Stanley Fisher's interpretation of Janet Yellen's testimony had a larger impact on the market than the FOMC chairwoman's speech itself. Data from the labor market on Friday will be yet another important event. The zloty remains sensitive to the perspective of the monetary tightening in the USA.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Expenses and incomes of Americans (estimations: positive 0.3% m/m and positive 0.4% m/m, respectively).
- 14.30: Base case inflation from the USA (estimations: positive 0.1% m/m; positive 1.5% y/y).
Fisher determined dollar's direction
In order to properly identify what happened in Jackson Hole on Friday, it is crucial to focus on the events' sequence between 16.00 and 18.00 (4.00 PM and 6.00 PM). Shortly after Janet Yellen's testimony was published, the dollar gained value significantly. This was a result of a statement that arguments for rate hikes have increased during past few months.
This sentence was quite hawkish. However, it's worth referring it to the entire eighteen-page testimony. It had shown that the FOMC chairwoman is still a part of a quite dovish faction of the Federal Reserve. They are preparing for rate hikes as well, but the chances that it will occur before December are rather small.
Therefore, during the following minutes the market has started to work-off the USD strengthening – the main currency pair was reaching the level of 1.1330-40. After initial increase, profitability of the two-year treasury bonds began to decline as well. This meant that the chances for the monetary tightening are decreasing.
Later on, the currency market, as well as the debt instrument market began to return to their levels from before the testimony. This is because they evaluated that it basically didn't bring any new information. The situation changed significantly when the market received comments from Stanley Fisher at approximately 17.30 (5.30 PM). This did not concern his opinions regarding interest rates in the USA, but that the Fed vice-chairman had basically interpreted Janet Yellen's words in his interview with CNBC.
According to information from the CNBC website, Fisher said that, “Yellen's comments were coherent with the possibility of two rate hikes this year.” The announcement from Bloomberg agency that was based on the above mentioned interview stated that according to Fisher, “Yellen's comments were coherent with a possible rate hike in September.”
Even though the interview alone was more complicated than this, Fisher actually did indirectly interpret the chairwoman's testimony, which generally doesn't happen often. Moreover, a person who participates in the FOMC meetings should theoretically more know than what we receive from the official statements from the Fed representatives.
As a result, investors began to trust Fisher's explanations, instead of their own conclusions. Of course, there is still a question, wasn't the Fed vice-chairman presenting his own opinion to a larger degree, rather than Janet Yellen's view? Perhaps this is a reason for an interview with Fisher on Bloomberg television, which is scheduled for tomorrow at 12.00 AM.
Moreover, Fisher also took note that the report from the American labor market scheduled for Friday, will most likely impact the Fed's decision regarding interest rates. This information was unambiguous enough to cause profitability of the American treasury bonds to clearly grow. Additionally, the EUR/USD has finished last week in the area of 1.1200.
Currently, the probability of rate hikes in September is estimated by the market at the level of 40% (25% on Thursday). However, in our opinion this value overestimates chances for rate hikes this month. It's also identical with too high evaluation of the dollar, taking the current situation into consideration.
What will happen next?
Regarding the forthcoming days, investors will most of all focus on Friday's data from the American labor market. Despite that employment in the USA is growing at quite a steady pace, the year's break had shown that the Labor Department's surveys have a large volatility. This is most likely due to the fact that the sample group is not large enough. As a result, credibility of month on month data is quite small.
However, this doesn't change the fact that it generates significant moves on every assets. Thus, if Friday's readings are too high (above 200k), they may extend the period of a stronger dollar until the FOMC decision in September. On the other hand, if payrolls are weak, we may expect a significant wear-off of the USD, due to the fact of a sudden reduction of chances for the monetary tightening.
On the other hand, the PCE inflation data will be the most significant today. Base case component (excluding food and energy) should especially be observed widely. If it is below the 1.5% y/y level, we may assume that the American currency will give away a portion of its recent gains.
Worse period for the zloty
Past days have not been positive for the PLN. Weak industrial production data, comments from Moody's regarding rating, recent comments from Żyżyński, as well as Łon on the discussion regarding a decrease in interest rates – these factors cause the Polish currency to wear-off not only against the euro or the dollar, but also against the forint.
The zloty is weaker in the global market due to its larger sensitivity to information regarding a higher probability of rate hikes in the USA, as well. As a result, the EUR/PLN exceeded the 4.34 level today, and the dollar was at the level of approximately 3.90.
Even though the anxieties related to the zloty may be slightly exaggerated (we don't expect the rating's downgrade by Moody's, or a decrease in interest rates by MPC), we need to keep in mind that a worse global sentiment or payrolls above 200k, may cause the dollar to exceed 3.90, and the EUR/PLN may reach the range of 4.35-4.40.