Afternoon analysis 16.09.2016:
Surprisingly positive inflation data from the USA are strengthening the dollar. The Japanese government is cutting estimations of investments outlays for September. Worse than expected data from Poland does not harm the zloty.
Inflation is reviving American market
The data from 14.30 (2.30 PM) appeared to be a positive surprise for investors, especially after a weak reading regarding retail sales from yesterday. The core CPI increased in August by 0.3% (against 0.1% in July), while the market expected a 0.2% increase.
Positive inflation data appeared to be favorable for the dollar as well. The American currency has started to strengthen significantly and gained approximately 0.6% against the euro. Theoretically, we can assume that better inflation would give the Federal Reserve an argument to raise interest rates.
However, the Fed does not take into consideration the CPI inflation data, but the PCE inflation, which is used in the FOMC forecasts. We will know the PCE data shortly after the Federal Reserve meeting next week. Therefore, the Fed members will most likely not take today's CPI inflation data into consideration.
This is why we continue to assume that the Fed would leave interest rates unchanged next week. If today's CPI inflation data is confirmed by the next week's PCE inflation data, this would be a strong signal for the market that the Fed may raise interest rates by the end of the year.
Lower investment outlays in Japan
In its monthly evaluation of the economy, the Japanese government has yet again ranked the growth pace as moderate. However, it has indicated weakness within the recent period. One of the symptoms of weakness are investment outlays. They have been ranked with a lower note for the first time in ten months.
This is yet another weak data from the Japanese economy after worse export, industrial production and household expenses. The Bank of Japan meeting will be held next week. The meeting would probably result in further monetary easing. As a result, the Japanese currency is one of the weakest in the world today.
Third in a row positive week for Polish currency
Today at 14.00 (2.00 PM), we have received slightly worse than expected data regarding an increase in employment (4.7%, expectations 5.0%, July 4.8%), as well as an increase in salaries in corporate sector (3.1%, expectations 3.2%, July 3.2%). However, it did not harm the zloty, which continues to strengthen against the majority of currencies.
One of the exceptions was the USD/PLN. The zloty lost against the dollar, but this was caused by a stronger American currency. The EUR/PLN went below 4.31 and the GBP/PLN below 5.05. In both of these cases, we are reaching certain psychological boundaries, which may be tested next week, if investors continue to be positive towards the Polish currency.
Markets next week
The decision from the Federal Reserve regarding interest rate, will definitely be the most significant event next week. This will be revealed on Wednesday, September 21st. Worse data from the American economy that we have received this week, strongly suggest that the Fed will leave interest rates unchanged. The only exception is the CPI data. However, it will probably cause a short-term strengthening of the dollar, as well as an increase in profitability of bonds.
Therefore, the dollar should become more volatile next week. Taking into consideration that the market consensus assumes a status quo, the decision should cause the dollar to wear-off. This would most likely strengthen the zloty. Next to the recent decision from the Moody's regarding no changes in Poland's rating, this will be another impulse for the zloty to strengthen against the dollar and depreciation of the USD/PLN exchange rate.
The Bank of Japan meeting will occur one day before the Fed meeting. Recent information and statements from the BoJ, as well as the Japanese government, confirm that the BoJ would like to sustain its mild monetary policy, in order to strengthen Japan's fragile economic growth.
The BoJ has also suggested that it will wait for the Fed's decision in September. However, regarding a minor likelihood of rate hikes in the United States this month, we may assume that the BoJ would forestall the yen's strengthening by taking interest rates below zero. This is what they have been suggesting this week.
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