Afternoon analysis 04.04.2016

The dollar gave away recent gains. The zloty strengthened in spite of warnings from Moody's. The NBP optimistic about the outlook for the labor market.

Although the latest reports from the US labor market data support the tightening scenario, the dollar remained weak. In the Friday's report the most important figures ­ employment change and wages growth ­ were above the expectations. However, the US currency did not exploit the situation.

The situation would have been caused due to the Fed's move to a more dovish stance. It has been reflected in remarks made by Fed Chair Janet Yellen, who cited the possibility of interest rate cuts. Although a similar scenario is not very likely, the comment has been enough to negatively affect the dollar. In the context of expectations for the next Fed move, the Wednesday's release of the FOMC's minutes may bring some insight.

Given the recent developments, the Fed may be forced to alter its dovish stance. The labor market expansion has resulted in significant increase of wages, which may support consumption and eventually result in higher inflation. Moreover, the latest data from China would have shown a breakthrough in the economic situation. The commodity market also stabilizes, which may signal better expectations for the global economy outlook.

The scenario for falling EUR/USD has been supported by the latest comments from the ECB. Today Peter Praet, the ECB chief economist, said the central bank may act forcefully, it is needed (according to Reuters). Praet said a prolonged period of low inflation may hurt the economy. In Mach the inflation rate stood at negative 0.1 percent against the ECB's target at 2 percent.

The zloty gained in spite of Moody's

Moody's Investors Service published report on Poland. Agency said in the note that the constitutional court dispute increases political risk and strengthens the negative pressure on the Polish assets (according to Reuters). As a result, global investors are reluctant to invest in Poland.

According to the schedule, Moody's will release revised Poland's rating on May 13. Given today's report, the probability that Moody's will lower the grade outlook has increased. In January Standard & Poor's cited institutional instability when lowering the rating for the first time in history. However, Fitch left the grade unchanged.

The National Bank of Poland released a positive report on the labor market. The released showed the labor market situation has improved recently, especially in the fourth quarter. The unemployment rate dropped near the lowest level in history (to 7.1 percent BAEL) in spite of rising labor participation. The employment growth also strengthened.

On Wednesday the MPC will release the interest rate decision. The market consensus is to leave rates unchanged. Currently, the basis rate is 1.5 percent ­ the lowest level in history.

The latest reports showed an ongoing expansion. Given the situation, the MPC will not be eager to alter a hawkish stance even in the face of low inflation (it dropped to negative 0.9 percent against the negative 0.8 percent forecast). The MPC would consider to change the policy to more dovish, if the economic situation deteriorates. If the MPC maintains a restrictive stance, the zloty may gain. The basis scenario for the Polish currency is to stabilize with a tendency to increase.