Following Mario Draghi comments other leading central bankers suggest a possibility to withdrawal from extremely dovish monetary policy. Investors are starting to believe in reflation trends in many countries but the US. The zloty is slightly higher and its behaviour suggests significant sensitivity to external factors. The EUR/PLN is close to 4.24 mark.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information unless marked otherwise.
- 14.00: Preliminary inflation data from Germany (survey: +1.4% y/y; 0.0% m/m),
- 14.30: Final Q1 GDP reading from the US (survey: +1.2 proc., annualized),
- 14.30: Weekly jobless claims from the US (survey: 240 tys.).
Global reshuffles continues
On Monday we noted that the meeting of central bankers in Portuguese Sintra could cause significant fluctuations on the FX. The central bank forum where the main theme was suppose to be innovation, productivity and investments, was used to suggest market participants a rising probability of incoming changes in the monetary policy.
It seems that most volatility have been caused by hawkish statements during Mario Draghi presentation. Firstly the EUR/USD rose from 1.1200 to 1.1400. Yesterday there was a short term correction caused by Bloomberg agency reports that the ECB message was misinterpreted. It cut the initial move by half. However, when Drahgi spoke again he didn’t use the opportunity to correct his previous statement. It was seen as confirmation of the initial view and the EUR/USD returned toward 1.1400. During the Asian session it exceeded this value reaching new one-year highs.
It is also worth noting that yesterday’s session was important both for the pound and the Canadian dollar. Mark Carney, the BoE governor, during his speech on innovations suggested a possible reduction of some monetary policy stimulation if the economic conditions turns to be favourable. What is interesting however, just a week ago, he was stressing arguments to keep the policy unchanged.
Carney’s comments pushed the pound around 1 percent higher to the dollar and were well fit to today’s Andy Haldane’s comments to the BBC. The chief BoE economist who had recently changed his view on monetary policy from dovish to hawkish stated that the central bank should look seriously at raising interest rates. As a result before midday the GBP/USD climbed to 1.3000 level.
Similar outcome can be seen from Stephen Poloz, Bank of Canada governor comments. Although both he and his deputy two weeks ago began to suggest a possibility of raising interest rates, his references to arguments of reducing stimulation initiated in 2015 (in response to falling oil prices) contributed to strong CAD appreciation.
Summarizing, the recent days has brought much less dovish tone from three leading central banks. Additionally market participants started to believe that monetary policy makers from the euro zone, the UK or Canada may push their benchmarks higher earlier than previously expected.
In this equation, however, the US is missing. Earlier in the year the US was supposed to proceed with significantly more hawkish policy than other major central banks. Since several weeks investors have stopped to believe in more hikes across the pond. The monetary policy divergence between developed economy has eased. It is a major element which brings gains to the CAD, the EUR or the GBP. If the US fails to deliver higher inflation, better readings from the jobs market or faster GDP growth the dollar weakness may even deepen further.
The zloty is gaining some value but it is still depended on the global sentiment
During this week, we have noted that for the zloty more hawkish approach from leading central banks (especially the ECB), is unfavourable scenario assuming the the Polish MPC doesn’t change it stance in the following quarters.
The negative PLN outlook coming from external monetary policy can be amplified or lessened by the global equities moves. If investors find out that more hawkish central bank stance may jeopardize economic growth and increase financing cots and therefore worsen to outlook for the stock market. A negative mix of tighter monetary policy and negative sentiment could markedly weaken the PLN. However, as long as the US indicies are close to all-time-highs the risks of a negative outcome remain limited.