order to stop the potential overvalue. This fact should limit the potential depreciation.

It’s worth observing the Mexican peso regarding oil quotations. The USD/MXN pair is near the level of 20, which is the highest in its history. The lack of positive information from the oil market may cause this level to be exceeded. Moreover, the scenario of a further wear-off on the MXN is supported by a negative attitude of investors towards this currency. The Mexican peso is basically using every piece of negative information to lose value and does not benefit from positive news.

More dovish voting members

A traditional change of the voting members of the Federal Reserve will occur in January. Currently, three out of four FOMC representatives (Rosengren, Mester, George) that have been appointed from the FOMC regional departments are relatively hawkish. These proportions may become completely different next year.

Evans, Kaplan and Kashkari, who will have a right to vote in 2017, would most likely represent the views, which are similar to the consensus of the FOMC Board of Governors. This means that they would be closer to the dovish faction. Of course, it’s not clear (just like the recent case of Rosengren) whether their views will change or not during their term of office. However, for the time being we can say that they’re quite dovish. This theory is confirmed by their statements from Friday, for example.

Kashkari tweeted, “We have more tools for a high, rather than low, inflation. The risks are asymmetrical.” This is one of the most crucial dovish arguments. On the other hand, during his official testimony in Houston, Robert Kaplan claimed that the economy is not overheated and that the Fed is entitled to be patient regarding the perspective of rate hikes. Evans remains dovish, which may be confirmed during his testimony on Wednesday. These facts are generally negative for the dollar.

Are risks exaggerated?

The zloty remains relatively weak. This is especially visible in quotations of the Polish currency against the forint. The EUR/PLN in the area of 4.30 is not a result of the global situation (which is favorable for the emerging market currencies), but of the local situation. The zloty is most of all harmed by speculations regarding a potential change of the minister of finance.

This topic is significant, but it’s possible that these anxieties are exaggerated. There are minor chances that the hypothetical successor of Paweł Szałamacha would be a clear supporter of fiscal easing. It’s also relatively unlikely that the current administration would resign from its promise regarding keeping the deficit of public finance sector below 3% of the GDP in 2017. Therefore, possible changes within the Ministry of Finance may have a short-term impact on the zloty. It’s more likely that the EUR/PLN would return to the 4.25-4.30 range, instead of going towards 4.35.


26 Sept 2016 13:46|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.

See also:

23 Sept 2016 16:35

Afternoon analysis 23.09.2016

23 Sept 2016 13:40

Daily analysis 23.09.2016

22 Sept 2016 16:36

Afternoon analysis 22.09.2016

22 Sept 2016 13:26

Daily analysis 22.09.2016

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