Daily analysis 27.07.2017

The dollar incurred significant losses after yesterday's Federal Reserve statement, however, the message from FMOC members was in line with expectations. New lows of the franc to the euro. The EUR/PLN pair in the 4.25-4.26 period. The Polish currency has lost value to the Hungarian and the Czech currencies.

Macro key data (CET time- Central-European). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• 2.30 p.m.: June's data on the USA purchasing orders of durable goods (estimates: +3.7% MOM; excluding means of transport +0.4% MOM),
• 2.30 p.m.: Weekly preliminary reading on initial jobless claims in the USA (estimates: 240 k).

Pressure put on the dollar after FOMC statement

Yesterday, the market participants have waited for a statement from the Federal Reserve. It was difficult to expect any clear breakthroughs because many of the FOMC representatives took the floor, and in addition, July's meeting did contain neither any new macro economic projections nor end with a press conference.

The market, however, has reacted sharply to statements from the Fed. During the hour, the EUR/USD pair has risen almost 100 pips toward the area around 1.1740. Equally rapid movements at that time were recorded by treasury bonds. Yields with 5-year period has dived to 6 basis points. In addition, after the next hours, the EUR/USD pair has still set new 2.5 year records around 1.1780.

Such strong movements could suggest that the statement has become much more dovish than expected. Practically, the changes in the FOMC were symbolic, and the element that could be blamed for the dollar weakening has appeared in a section describing the current situation rather than future Federal Reserve actions. In June, the committee wrote that "inflation excluding fuels and food is moving slightly below the 2% target". Now the excerpts are that the "inflation excluding fuel and food has decreased and has been moving below the 2% target. " The change is obviously visible, but it reflects facts that the market has been aware, due to the data has been already published. Even if the description can be picked up a little dovish, the movement on such a large scale seems to be unjustified.

At the end of the statement, where FOMC usually suggests the next move, there has been rather a hawkish change. The Committee now expects to normalize the Fed's balance sheet "relatively quickly," and in June the deadline was described as "in this year". Relatively quickly probably means that the decision may be announced in September.

Generally, the information that yesterday came from the FOMC should be considered as neutral, and even if we assume that the inflation description may have been a bit less dovish, however, it was not the reason for the dollar's drastic weakening. The market's nervous reaction may mean that its participants have been still very negative about the dollar, which increases the odds that any unfavourable dollar information (especially suggestions from Fed members) may cause unnaturally strong changes.

The EUR/CHF pair has been testing the highest levels since the SNB rate release

Yesterday, in our second currency comment, we pointed the visible franc's weakening. This morning, it has deepened even further and EUR/CHF exceeded 1.1200. These have been the highest levels since the Swiss National Bank (SNB) released the course in mid-January 2015.

The reasons for the franc weakening have remained unchanged. The attractiveness of the Swiss currency as a "safe heaven" has been declining as in recent months, the risk of the euro area’s disintegration has clearly decreased. In addition, the ECB's chances of exiting the ultra-mild monetary policy have been increasing, and the SNB, due to the lack of inflationary pressure and still too strong exchange rate, should not change its attitude for the next few quarters. The franc should remain under strong pressure.

The zloty has been weaker in relation to region's background

The zloty has been stabilising in the range of 4.25-4.27 per euro. In turn, the fall of the USD/PLN or the CHF/PLN pair may suggest that the situation on PLN has been relatively good. In fact, however, the condition of the domestic currency has been rather weak. The zloty is about 0.2% of the 4-month lows to the forint and has tested the lowest levels this year in relation to the Czech koruna.

The relative weakness of the Polish currency has been mainly due to domestic political factors. Of course, it is difficult to assess their impact, but it has been about 1.5-2.0% at this time. So if we were not dealing with the political intense atmosphere, then the franc's quotes would be in the region of 3.73-3.75 PLN today.