Afternoon analysis 01.12.2017

External factors weakened the Polish currency today, despite the publication of favourable data. The dollar was gradually paring some losses before the planned vote on the draft tax reform in the Senate in the US.

Weaker zloty

In the second part of the day, the Polish currency was still under pressure from a slightly worse global sentiment. This was related to the delay of the vote on the draft tax reform in the US Senate from yesterday evening to today, which also contributed to the depreciation of the main European stock market indexes. Increased risk aversion could also be observed by a slightly higher valuation of the yen or the Swiss franc.

This combination of factors caused one unit of the Swiss currency to once again cost more than 3.60 PLN, i.e. 2 gr more than during the morning session. A similar difference could be observed in the dollar's valuation - the USD/PLN quotations rose to 3.55, slightly over 2 gr more than in the morning.

The Polish better than expected manufacturing PMI, which indicated the fastest growth pace in production since February, was not enough to support the Polish currency. Therefore, its quotations in subsequent hours are likely to also depend on external factors. A vote on the draft tax bill in the US Senate could improve the sentiment in the market, which in turn, could improve the zloty's condition, if, however, there is no significant appreciation of the dollar.

Nevertheless, it may be very difficult to determine the impact of a project's vote on the dollar quotes - the details of the Republican senator project are still unknown, especially with regard to corporate tax rates. The dollar has been steadily appreciating since the morning, which could partly be a consequence of recovering from its weakening and partly of its positioning before a potential vote in the Senate. After increasing to 1.1940 in the morning part, the EUR/USD quotations fell at 3.00 p.m. close to the 1.186 level, which also resulted in a return of the dollar index (DXY) above 93 pts.

At 4.00 p.m., November's ISM reading on the US industrial sector will be published - in the context of the events in the Senate in the US, its impact on the dollar is likely to be limited. Only a reading close to September's records (60.8 points) could probably strengthen the dollar. The median of market expectations indicates a fall of this index from 58.7 pts last month to 58.4 points.

Next week's preview

After a two-day meeting, on Tuesday the decision of the Monetary Policy Council on interest rates in Poland will be published. Although they are not expected to be changed, the MPC press release and the statement may be important. On Thursday, the preliminary estimates of consumer inflation (CPI) in November were published. The reading of 2.5% beat the market estimate by 0.2 percentage points and is the highest in 5 years. This may lead some MPC members to tighten their stance on monetary policy and suggest the possibility of rate hikes before the end of 2018.

However, the chances for this view to change seem to be limited at the moment. Probably a few more readings of the headline inflation index around this level or higher, combined with an increase in core inflation (excluding energy and food prices) are needed to persuade the dovish part of the MPC members to suggest increases before the end of next year. A lack of such a reference, especially in the context of the inflation pace increase and higher than initial estimates the increase in GDP growth pace, could weaken the zloty. In particular, if we are dealing with worsening of the global sentiment and/or a much stronger dollar.

Probably the most important event of the next week will be the labour market's report from the USA which will be published on Friday. In addition to the employment change in the private sector, most of the market's attention may be focused on the change in the average hourly wage. An increase in its pace may cause inflationary pressure which determines next year's rate hikes. So far, inflation in the US has not shown an upward trend, which may hinder the Fed members from raising interest rates next year. A wage increase below 0.2% could suggest a reduction in inflationary pressures and weaken the dollar.