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Daily analysis 27.04.2016

27 Apr 2016 13:43|Marcin Lipka

What should the Federal Reserve's goal be after publishing the announcement today? Elements which create the behavior of oil. The Monetary Policy Council representatives sustain the suggestions about leaving interest rates at an unchanged level. The euro, as well as the franc, remain near the levels of 4.40 and 4.00, respectively.

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

  • 20.00: Publication of the announcement after the April meeting of the Federal Reserve.

What is the Fed's goal today?

Before we know the decision of the Federal Reserve today, it is worth wondering what the current goal of the American monetary authorities is. It is most likely that they do not want to withdraw from their March estimations regarding two hikes for this year. At the same time, it is not their intention to confirm the monetary tightening for June. So how can they achieve this compromise?

First of all, the announcement has an established order. It begins with a description of how the economic situation has changed since the previous FOMC meeting. There is not much that can be changed here. The data from the past six weeks (apart from the data from the labor market) was quite weak, and this will be included in the Fed's message.

The other part of the announcement definitely gives more space for an intervention. In this part, the Federal Reserve representatives are trying to evaluate what will happen in the future regarding economic growth, inflation, the labor market and the international situation. To a certain degree, these matters are summarized in the risk balance. This index evaluates whether there are more dangers for the base case scenario, more chances for a faster development, or if the risk is equal for both of these factors.

The two most recent meetings did not bring any consensus regarding the risk balance, thus it was not included. What is interesting is that the behavior of the global markets from the past few weeks should decrease dangers in the near future. The situation in China has calmed down, currencies from the emerging markets worked-off their decreases and stock markets worked-off their losses. However, the data from the American economy was significantly weaker. The repeated statements from the FOMC regarding, “being dependent on the data when it comes to making decisions about interest rates,” make the argument visible to the point in which the risk balance will not appear again.

The market should interpret this as a dovish signal, which is negative for the dollar. This would also suggest that the chances for an increase in interest rates in June are small again. However, the Fed could decrease this dovish message (if it wants to) by modifying the record regarding the situation in the markets. The announcement from March said that, “the global economy and the events in the financial market continue to be hazardous.” If this statement is modified towards the direction of “decreasing global risks,” the lack of a general balance could be limited. This would also decrease the chances of a negative effect for the USD.

Of course, the above approach assumes that the FOMC would like to buy some time due to an unambiguous period of weaker publications from the USA and wait for new macro data. However, if Janet Yellen wants to announce the dovish approach more clearly, it can be done by sustaining a pessimistic tone of the future global event.

Of course, the FOMC may want to be more hawkish. In this case, we would receive information about the rule of balanced risks. We could also receive a suggestion from the FOMC meeting in October. At that time, the matter of increasing interest rates in December had appeared. However, currently considering the weak data from the USA, a similar scenario seems unlikely.

In conclusion, the market should interpret the meeting as slightly more dovish. The description of the economic situation will probably be weak. Moreover, the lack of the risk balance can be a sufficient enough signal to decrease the chances for the hike in June, even if the FOMC looks more positively on the global matters.

Oil continues to grow

Before noon, the quotations of American oil exceeded the level of 45 USD for the first time since the beginning of November 2015. Currently, the market is mainly focusing on the data about American supplies and production. According to the API publication, supplies decreased yesterday. Despite the fact that this was expected for a long time, we can see that this phenomenon supports the quotations of the WTI.

The mining of oil in the USA is another significant element to be considered. Due to a smaller profitability of slate mining, it continues to decrease. However, many producers may decide to return to the market, due to a price which comes near the level of 50 USD. Thus, if the pace of this depreciation withholds, or if we see the return to production at the level of more than nine million barrels per day, it would be a strongly negative signal for oil. This would mean that the American supply has found its balance, and that it may seriously increase in winter. This is especially the case if we consider the fact that the OPEC is willing to withhold an increase in mining.

Comments from the MPC

The session in the currency market yesterday was favorable for the zloty. The EUR/PLN went below the level of 4.40, and the dollar went away from the level of 3.90. However, the weakness of the Polish currency remains visible. In our opinion, it cannot be explained with the matter related to the credits denominated in franc, nor the anticipated decision from the Moody's (we wrote more about this in the past analyses).

Theoretically, the zloty should be supported by today's comments from the MPC members. In his interview with Rzeczpospolita, Kamil Zubelewicz sustained his neutral (going slightly towards hawkish) approach to the monetary policy. Eugeniusz Gatnar showed a similar viewpoint in his interview with the Polish Press Agency. However, the above mentioned representatives of the Council are considered as relatively neutral/slightly dovish. Thus, the zloty did not react much on these suggestions. It is possible that the PLN could be strengthened slightly by similar statements from the dovish members of the MPC, for example Eyrk Lon and Jerzy Zyzynski.

When it comes to the FOMC decision today, it should be relatively neutral for the zloty. If it appears that the Fed is slightly more dovish, the zloty may gain 0.01-0.03 PLN against the main currencies. However, it is unlikely that this event will be a turning point for the zloty.

27 Apr 2016 13:43|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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