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Daily analysis 30.05.2016

30 May 2016 13:36|Marcin Lipka

Janet Yellen confirmed that the Federal Reserve wants to raise interest rates in the coming months. However, the tone of this confirmation was quite conservative. The oil market before the OPEC meeting. The zloty sustained some gains from Friday, but the Polish currency remains relatively weak.

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

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

Yellen speaks cautiously of the hikes

On Friday, the market participants were focusing on hypothetical comments from Janet Yellen. However, her testimony itself consisted more of the historical aspects of the monetary policy and scientific achievements of the FOMC chairwoman, as well as those of her predecessor. There was only one question regarding the current monetary policy. However, Yellen's answer was not as unambiguous as it had been briefly presented by information agencies.

Janet Yellen said that, “we have seen a weak economic growth in the first quarter, as well as a relatively weak growth at the end of 2015. It seems that, according to the recent data, the economic growth is improving. If the economic growth, as well as the labor market, of which I expect to continues to improve, we will continue to observe the new data and estimate the risk of forecasts.”

Further on, the Fed chairwoman said that, “it is appropriate for the Federal Reserve to raise interest rates gradually, as well as cautiously. Such a move is likely to be appropriate in the forthcoming months.” This statement confirms the view of the majority of the FOMC members that the hikes may be decided at one of the forthcoming meetings. However, the statement's tone was far more cautious than it was in case of other members of the Fed.

As a result, the next days do not have to be favorable for the American currency, especially considering that the payrolls reading is planned on Friday. It may be disturbed by the strike on Verizon. Even though the market is aware of this fact, it may stop appreciation of the USD by the end of the week.

Moreover, a testimony from Lael Brainard is planned this Friday afternoon, shortly after the Labor Department data will be announced. She is famous for her dovish views on the monetary policy. Thus, if the American economy creates less workplaces than expected (160k), and the data regarding salaries is near the readings from the past month, Brainard's comments may be another element that would withhold an increase in the USD value.

As a result, it may appear that the American currency will return to the appreciation trend after Janet Yellen's testimony in Philadelphia on June 6th. It is likely that this testimony would reduce a one-time impact of the payrolls reading (if it is below 100k). Also, it may present the arguments for the hikes in the forthcoming months more broadly. In conclusion, despite the nearing monetary tightening in the USA, the following days do not have to be favorable for the American currency. It is possible that the second week of June will be better for the dollar, and the EUR/USD quotations may reach the area of 1.10.

Oil market before OPEC

An increase in oil prices was supported by many unexpected elements during the past few weeks. The mining in Nigeria is currently lower by approximately 300-400k barrels than it has been the past two years, due to safety related problems. Wildfires in Canada decreased this country's production by approximately one million barrels per day. It is also worth remembering the already finished strike in Kuwait. According to the EIA data, it decreased April's daily mining by 200k barrels.

Additionally, it is worth noticing a quite rapidly decreasing production in the USA. It decreased by more than 800k barrels per day for one year, and by an additional 300k barrels since the beginning of March. According to the EIA, the average mining in the USA for the third quarter, is estimated for only 8.27 million barrels, which is 500k less than it is currently.

The above information should be included in the current prices to a significant degree. The market should focus on the future, as usual. One of the important events is the OPEC meeting planned for June the 2nd. However, we should not expect any changes in the cartel's policy for the time being. Especially now that the Saudi Arabia's strategy of keeping its contribution in the market, as well as of forcing the less effective producers to decrease their mining, is bringing positive price effects.

On the other hand, higher prices may cause that the American mining will not depreciate as rapidly, as it was expected by lower prices. Moreover, the Canadian production will probably be restored, especially considering that the wildfires did not destroy the mining infrastructure.

This would suggest that the appreciation trend is in for a clear correction. However, there is still one unknown – the demand. For the time being, the demand grows unexpectedly rapidly in the USA. The demand for fuel exceeds 9.6 million barrels per day. This result is 350k higher than it was one year ago. If the demand continues to increase in the next months, a clear correction will be difficult to achieve in the forthcoming weeks.

Zloty remains weak

The Polish national currency remains weak. There was no reaction of the zloty on the positive signals from the MPC. In his interview with the Polish Press Agency today, Marek Chrzanowski said that, “a further stabilization of interest rates is an optimum solution.” Moreover, the MPC member emphasized that, “there is a need for a determination in ensuring a consistency between the policy and the declarations from the Convergence Program.”

Chrzanowski's comments regarding restructuring of the currency loans should be as well positive for the PLN. He claims that, “involving the NBP in restructuring the currency loans would be risky for the entire economy, and that is why I find such solutions unwelcome.”

Thus, the base case scenario for the zloty is to remain within the range of its current volatility (slightly below 4.40 on the EUR/PLN, and the area of 3.95 on the USD/PLN). The franc will probably remain within the range of 3.97-3.98 PLN within the next hours.

30 May 2016 13:36|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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