Afternoon analysis 01.09.2017

The US labour market report has failed to meet market expectations, significantly limiting the dollar's chances to pare some losses. The zloty is relatively stable, but its further fate depends on the dollar's trading in subsequent trading hours.

US data below expectations

Today, investors were expecting a report from the US labour market - probably the most important publication this week. However, just a few hours before its publication, one of the news agencies quoted Ewald Nowotny, a member of the European Central Bank, as saying that "the euro quotes are within historical variations".

The market has interpreted this message as a reduction of the probabilities of ECB verbal intervention in order to limit the euro's appreciation. This resulted in the euro's appreciation - the EUR/USD pair rose from around 1.189 to 1.193. However, for the expected, more significant reaction, we had to wait until the US Bureau of Labor Statistics (BLS) report was published.

August's labour market report turned out to be worse than expected in the case of the most important data. Average wages increased by 2.5% compared to August last year, while growth by 2.6% was expected. Compared to July, wages increased by 0.1%, against expectations by 0.1 percentage point higher.

Correlation of ADP employment change data (which was published on Wednesday) with the official BLS data once again proved to be below expectations. While the ADP reading pointed to an increase of 237k, according to today's data, non-farm payroll has increased by 156k, so 24k below consensus. An additional monthly reading of 209k was revised downwards to 189k.

Also, the unemployment rate was not impressive - it was expected to remain at 4.3%, while it rose to 4.4%. The number of employees decreased by 74k and the activity rate remained unchanged at 62.9%.

The initial dollar's reaction was limited - the dollar index (DXY) fell from approx. 92.5 points to 92.1 points, although by 3 p.m. it returned to the level before the publication. Similarly, EUR/USD trading was on the rise - after the publication, the rate has increased to 1.198 just to fall to approx. 1.190 in the next thirty minutes.

Today's weak US labour market report combined with almost according to expectations PCE inflation will most likely continue to cause supply pressure on the dollar and in the following hours, the dollar may incur losses. On the other hand, the Bloomberg announcement (released after the publication of the BLS) has indicated that the ECB may not be ready to take a decision on the QE tapering before December.

Worse dollar condition supports the zloty

Today's weaker than expected labour market report in the US has been good news for the PLN. It increases the probability of keeping the current relatively of a good valuation for the zloty in relation to the main currencies. After initial fluctuations connected with the BLS publication, the domestic currency was stable at yesterday's levels (except for the globally stronger pound today, to which the zloty lost about 0.4%). Therefore, the next trading hours will be crucial. If the dollar loses value and the EUR/USD rate is clearly going to rise above 1.19, gold may gain. If the course is close to 1.19 level, the zloty will probably be stable.

Next week's preview

The most expected and probably the most important event of next week will be Thursday's statement and press conference after the ECB’s Governing Council meeting. Changes in both interest rates and asset purchase programs are not expected.

However, taking into account the recent appreciation of the euro and concerns about its high exchange rate expressed by the ECB during its last meeting, there is a chance, that the ECB may again refer to the exchange rate in the statement and/or during a press conference. The relatively high exchange rate of the single currency may hamper the return of inflation to the path of sustainable growth and the pursuit of the inflation target (2%).

Should this high level of exchange rate be maintained, it could convince the Governing Council to consider a slower rate of reduction of the bond-buying program. On the other hand, the mentioned Nowotny's comment may suggest that the ECB will try to withhold the referring to the euro exchange rate.

Slightly less important, however with the power to influence the zloty, may be the message and conference of the Polish Monetary Policy Council on Wednesday after a two-day meeting. As in the case of the ECB, no change in the interest rates' level is expected. The information that could raise the value of the Polish currency would be a suggestion of the Council about the possibility of interest rate increases before the end of 2017.

Lately, we have not seen any inflation increases that would exceed market expectations. Therefore, the chances of such a hawkish message seem to be relatively limited.