Afternoon analysis 04.10.2016

The Reserve Bank of Australia left its interest rates unchanged. The pound is near its three-year minimum against the zloty.

Record low interest rates sustained

After two decreases in interest rates by 25 base case points at meetings in May and in August, The Reserve Bank of Australia (RBA) decided to keep its interest rates at a record low level of 1.5%. The decision was unanimous and the announcement did not strengthen the Australian dollar against the majority of currencies, except in the case of the globally stronger American dollar.

The announcement from the RBA shows that the economic growth remains moderate and that inflation is relatively weak. The latter is mainly due to a lower increase in labor costs, as well as a low pressure on prices. However, low interest rates support the local demand and a low currency exchange rate has a positive impact on trade exchange.

Even though the Australian dollar remains at its historical minimum against its American equivalent (it has lost approximately 28% since mid-2013), the progressive appreciation which has been going on since January (approximately 12.6%) may complicate the adjustment of economic processes within the Australian economy. However, this may change by the end of the year. The CME estimates that the likelihood of rate hikes in December is at the level of approximately 60%. A globally stronger USD would have larger chances to wear-off the Australian dollar. This is what the RBA is counting on.

Zloty is close to exceeding a significant level against GBP

Due to a global wear-off of the pound, which has been caused by the comments from the British Prime Minister, Theresa May, the British currency became the weakest in thirty years (GBP/USD is at the level of approximately 1.275). The GBP/PLN is nearing the 4.90 level (4.907 currently). The lowest level of this pair that we have recently quoted was 4.888 on August 16th. If the zloty remains relatively strong and the pound is still weakened by Brexit-related matters, we may see the GBP/PLN at the level of 4.70. Last time the pair was so low was at the beginning of 2013.

Tomorrow’s events

Shortly after the opening of the European stock markets, the IHS Markit will publish the PMI indexes for services from September. Investors will probably yet again focus on the British readings regarding Theresa May’s statements about Brexit. Despite a negative impact of Brexit on the pound, the British economy continues to surprise with positive data. The market consensus estimates a slight decline of the PMI for services from 52.9 in August, to 52.0. However, the reading may be another positive surprise due to a positive global sentiment, as well as the previous positive data.

At noon, we will know the decision from the Monetary Policy Council regarding interest rates. The market estimates that interest rates will remain at the level of 1.5%. This is what has been suggested in the previous minutes, as well as at the press conference after the previous meeting. During the press conference, the MPC chair said that rate hikes are possible no sooner than at the end of 2017.

Due to positive industrial ISM data from the USA, as well as to a relatively hawkish statement from Loretta Mester (the FOMC member who has a right to vote this year), the dollar is one of the currencies which is strengthening the most. The EUR/USD yet again went below the 1.12 level. Shortly before the opening of the American session, we will know the ADP data regarding changes in employment in non-agricultural sector for September. The market consensus assumes its increase by 169k (177k in August). If the data is at this level, this would be the worst reading since April/May. At that time, the mentioned increase in employment was below 170k. Investors will focus especially on the ADP data regarding rate hikes in December. The labor market condition is one of the main factors that determines the decision regarding the interest rates level.

At 16.00 (4.00 PM), we will know the American ISM for services from September. The market expects the index to be at the level of 53 points. In July it was at the level of 51.4 points, which was the worst data since January 2010. The estimated reading would be a return to the level from May. However, we need to mention that the ISM for services has been generally weak in 2016. Only three readings were above the level of 55 points, whereas in 2015 none was below this level. However, a better global sentiment, which was confirmed by the PMI, as well as by the ISM data, may cause tomorrow’s ISM for services to be even better than previously estimated.