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Daily analysis 26.10.2016

26 Oct 2016 14:00|Marcin Lipka

Yesterday’s statement from Mark Carney improved the pound’s condition. It’s possible that the comments from the BoE chairman may reduce the pressure on the British currency which is coming from the monetary policy. The zloty remains relatively stable. The EUR/PLN is near the level of 4.32.

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

  • 15.45: PMI index for the American services sector (estimations: 52.5 points).

Chance for a decrease in pound’s depreciation pressure

We had the ability to observe a sudden wear-off on the pound before Mark Carney’s statement yesterday. The GBP/USD went down from 1.2240 to 1.2083. This was its lowest level in more than thirty years, not counting the flash crash from October 7th. The pound was weak against the zloty as well (approximately 4.80 PLN).

It’s difficult to say what caused the pound’s sudden overvaluing. Perhaps it was the comment from the Secretary of the Treasury, Philip Hammond, who praised the quantitative easing. Moves on the GBP/USD could have also been caused by the strengthening of the dollar in the global market. This probably started on the USD/CHF, which almost reached the level of 1.0000. It’s also possible that the liquidity before Carney’s testimony was quite limited and the amount of purchasing offers was relatively small. Therefore, a minor overvalue translated to a large depreciation.

However, the matter of the pound’s overvalue from yesterday doesn’t seem the most significant. More importantly are the reasons that caused the pound to rebound to the level of 1.22 on the GBP/USD. The press informs of two main matters that may have pushed the pound upward. Primarily, Mark Carney said that a specific level of the pound is not the goal of the BoE, but they also can’t be indifferent to the currency exchange rate.

This may suggest that the scale of the pound’s overvalue was large enough to potentially change the monetary policy’s assumptions to a certain degree. This was a positive signal for the GBP. Another significant remark from the BoE chairman concerned inflation. Recently, Carney claimed that inflation is not a danger for the time being. He stated that sustaining positive trends in the labor market is more important than the possibility of consumer prices exceeding the 2% goal. On the other hand, yesterday he said that there are boundaries of acceptance for inflation growth above the 2% target. This also was a strong signal that the monetary policy will be milder, which is positive for the GBP.

More fundamental changes?

It’s also worth noting that a more fundamental change from the BoE is possible. Recently, the central bank’s announcements stated that there are anxieties of the consumer side of the economy. This was an argument in favor of the QE extension.

However, Carney is currently taking note that due to Brexit-related uncertainty among entrepreneurs, we may experience a limit in economic supply. He claims that low supply, stable demand and a decreasing pound are causing inflation to accelerate. It seemed that this type of inflation is more fundamental for Carney than an increase in consumer prices, which is related to the pound’s depreciation.

However, it’s still unknown, whether Carney’s remarks from yesterday will change the BoE attitude, or if were they only used by him to decrease pressure on the pound.

Currently, it seems that anxieties regarding the sustainment of the economic supply will continue to dominate. However, it’s possible that there will be a wider discussion regarding the impact that this phenomenon will have on inflation. The BoE meeting in November will be really interesting and it may cause a reduction of negative impact of the monetary policy on the pound. If this happens, this would be a positive signal for the British currency. This could either decrease the scale of estimated wear-off of the pound, or cause its clear rebound if it appears that Theresa May’s government would soothe its attitude towards Brexit.

Stable zloty

The EUR/PLN was moving within the range of 4.31-4.32 for the past few hours. There was some more volatility on the pound, the franc and the dollar. However, they were mostly a result of the behavior of these currencies in the global market. The forint was relatively stable against the zloty as well.

Theoretically, the behavior of the debt instruments may be slightly disturbing. Profitability of the ten-year treasury bonds are above the level of 3.00%. However, it’s worth noting that this has been a consequence of moves within the eurozone. Today, profitability of the 10-year bonds increased from 0.02% to 0.08%. Until the difference between the German and the Polish bonds doesn’t exceed the level of 300 base case points, we shouldn’t expect negative consequences for the zloty.


26 Oct 2016 14:00|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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