Afternoon analysis 07.11.2014

, author:

Piotr Lonczak

In spite of weaker labor market data, the dollar remained near it two year high. The USD/PLN domiciled above 3.40. The pound at 13-months low against the dollar as the UK economy falters.

In October the US companies added 214k in employment in non-farm sector – less than 235k expected by analysts. Other data was also below expectations – the wage growth was 0.1 percent against 0.2 percent expected and employment in private sector. Nevertheless, the unemployment rates surpassed the expectations. It stood at 5.8 percent in October, down from 5.9 percent in the previous moths. It was the lowest level since July 2008.

A recent data from the US labor market looked very good. The ADP data on employment in private sector showed significant growth. In addition, the four-week average of unemployment claims is at its lowest level since 2000. Strong labor market coupled with solid short term indicators (especially ISM reports) and GDP readings reflects a concrete momentum of the economy.

Given current economic environment, the Federal Reserve will stick to its plan to raise the interest rates in the middle of 2015. Conversely, the European Central Bank moves in the opposite direction as its president Mario Draghi reaffirmed his leadership and stressed the willingness to provide additional stimulus. What is very important, Draghi gave a clear indication that the ECB considers widening the scope of asset classes to be purchased in its asset buying scheme. Thus, the full quantitative easign, that encompasses government bonds, is possible.

As a result, the EUR/USD closes this week at its lowest level in more than two years. Today it touched 1.23575 – the lowest level since August 2012, but later it rose. Moreover, the dollar posted significant gains against other currencies. The USD/JPY is at the highest level in seven years above 115 yen.

Also, the pound posted significant losses against the dollar. The GBP/USD fell near 1.58 as the trade balance missed expectations by widening to minus 9.8 billion pound against minus 9.4 billion expected.

The British currency had a very good first half of the year as the Bank of England was considered the first major central bank to rise interest rates. A strong performance of the currency was impaired by the Scottish independence vote. In addition, the US economy is catching up, thus eventually the Fed may rise rates sooner than the BoE.

The zloty influenced by strong dollar

The unexpected move from the Monetary Policy Council – that left rates on hold albeit it was expected to cut them by 25 basis points – didn't spur appreciation of the zloty. Moreover, the press conference of the president Marek Belka didn't give a clear view for interest rates outlook.

Given a lack of coherent signal from the MPC, the potential growth of the zloty was consumed by the risk of additional unpredictable moves from the monetary authorities. Given this situation, the zloty's developments are determined by trends in the broad market.

Additional burden for the zloty stems from rising tension in Ukraine. After votes conducted by separatists the Ukrainian government said that it was in violation of Minsk agreement and warned of revoking autonomic legislative for Donbas. In addition, information agencies said that the Russian tanks encroach Ukraine.

A strong dollar and heightened risk aversion pressed the zloty down. The USD/PLN moved above 3.40 and the EUR/PLN hovered above 4.22 and the CHF/PLN was above 3.50. The tendency for a stronger dollar and a stable euro still holds.

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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 the written permission from Sp. z o.o is prohibited.

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