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Afternoon analysis 01.12.2016

1 Dec 2016 16:02|Bartosz Grejner

The pound is stronger after suggestions that Great Britain could pay for single market access. Initial jobless claims considerably above expectations, but it’s oil and U.S. government’s bonds that dictate trading today. Zloty, together with other emerging markets currencies, is noticeably weaker – the EUR/PLN pair is at its highest since June.

A softer Brexit?

David Davis, Secretary of State for Exiting the European Union, informally known as Brexit Secretary, suggested today at the House of Commons, that the British government could consider paying the European Union for access to the single market. Davis said that they would consider such an option during the Article 50 process over the next two years, among others. “The major criterion here, is that we get the best possible access for goods and services to the European market,” said Davis at the House of Commons.

The spokeswoman for the prime minister confirmed that Davis’ view is similar to what the government has said to date, and namely how it will “make the decision about how taxpayers’ money will be spent.” The aforementioned access to the single market could indicate that the process of leaving the EU could be relatively softer than anticipated. As a result of the Brexit Secretary’s suggestions, the pound grew considerably stronger today – the GBP/USD pair increased by about 1.5% to 1.27, which is the highest level since the 6th of October, one day before the “flash crash” of the British currency.

Initial jobless claims ignored

The U.S. Department of Labor reported today that initial jobless claims rose by 17k to 268k. After the presidential elections, jobless claims were down to the lowest level in 43 years (233k). However, in the last two weeks, they only rose by 35k. The mentioned data is theoretically unfavorable for the U.S. economy or the dollar, but the markets virtually ignored them.

Oil prices rose strongly (about 3%) for the second day in a row, which caused inflation expectations to increase further. Yields on 5-year U.S. government bonds rose to the highest levels (1.9%) since May 2011. Similarly, as it was after their abrupt spike after the U.S. elections, the biggest losers were the emerging markets and their currencies.

Zloty loses value

Today’s sharp spike in U.S. government bond yields caused a relatively high outflow of capital from the emerging markets, including Poland. Despite a better than expected manufacturing PMI for the Polish economy, the zloty lost considerably, as well. The dollar cost 4.22, increasing its 14-year record highs against the Polish currency. The euro was the most expensive since the 24th of June (one day after the referendum in which Brits decided to leave the EU.) On the interbank market, the euro cost over 4.47 zloty.

The relatively stable frank-to-zloty relation also rose to the highest levels in 10 days, ie. 4.15. The global sentiment, combined with suggestions of single market access in return for contributions to the EU budget, markedly increased the aforementioned relation. The GBP/PLN pair was at its highest level since the 14th of July (5.33 zloty), although it’s still 0.40 zloty short of pre-Brexit levels.

Tomorrow’s preview

CIPS will publish November’s PMI construction for the British economy tomorrow at 10.30 a.m. Since September 2014, it had been gradually falling, and even fell below the 50 boundary in June and July this year (which meant decreasing activity in the construction sector). However, its value rose above 50 in September and October to the highest levels since March. The median market expectations imply a PMI of 52.5 in November, which would constitute a 0.4 decrease in comparison to the previous month. Should tomorrow’s data deviate from the consensus, it could cause more volatility of the pound, which has been especially susceptible to data regarding the British economy.

An hour before the start of the session on the New York Stock Exchange, The Bureau of Labor Statistics will publish a report regarding the U.S. labor market in November. The unemployment rate had been steadily decreasing since October 2009, when it was 10.2%. At the end of 2015, it reached 5% and has oscillated around this level since then. The market consensus indicates that it will remain at 4.9%.

The markets could then react to a change in private employment (non-farm payrolls) and in average hourly earnings to a great extent. Yesterday’s ADP report showed that private employment rose by 219k in November, which was significantly more than the predicted 170k. Market projections for the BLS data suggests an increase of 175k, compared to 161k a month earlier.

Taking into account the ADP data which was published yesterday, tomorrow’s BLS report could also exceed expectations, which may strengthen the dollar. The change in average hourly earnings could prove vital as well – it indirectly influences consumer spending, which in turn accounts for the majority of economic activities. The higher it is, the higher the GDP growth is, thus being positive for the American currency as well. The average hourly earning grew 0.4% MoM in October which was the highest growth rate since March. However, market expectations for November are 0.2 percentage points lower.


1 Dec 2016 16:02|Bartosz Grejner

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 acknowledgement of the source is prohibited.

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