Daily analysis 02.11.2016:
The dollar is at its lowest level in one month. Oil price is near its level from before the agreement in Algiers. The British building sector PMI is better than expected. On the other hand, the Polish industrial PMI is at its lowest level in more than two years.
Dollar wears-off due to decreasing oil and elections in the USA
Over the past few days we have been observing a global wear-off of the American currency. Today, the EUR/USD was testing the level of 1.11. This is its lowest level since October 11th. The dollar’s global wear-off is determined by the presidential elections in the USA. The market is relatively negative towards increasing chances for victory of Donald Trump. Despite the weakness of the American currency, the Mexican peso is losing value as well. The USD/MXN is at its highest level since October 7th. The recent weakness of the peso is strongly related to an increasing support for the republican candidate.
What’s interesting is that historically the weak dollar has had a positive impact on oil price. This is expressed in dollars and the lower the value of the American currency, the higher the oil price. Today, the WTI oil prices were only one dollar above the level from before the agreement made in Algiers in September. On October 19th, the oil price was at the level of more than 52 USD. Today, it’s at the level of 45.90 USD. Such a sudden depreciation was caused by the lack of specific decisions regarding production limits in particular OPEC countries.
Moreover, a meeting of oil producers from outside of OPEC was held last weekend in Vienna. This didn’t result in any resolutions regarding production limit. The main argument in favor of such situation, was the lack of specific decision from OPEC countries. Until there’s no agreement within OPEC, the countries that are not the cartel members will not decide to decrease their own production.
Olil prices have a significant impact on the global inflation expectations. Low and decreasing prices cause these expectations to decrease as well. This may cause investors to revise the probability of rate hikes. We are observing this relationship on the dollar. The above mentioned overvalue of the dollar is caused by a decrease in probability of rate hikes by the Fed in December. According to the calculations based on the Fed rate contracts, it was at the level of 65.9% today, while just a few days ago it was at the level of 74%.
Positive data from British economy
Today at 10.30 AM, CIPS/Markit published the PMI data for the British building sector for October. This index was at the level of 52.6 and it appeared to be better than the market consensus (51.8), as well as the result from September (52.3). At the same time, this was its highest level since March 2016 (54.2). We have been observing an increase trend for this index over the past few months. After the Brexit referendum on June 23rd, a negative sentiment caused this index to go below the level of 50 in July and in August, to the level of 46.0 and 45.9, respectively.
The most significant factor of this index’s growth was yet again the apartment sector. It’s growth was only slightly worse than its eight-month peaks, which were reached in September. However, the British construction companies look slightly worse at the potential business activity for the forthcoming twelve months. Further development of this sector is expected by 43%, while 14% claim that the business activity will be lower. The 29% balance is the second worst result since May 2013. According to some of the companies, the uncertainty regarding Brexit is the main reason of a worse investors’ sentiment.
A weaker pound caused the growth pace of production factors for October was at the second best level since June 2011 (only the reading from August was better). The PMI data from the British building sector was generally positive for the local economy, as well as for the pound. Today, the GBP/USD increased to the level of 1.227 and the GBP/PLN went up by 0.03 PLN (4.78 PLN). However, the uncertainty regarding Brexit, as well as a weak pound, may gradually fade out the optimism regarding the British economy.
After one day on holiday on November 1st, the Polish investors heard an unpleasant news. At 9.00 AM, Markit published the PMI data from the Polish industry for October. The index was at the level of 50.2 and this was its worst reading since September 2014. Investors could feel even more disappointed, because the market consensus was at the level of 52.9. This consensus was higher than the result from September (52.2), which was the best result in six months.
This result was mainly caused by a decrease in new orders, which happened for the second time during the past two years. The lack of demand pressure was negative for employment as well. It continued to grow in October, but its growth pace was the lowest since August 2014.
As a result of a negative PMI, the global uncertainty regarding presidential elections in the USA and of decreasing oil prices, the Polish currency became slightly weaker. After a decrease in the EUR/PLN on Monday (4.30), this pair returned near the level of 4.32. The franc costs more than 4 PLN.
Due to the global uncertainty, the Swiss currency may be considered by investors as a relatively safer investment, which may cause its appreciation. On October 25th, we saw that the dollar’s relation against the franc was 1:1. After an increase in the value of the Swiss currency, the USD/CHF is close to exceeding the level of 0.97. The extending global uncertainty may cause the franc to cost more than 4 PLN and the CHF/PLN may go towards 4.1.
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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 Cinkciarz.pl Sp. z o.o is prohibited.
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