Daily analysis 05.09.2016:
Better data from the United Kingdom may be helpful for the pound in the short-term. The majority of the market anticipates the actions from the ECB. The zloty is working-off the losses from last week. The euro is near the level of 4.35 PLN.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could significantly impact the analyzed currency pairs.
PMI support pound
Last week's PMI readings from the British industry could suggest that the IHS Markit readings from July have overestimated the short-term impact of Brexit on the UK's economy. A similar assumption can be made now, after the base case services index.
The index went from 47.4 points to 52.9 points, against the 50.0 points expectations. The growth scale was the largest in twenty years, which is the moment of creating the index. Chris Williamson, IHS Markit chief economist, wrote in his data comment that, “the record growth of the services index and positive information from the industrial, as well as the building sector, suggest that there is a chance for avoiding recession.”
Surveyed economists have taken note that the business activity is returning to its usual rhythm, just as they did last week regarding the industrial PMI. Therefore, we can currently assume that the initial fear related to a breakdown of investments or consumption would probably not appear, or its scale would be small.
This also causes the probability of a further monetary easing by the Bank of England in the forthcoming months to reduce. As a result, downward pressure on the British currency will probably be limited until the end of the year.
However, the situation of the pound will not clearly change in the long term. A record high deficit of the current account is the basic element that will have a negative impact on the GBP. The matter of negotiations regarding access to the common market between London and Brussels will be a significant matter as well.
Today, the Financial Times has published an article entitled “Japan calls for ‘soft’ Brexit — or companies could leave UK”. The text regards a document that has been sent to the British Government. This document brings up that the Japanese companies have been encouraged to make investments in the British Isles, due to the UK's promise of, “being the gates of Europe”. The Japanese claim that, “the United Kingdom has a moral duty to respect these promises.”
We can expect similar pressure from other countries to follow. Therefore, a serious problem is ahead of London. This is whether to fulfill the citizens' will and risk the loss of trust among foreign investors, or decide on such form of Brexit that would sustain the basic UE laws (including the freedom of movement). The longer these negotiations are, the worse for the pound.
The final element is the matter of Scotland. This is most likely to become clear next year. If there is a real danger of Scotland leaving the United Kingdom, it will be another reason for weakening of the pound. The GBP/USD, as well as the GBP/PLN, would go then to theirs many-year minimum.
The European Central Bank (ECB) meeting will be the main event of the forthcoming days. It's very likely that the ECB will decide to extend the quantitative easing beyond 2017 on Thursday. However, this should not wear-off the European currency clearly.
However, it's possible that Mario Draghi and his associates will also decide to resign from the rule of purchasing treasury bonds (their profitability is below the deposit rate level). In our opinion, this decision would be negative for the euro. This is mostly a result of a larger determination from the ECB, as well as the view of its hawkish faction that such move is necessary.
When it comes to the rest of the elements that have been appearing in the market discussion (a decrease in interest rates and an increase in scale of assets purchase), it seems that they are not necessary for the time being. Especially taking into consideration that the monetary stimulation has been extended a not too long ago.
Return to 4.35 on euro
There were many reasons for a wear-off of the zloty over the past few days. However, the depreciation scale on Friday was definitely too deep (we have taken note of this fact in our analyses from before last weekend). Due to worse data from the American labor market, as well as a decrease in probability of rate hikes by the Fed, the emerging market currencies have gained. This has been a good reason for the zloty to reduce its strong wear-off from last week.
We can currently estimate that the EUR/PLN exchange rate may remain near the 4.35 level until the decision of Moody's on Friday. Despite the Agency's previous announcement, as well as the recent statements from vice-prime minister Morawiecki, we are not certain whether Poland's rating will be downgraded on Friday. However, such probability is increasing in the long-term, especially taking into consideration the project of decreasing retirement age.
Regarding the zloty's condition, it is also worth keeping in mind the MPC meeting on Wednesday, as well as the ECB meeting on Thursday. In our opinion, the Council will clearly sustain its view of leaving interest rates at an unchanged level, especially regarding the recent wear-off of the zloty. Moreover, we will probably yet again hear of a temporary slowdown of the Polish economic growth. Therefore, the PLN reaction should be rather neutral, or even slightly positive.
When it comes to the ECB, only fundamental changes in its monetary policy may be significant for the PLN. Since we don't expect such changes, the zloty should remain at its level from before the meeting (apart from a short-term volatility during Mario Draghi's press conference).
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