Afternoon analysis 05.01.2018

05.01.2018 15:38|Bartosz Grejner

December's labour market report failed to meet expectations in the case of employment growth but was in line with expectations as to the pace of wage growth. The trade deficit was also higher than expected in November, however, the dollar gained - the EUR/USD pair reached the lows of the day. The zloty weakened in relation to the main currencies.

Data from the labour market failed

The long-awaited data from the US labour market for December has failed to meet expectations. Employment growth in the non-farm sector by 148k was below economist consensus by 42k. It was the lowest growth in the last three months, and from the last nine months if the data for September was excluded (disorder due to hurricanes). This data also coincided with the report of ADP (privately owned), which indicated an increase in the number of payrolls by 250k in December.

The goods trade deficit in November was by 1 billion USD higher than expected, which increased to 50.5 billion USD, reaching the highest level since April 2012. According to market consensus, the most important data on changes in hourly wages turned out to be relatively high - it increased by 0.3% per month and 2.5% per year.

Taking into account the negative impact of employment and trade data, as well as the increase in wages which was in line with expectations (meaning that there is no inflationary pressure higher than the forecast), it is hard to expect that this set of data could support the dollar. Although around 3.00 p.m. the dollar appreciated - the EUR/USD quotations dropped to the lowest level today (around 1.202). At 4.00 p.m. the ISM index data from the service sector and on orders for durable goods will be published. It may give additional stimulus to the dollar quotations.

If the aforementioned set of data was a positive surprise (ISM close to 60 points), the dollar could receive some support, given that the wage date has not disappointed. In the opposite case, we can observe renewed pressure on the US currency.

Zloty significantly depreciated

While the hours passed by, the Polish currency weakened in relation to the main currencies by 0.01-0.02 PLN, it was due to a slightly better dollar condition. Moreover, the positive outcome of the aforementioned labour market report could have been a threat to the zloty. It was, however, below expectations in the case of employment, which combined with the growing trade deficit in the US, may limit the potential loss that the zloty could sustain today.

For the zloty quotation, the aforementioned data of the ISM index and new orders in the industry may be significant. A reading clearly above expectations may strengthen the US currency. At the same time, it may weaken the zloty, particularly because it recently appreciated in relation to the main currencies, despite lower inflation expectations and an accommodative monetary policy. Therefore, this may give chance for recovery on the Polish currency, which is particularly sensitive to changes in market sentiment and the dollar's value.

Next week's preview

Wednesday may appear to be an important day for both the pound and the zloty. At 10.30 a.m., the Office for National Statistics (ONS) will publish data on industrial production, construction production and trade balance account in November, which may be relevant for the British currency. During the last five months, industrial production surprised positively by exceeding market expectations and increasing growth pace (on an annual basis) in each following month.

In October, production grew by 3.6% year-on-year and its main component - manufacturing production - by 3.9%. The median of market expectations indicates a slowdown of this pace to 1.7% and 2.8%, respectively, due to a higher base last year. Moreover, the two previous months were also positive for the trade balance. In September, the deficit reached 10.45 billion GBP and was the lowest in 11 months; also in October, it has not exceeded 11 billion GBP (expected 11.45 billion GBP). The market consensus assumes the continuation of this positive trend and a deficit of 10.5 billion.

In recent months, activity in the construction sector failed to meet expectations. October's production fell by 0.2% on a yearly basis, which was the first fall since April and only the second since that year. In November, the declines will probably be maintained (-0.8%). However, with further good readings for industrial production and foreign trade, a decline in construction production is unlikely to hamper appreciation of the pound.

On the same day, the decision of the Polish Monetary Policy Council regarding the level of interest rates will be published, which is expected to be left unchanged (main interest rate: 1.5%). The recent lower than expected consumer inflation reading (2% vs. 2.5% a month ago) is likely to give the MPC more arguments for the continuation of an accommodative monetary policy. This reduces the probability of rate hikes before the end of the year. In the case of such a dovish message by the Council (press conference and statement publication at 4.00 p.m.), the zloty may depreciate, especially if the dollar is in better condition.

On Thursday at 1.30 p.m., the European Central Bank will publish discussion records from December's MPC meeting. Inflation in the eurozone remained suppressed (December's core inflation stayed at 0.9% YOY, 0.1 percentage points below expectations). Moreover, it is too early to discuss the possible withdrawing from the bond-buying program, which is assumed to last until the end of September or longer. Therefore, the impact of this publication on the euro's quotation seems to be limited, although the euro's fluctuation range may increase.

On Friday, at 2.30 p.m., December's consumer inflation (CPI) data in the USA will be published. Its level is expected to remain at 2.2% per year. However, the core inflation reading (exclusive energy and food prices) will be more important. With the exception of October (1.8%), from May to November it remained at the 1.7% per year level. The median of market expectations indicates its growth to 1.8%. Probably an increase of 0.1 percentage points above this level may cause a clear dollar appreciation, which could also have a negative impact on the emerging countries currencies (including the zloty).


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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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