US dollar soars on Fed pivot to fighting inflation
The greenback rose against every G10 currency last week, together with sterling, which joined the dollar rally, as the Bank of England whipsawed markets yet again by hiking rates unexpectedly. Emerging market currencies mostly held up better than G10 ones against the dollar, an interesting development that bears watching closely. The Turkish lira was yet again the exception, crashing by over 15% again as Erdogan’s policies threaten to unravel the Turkish financial system. There has been a massive turnaround in central bank priorities over the past few weeks, as shown by the Fed hawkishness, the Bank of England’s unexpected hiked rates, and the budding dissent within the ECB council. As the news-flow turns light into the holidays, traders will be paying close attention to the omicron variant news. Into the New Year, the different pace of central bank tightening will continue to be the key driver in currency markets.
Economic data from Czechia has been limited of late, but it’s worth mentioning that news on the coronavirus front continues to improve, with the 7-day moving average of new cases declining to approximately 10,000 from almost double that in late November. This week the Czech National Bank meeting will be at the centre of attention. The bank is widely expected to increase the reference rate on Wednesday, with the consensus penciling in a 75 bp. hike which would take it to 3.5%. We are also leaning towards an increase of this size, although neither a slightly smaller or slightly larger move cannot be ruled out.
The ECB clearly will lag its global peers in this tightening cycle. However, we think there were subtle but clear signs that the institution is shifting its view on inflation and taking a more hawkish stance. The inflation forecasts were revised sharply higher. Also, the omicron variant was cited as a potential cause of additional inflation. Finally, President Lagarde suggested the existence of a hawkish dissenting faction within the Council, admitting the decision was not unanimous. For now, however, Lagarde insists that a 2022 hike remains “very unlikely”, and the euro struggled to find a footing all week long.
NBP January Meeting Preview: Another rate hike in the pipeline
This Tuesday the Monetary Policy Council of the National Bank of Poland will decide on interest rates. The January meeting will be at the centre of attention in Eastern Europe at the beginning of 2022 and may impact the zloty. The meeting was rescheduled to the 4th of January from the 12th shortly before Christmas. This does not necessarily have to carry meaning but it’s worth noting that because of that the MPC will not have the inflation figures for December, as the initial estimate will be published later this week, on Friday. The decision will, therefore, take place in an environment of additional uncertainty. Inflation is widely expected to have increased further into year-end and has surprised significantly to the upside in recent months, coming in at an upwardly revised 7.8% in November and far above the bank’s inflation target (2.5% ± 1p.p.). The less volatile measure of core inflation, which is particularly important for the NBP as it excludes food and energy prices and therefore better reflects changes in domestic demand, also increased to 4.7%.
NBP’s own inflation projection from November pointed to inflation of 5.8% in 2022 but considering a number of sudden shifts (particularly rise in energy prices and the recent decision of Poland’s market regulator, URE, to significantly increase energy and gas prices for households) those projections have become stale. In a recent interview with Business Insider, NBP’s president Adam Glapiński shared the bank’s current views stating that average price growth in 2022 will equal 7.6%, inflation will reach its peak in June (8.3%), and then decline to 6.2% in December.