Daily analysis 29.10.2015

The Federal Reserve is preparing the market for an increase in interest rates in December. The dollar should be a beneficiary of changes occurring in the monetary policy of the USA and the EBC. The zloty is this month's weakest currency.

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

• 13.30: Initial reading of the American GDP (estimations: +1.6% reading annualised quarter on quarter, seasonally equalized).
• 13.30: Weekly jobless claims in the USA (estimations: 265k).
• 14.10: Testimony of Dennis Lockhart, chairman of the Fed from Atlanta.

Fed showed its hawkish face

In Tuesday's analysis we described a possible announcement after the Fed’s October meeting. We suggested that fear of the events on the global financial market and economic situation decreased, and this fact is most likely to be noticed by the FOMC. Mainly based on this, we assumed that the message from the American monetary authorities will be slightly more hawkish than the consensus.

And it actually happened. The announcement contained three lines that caused commotion in September and was one of the elements that caused the dollar's depreciation. Now, they were replaced with information about the observation of events. However, this was just one argument for yesterday's appreciation of the dollar and an increase in the profitability of the American treasury bonds.

The excerpt from the announcement referring directly to activities in the area of monetary policy has also been modified. One-and-a-half months ago the FOMC members wrote that “while establishing the interest rates, the Committee will consider the progress – performed or expected – in achieving the goal of a maximum employment and 2% of inflation”. Currently, this statement sounds like this “while establishing whether an increase in interest rates, at the next meeting, will be appropriate the Committee will consider the progress – performed or expected – in achieving the goal of maximum employment and 2% inflation”.

This very serious change reminds us of the Fed’s actions from 2004, when the monetary tightening began for the last time. At that time, the FOMC lead by Alan Greenspan, wrote in March 2004 that it will be “patient in resigning from the accommodative policy”. However, in May the same year he wrote, “the Committee estimates that the accommodative policy can be erased at a pace that will be mild”. During the next meeting, the interest rates were increased by 25 base case points.

Of course, yesterday's changes do not guarantee that the Fed will start the cycle of monetary tightening in December and that it will last without a break for the forthcoming quarters. It is known that the pace of an increase in interest rates will be mild and to a significant degree dependant on the macroeconomic situation. However, a chance for movement in December increased significantly. Additionally, it is not only the view shared by probably the majority of economists. The market is also getting more and more convinced to this idea. Currently, according to the contracts for the interest rate, the chances for hikes in December, increased to 46% and are at the highest level since August. This was the moment in which China depreciated the renminbi and the market took it as an announcement of serious problems in the Chinese economy.

Yesterday's decision should also have serious consequences on the main currency pair. After the above mentioned information, the EUR/USD decreased by more than 150 pbs, and tested the level of 1.09. Thus, it is becoming more likely that the scenario predicted by us, will be implemented after Thursday's EBC meeting. The goal for the main currency pair should currently go to the range of 1.00-1.05 in the coming months.

Few words about the foreign market

If the appreciation of the dollar occurs, it will of course be divided by many corrections – this is the specific nature of the currency market. An increased variability can also be expected, especially in the moments of publication of the crucial macroeconomic data, or testimonies from the Fed members, who share the views of Janet Yellen. This afternoon we will know the GDP readings from the United States and have the testimony from Dennis Lockhart. Tomorrow on the other hand, we will receive the quarter data about changes in the cost of employment, and John Williams will speak at Brookings Institution about the topics regarding the monetary policy. If the macro data is not a negative surprise, another week will belong to the dollar. The main currency pair will probably end Friday's session below the level of 1.10.

Zloty remains under pressure

Since the beginning of the month, the zloty is the weakest currency out of the 31 currencies from the emerging markets. This not only shows an effect of the parliament elections, but most of all the lack of specific information regarding the new minister of finance, and also the controversial comments regarding the particular members of the MPC. The market is also sceptical about the comments regarding a will to increase in GDP to 5-6% per year. Especially that a very reasonable economic policy is required, in order to maintain a development at a level of 3.5% in the current global macroeconomic environment.

Straying away from the area of 4.30 on EUR/PLN is mainly related to a decrease in value of the euro on the global markets, and a positive ending of the stock market session in the United States. However, if we don't hear any realistic announcements from the crucial members of the current administration, the euro may quickly cross the area of 4.30, and the dollar will come closer and closer to 3.95, even when assuming no changes on the leading currencies.

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

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