Dollar incurs losses (Daily analysis 29.11.2018)

Extremely violent reaction to the words of the Federal Reserve President. A fundamental change of opinion within 8 weeks? The zloty losses previous profits, perhaps due to the very strong reaction of investors. The euro again in the range of 4.29-4.30 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 8:00 p.m.: Minutes from November Federal Reserve meeting.

Crucial nuance

Strong increases on the US markets and a sharp weakening of the dollar. This is the result of yesterday's speech by the Chairman of the Federal Reserve. The plenty of changes on the broader market was caused by one sentence said by Jerome Powell, or rather an interpretation of this sentence. Was it right?

For the Fed, the key issue now is how far current interest rates are from a neutral level, i.e. one that neither stimulates nor hampers the economy. When the Fed approaches this threshold, there are fears that there may be a break in monetary tightening. Where is this line?

This is not so clear. FOMC members estimate that it is in the range of 2.5-3.5% (currently, interest rates are in the range of 2.00-2.25). Returning to yesterday's speech. Powell said: "Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy". This does not arouse much emotion, knowing that the estimates are indeed relatively broad. However, in the messages of news agencies (e.g. Bloomberg), which receive the text of the speeches some time in advance, he said that rates are not on a pre-established path, being just under a neutral range.

Comparing the two statements would seem a mistake, as two paragraphs practically separated them. In addition, the word "range" in many other publications later was missing, suggesting that Powell believes that we are practically at a neutral level of interest rates. We could believe it if it wasn't for his speech at "Atlantic Ideas Festival" less than two months ago (October 3rd).

There, in the 11th minute of the interview (available on the CNBC TV Youtube profile), we can hear: "Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral. We may go past neutral, but we're a long way from neutral at this point, probably."

Both statements differ significantly, but only if we skip the word " range" and compare the statement with "fixed path". If the whole presentation is analyzed, you can simply see that Powell stated that it was approaching the range of a neutral level, but this does not mean that his estimates are at the lower limit of the level. Especially if we take into account his speech from 8 weeks ago at the "Atlantic Ideas Festival". Didn't the market notice this?

Of course, the market noticed, but violent reactions are a matter of seconds. A broad analysis comes later. Moreover, the discussion about reaching a neutral level is quite common, so there was a chain reaction. At this point, it seems that there has been a rather strong weakening of the dollar in relation to Powell's statement, although it cannot be ruled out that it will continue.

Today is scheduled publication of minutes from the November FOMC meeting. It may show the opinions of the more dovish of the Fed members, concerning the approaching of neutral interest rates. This would be in line with the mild market interpretations of Powell as well. It seems that there will only be a continuation of this misinterpretation from yesterday. We believe that only at the FOMC meeting (held on 18-19 December) this issue can be "straightened out", for example at the Powell conference. Another form could be to leave the prospect of three interest rate hikes next year. Currently, this would be seen as the dollar strengthening. As a result, pressure on the dollar may persist in the short term, but the dollar should remain strong in the longer term.

Stable zloty

Strong growths on the US markets combined with the dollar weakening supported the zloty against the majority of main currencies. In the morning, the euro was quoted even below the 4.29 PLN limit. Around midday, however, it returned to the levels of the last days, i.e. the range of 4.29-4.30.

Currently, there are no strong threats to the zloty. If the perception of minutes from the last meeting of the Fed is dovish, then it can be expected that the zloty will get an impulse to strengthen again and the EUR/PLN exchange rate to decrease. However, apart from surprising events, the baseline scenario remains a stable trade on the zloty in relation to the European currency.