Daily analysis 29.09.2015

Comments from Fed officials didn't surprise, but a slide on developed equity markets caused some stronger changes on currencies. What is the view on EM markets from the Reserve Bank of India? The zloty remains under pressure from risk off sentiment.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 16.00: Conference Board consumer confidence index from the US (survey: 96.4 points).

Turmoil on capital markets

Before the US equity opened the EUR/USD was traded between 1.1150-1.1200. But when the market participants from across the pond started trading the stocks began to slide. Moreover, yields on treasuries also dropped which pushed the dollar lower.

Strong risk aversion was also translated to overall slight appreciation of the euro and the yen. Higher Japanese and European currency valuation is still connected with carry trade reversal. Return of capital to the EUR or to the JPY pushes both currencies hither even though they also might be hurt by the Asian slowdown.

If there was no turbulence from capital markets the comments from Federal Reserve members should be considered as neutral or even slightly hawkish because both Williams and Dudley suggested not only that the hike is possible in 2015, but also the October meeting will be a live event.

Overall, there is still a slim chance that the monetary tightening can begin next month especially that issues which caused keeping the rate unchanged in September will still be present in a few weeks. However, keeping October as a possibility can also suggest that the Fed is not going to easily resign from tightening this year.

Regarding Charles Evans’ statement it was confirmed that he remains one of the most dovish FOMC members. However, he also sees that the tightening moment is approaching, but the sum of hikes should not exceed 125 bps until the end of 2016. The consensus expects 125 bps at the end of next year.

Hints from other central banks

Recently, we have tracked comments from world central banks regarding the situation in EM economies and in China. In this context the decision of the Reserve Bank of India (RBI) on cutting the benchmark by 50 bps while economists were expecting 25 bps looks important. The RBI trimmed the rate deeper than expected due to external risks

In the RBI statement we read that “EMEs (emerging market economies) are caught in a vortex of slowing global trade volumes, depressed commodities prices, weakening currencies and capital outflows”. Regarding China Raghuram Rajan the RBI governor and former IMF chief economist writes that “China's intended rebalancing from investment towards consumption is being hit by the stock market meltdown, slower industrial production and weaker export. The devaluation of the renminbi on August 11, while mild, has unsettled financial markets across the world”.

In the Q&A session Rajan claimed that “general sense that global activity to be downgraded more”. On the other hand, Rajan wants the Fed to hike rates and was suggesting at the Jackson Hole meeting that the current slowdown would be milder than the turmoil 2008/2009. The current RBI governor warned world leaders about the incoming crisis long before it appeared.

The foreign market in a few sentences

Today's session on capital markets looks to be much calmer. If the consumer confidence numbers turn out to be close to the consensus, then the US equities may regain some of Monday's losses. If that is the case, there is also a high probability that the EUR/USD can fall back to the 1.1150-1.1200 level.

Weaker zloty

A significant slide on foreign capital markets caused also risk aversion on EM currencies including the Polish zloty. The EUR/PLN rose to around 4.25 at the beginning. Despite the fact that the PLN regained some ground in the morning there is still a fairly high chance that with a weaker session in the US the euro will be worth around 4.25 again.

The broader weakness of the Polish currency translates also to some upward pressure on the CHF/PLN. Overall it is worth noting that the higher franc valuation is not a result of Swiss currency appreciation but PLN depreciation. It is a fairly good message because there is not a significant heaven flow to the Swiss franc and when the situation calms down on the capital markets we are expecting the EUR/PLN to return towards 4.20 and gain, the CHF/PLN can slide below 3.85.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: