Daily analysis 29.03.2017

Increasing profitability of the American debt is supporting the dollar. However, the American currency remains weak against the emerging market currencies. The pound in view of Brexit initiation, the Scottish referendum and the data regarding the terminal contract positions. The zloty has only lost against the globally stronger dollar.

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

• No macro data that could significantly impact the analyzed currency pairs.

Dollar is stronger, but only against some currencies

At least two favorable elements for the American currency appeared yesterday. Primarily, the Conference Board consumer trust index reached its highest level since December 2000. Moreover, its value went above 125 points, which was 10 points more than estimated. Although this survey was conducted before the withdrawal of new healthcare regulations from the House of Representatives, this doesn’t change the fact that this increase was spectacular.

The above mentioned data helped to increase the profitability of the American bonds. However, this move was quite limited. The CNBC interview with the Federal Reserve vice-chair, Stanley Fischer, had a definitively larger impact on the way that investors evaluate the future interest rates. The FOMC representative clearly confirmed that he expects two more rate hikes this year.

Moreover, Fischer claimed that the risk regarding the restrictive monetary policy are more less balanced. This may slightly reduce speculations that the Fed may resign from three (including the one from March) rate hikes this year, due to the extending discussion regarding fiscal changes.

These comments caused the profitability of the five-year treasury bonds to reach the area of 1.98% during the Asian session (8 base case points more than before the data regarding the consumer sentiments). In addition, the EUR/USD was pushed to 1.0800. However, the stronger dollar didn’t cause a wear-off of the emerging market currencies. Today, the Indian rupee has been the strongest against the dollar in eighteen months and the majority of the EM currencies have quoted relatively minor losses against the USD. Moreover, they have strengthened against the franc (zloty, for example).

This proves that the positive sentiment towards the EM economies remains very strong. Even Stanley Fischer said that he has been positively surprised that the emerging markets have been in such a positive condition, despite increasing interest rates in the USA.

Brexit begins today

This afternoon, the British government will send the documents regarding the formal application for leaving the European Union to the European Council. It has been estimated that the entire process will take two years. The pound has been quite unstable over the past few hours (difficult to explain wear-off during the Asian session, followed by a rebound). However, it’s worth noting that the recent negative signals for the British currency may facilitate its rebound in the near future.

Yesterday, we found out that Scotland will send a formal request regarding the independence referendum to the British government. Moreover, the European Union insists that the United Kingdom should pay a 60 billion euros bill for Brexit (according to calculations from “The Financial Times” from October, the fee should be 20 billion euros.) Last week, the CFTC published the data that shows the record amount of positions set for the GBP/USD depreciation. This may cause some investors to close these positions, because they may come to a conclusion that such negative trend for the pound will be difficult to sustain. If this happens, the GBP may begin working-off its losses.

Test for zloty

Today’s session may be a certain test for the zloty. Both an increase in the profitability of the American debt and the dollar’s strengthening, should cause the zloty to lose value. Nevertheless, the PLN wear-off is very limited and it has only lost against the dollar. The EUR/PLN remains near its one-year minimum and both the franc and the pound have lost against the zloty.

This goes to show that the zloty is in a very positive condition, just as all the emerging market currencies. The chances that this situation is sustained are increasing. Only a larger rebound may deteriorate the sentiment towards the emerging markets.