Afternoon analysis 03.11.2017

03.11.2017 15:29|Bartosz Grejner

Data from the US labour market failed to meet expectations but October's activity in the service sector according to ISM was the highest in 12 years. The labour report had a limited impact on the zloty - the Polish currency was in a slightly worse condition before publication.

Weak data from the labour market

October’s report from the labour market in the US published by the Bureau of Labor Statistics (BLS) was significantly below market expectations. The unemployment rate decreased again and new 17-year lows (4.1%) were set. This was primarily the result of the departure of a 765k civilian labour force in October alone. The participation rate also suffered from this, which decreased by as much as 0.4 percentage points during the month, from 63.1% in September to 62.7%.

October's data on unemployment was also not impressive. In the private sector, there were 252k more payrolls while the increase by 303k was expected. However, September's decrease by 40k was revised to an increase of 15k, therefore, the tone of this data was neutral. On the other hand, probably the most important data from this report was relatively weak: for the first time since last November Americans wages have not risen in relation to the previous month. Although they increased by 2.4% compared to the same month in 2016 but growth by 0.3 percentage points higher was expected.

The dollar fell in the first minutes after the publication. The main pair quotation, i.e. the EUR/USD pair, rose from 1.1650 to 1.1690, so to the upper limit of last week's trading. During the next hour and a half (until 3:00 p.m.) the dollar managed to pare all losses incurred as a result of the BLS publication. The BLS data, however, might still have been affected by the hurricanes in September, therefore, their impact is likely to be limited.

On the other hand, the positive impulse for the dollar was provided by the ISM sector activity index, which in October increased to 60.1 percentage points above market expectations (1.6 pts), setting at the same time the new 12-year highs. This may help the dollar to strengthen slightly, although a significant appreciation should not be expected, but rather movements within the fluctuation range of the past few days. The better than expected impact of the ISM index on the service sector was reduced by its decrease presented by the IHS Markit (55.3 points vs. 55.9 points). Despite hurricane disturbances, weak labour market data is also likely to hamper the dollar's appreciation.

Slightly weaker zloty

Mixed data from the US caused only a limited reaction to the Polish currency. It was already depreciating in the morning - this could be seen in his relation to the Hungarian forint, to which it lost about 0.3%. The zloty was also in a worse condition in relation to the main currencies, i.a. the dollar, the pound, the euro or the franc, although these changes have been within the range of the last days' fluctuations.

The further zloty's weakening depends mainly on the dollar's behaviour. If we observe its appreciation, the Polish currency may lose value. Although taking into account the published data on the US economy, the changes on the US currency are likely to be limited. Which may be positive for the zloty, as the risk of more significant changes in such a scenario will also be limited.

Next week's preview

Wednesday may turn out to be an important day for the zloty when a statement will be published after the two-day meeting of the Polish Monetary Policy Council (MPC) and a press conference will be held with the participation of its chairman and members. Although interest rates are expected to remain unchanged, the Polish MPC's statement may have a significant impact on the Polish currency's behaviour.

Recent macroeconomic data indicates over 2% inflation in Poland and a 1% core index, i.e. average increase in the price level excluding energy and food prices (in annual terms). We are also continuing to observe the strong growth of consumption and stable one in the case of investments, which also contributes to high economic growth in the recent quarters. These factors may inspire some members of the Polish MPC to sharpen their stance on monetary policy.

The consensus does not assume rate hikes before the end of 2018. However, if the statement and a press conference suggested that an earlier increase in interest rates could be considered, the zloty might appreciate. Especially in the context of the still mild policy of the European Central Bank (asset purchase program extended to September 2018 at the least).

On the other hand, the ECB's decision may also prevent the Polish MPC from tightening monetary policy due to a fear of limiting the still high GDP growth pace. Taking into account the previous statements and current events (ECB, expected rate hikes in the UK but no indication for the next), it may suggest that the MPC will repeat its the current rhetoric.

This seems to be currently the most likely scenario and may have a relatively limited impact on the Polish currency. Zloty trading may, therefore, be subject to fluctuations due to external rather than internal factors. The dollar's appreciation could weaken the zloty. However, if the tax reform program encounters further difficulties in its implementation, the Polish currency could remain relatively stable next week.

 


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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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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