Afternoon analysis 24.03.2016:
Weakness of the US industry did not hurt the dollar. In contrast, the labor market data and the service PMI index were above the forecasts. The zloty dropped due to heightened risk aversion in the markets.
Today's data from the US industry was rather weak. Orders for durable goods dropped 2.8 percent on a monthly basis. Although the reading was close to the expectations, there was a revision of the prior month data (4.7 percent against 4.9 percent). Moreover, the data excluding transportation equipment missed the forecast. It dropped one percent against the 0.2 percent forecast and 1.7 percent growth in the prior month (revised from 1.8 percent).
Similarly, the report on industrial production released in the last week was rather weak. Production dropped 0.5 percent on a monthly basis against negative 0.2 percent forecast. The latest data from the industry suggests a deterioration of the situation.
However, other reports today were better than expected. The number of unemployment claims stood at 265k against the 268k forecast. In the prior week, the reading was 259k (revised from 265k). The data confirmed an ongoing expansion in the labor market.
Also, the service PMI index exceeded the forecast. It increased to 51 from 49.7 in the preceding month. Although the index has yet to return to a positive level, the comment on the report was rather subdued. It cited the slowest growth of new business and subdued expectations for the sector's outlook. However, the report pointed at rising wage pressure - a development expected by the Fed.
Currently, the major factors that determine the situations in the broad market are the unexpectedly hawkish comments from the Fed. A similar stance has been recently presented by policymakers who are usually viewed as dovish.
Today, St. Louis Fed James Bullard said that the next hikes are not far away if the economic situation moves as expected (according to Reuters). The statement was coherent with the view that has been presented by other Fed policymakers. Currently the probability of a hike in July exceeds 50 percent.
As a result, the dollar gains. However, the last two sessions in the stock market were negative. A drop of stock was coupled with declines of commodities. Moreover, a quite hawkish stance of the Fed may affect the emerging market currencies.
In the beginning of the week the zloty was quite stable. The Polish currency managed to keep gains from the preceding week. The situation changed today as the broad market sentiment had deteriorated.
The factor that could have stabilized the zloty was probably the unexpected decision of the Hungarian Central Bank to cut interest rates. The move resulted in a severe drop of the forint. In Poland, a similar scenario is not very likely. A relatively hawkish stance of the MPC may stabilize the zloty in the long term.
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