Daily analysis 08.07.2016:
The largest deterioration in the British consumers sentiment in twenty-one years. Moody's revises the perspective of economic growth for the euro zone. Will the pound equalize with the dollar? The American data should appear better than the consensus. The zloty remains steady against the main currencies.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.30: Data from the American labor market (estimations: new workplaces in non-agricultural sector positive 180k; unemployment rate 4.8%; growth of hourly wage positive 2.7% in annual interpretation and positive 0.2% in monthly interpretation).
Negative consequences of referendum
The GBP/USD pair was relatively stable in the past few hours. It remained slightly above the 1.30 level. However, information from the United Kingdom continue to be negative. According to the GFK survey that was conducted during the first week after the referendum, the consumers sentiment decreased the most in twenty-one years.
Moreover, according to the BDO consulting company, the high street sales in the British cities decreased by 3.6% y/y. This was the largest depreciation for June in ten years. It is also worth noting that according to the BDO, the beginning of June was favorable. In the month's first week, there was a 3.8% y/y growth. However, the last week of June ended with an 8.1% y/y depreciation.
Forecasts regarding the Brexit consequences are negative for the euro zone as well. Today, Moody's reduced its estimations regarding the economic growth for the euro zone, by 0.2% and 0.3% for 2016 and 2017, respectively. The rating agency also claims that, “a possible consolidation of nationalist as well as protectionist movements, may have a dangerous impact on the European Union in the long-term, and even threaten its existence.” According to Moody's it would, “decrease the long-term perspectives of economic growth for the particular EU member.”
Getting back to the pound, the Financial Times published estimations of some of economists regarding the future condition of the pound today. The article entitled “How low will the pound fall?” contains a statement from George Magnus, senior economic counselor of the UBS. In his opinion, the GBP/USD depreciation to the 1.15 level remains the base case scenario. However, if The United Kingdom experiences a larger economic slowdown and political deadlock deteriorates the sentiments, the parity is rather likely in Magnus' opinion.
In our opinion, it is too pessimistic to expect a depreciation below the 1.20 level on the GBP/USD for the time being. Two elements are required to violate this level. Firstly, thee would have to be a referendum in Scotland. Secondly, the negotiations with the European Union would have to be very difficult. In any other case than those mentioned, we should not expect rate to decrease by more than a few percent. The risk that the pound would reach the 4.8-5.0 range against the zloty, is relatively small as well.
American labor market
We have been suggesting for more than a month that the recent very weak data from the American labor market, was just a statistical disturbance. This theory has been confirmed by the record low reading of jobless claims, the ADP reading from yesterday and improvement in employment subindex of ISM for services sector.
Moreover, in our opinion there is a large chance that today's payrolls will clearly exceed the value of 200k (with the 180k consensus). This is especially considering that the telecommunication sector employees (approximately 30k) will be included in the statistics, after a strike last month.
Estimations of increase in salaries are rather high (positive 2.7% y/y). However, if they are exceeded, there is a large chance for an increase in value of the American dollar, especially against the euro as well as the pound. Profitability of the American treasury bonds would probably grow as well. This would suggest that a return to the discussion regarding rate hikes is becoming more likely. In this scenario, the EUR/USD could go below the 1.10 level.
On the other hand, growth of the dollar against the emerging markets currencies could be limited. This may happen because the capital flow to more hazardous assets, due to a general improvement in the global sentiment.
Limited impact on the zloty
Payrolls should have a limited impact on the zloty. This is of course, if there is no dramatic deflection from the consensus. In the case of better readings (more than 200k), the EUR/PLN should go towards the 4.40 level and the dollar should remain near the area of 4.00. On the other hand, if the values are near 150k, the zloty may lose approximately 0.02 PLN due to a worse global sentiment.
It is also worth remembering that the salaries growth has recently been quite accurately analyzed. The higher it gets, the bigger chances for an increase in value of the dollar. This is because it should be an inflation factor that will take the FOMC closer to raising interest rates.
Even though we do not expect this scenario to happen, we should not completely exclude very weak data (below 100k). In this case, the market reaction is most likely to be negative, despite the anticipated milder monetary policy. This would probably take the EUR/PLN above the 4.45 level. The dollar would most likely cost slightly more as well.
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