Afternoon analysis 05.05.2017

Inconclusive data from the US labor market have weakened the dollar so far. The Polish currency has been strengthening after the US report, however, high volatility could be expected in the coming hours.

Mixed data from the US economy

The long-awaited report regarding the US labor market brought mixed feelings. The unemployment rate fell to 4.4%, below the expected 4.6%. A lower rate could be observed as far as 2001. The increase in private nonfarm payrolls also proved to beat the consensus of 190k with a reading of +194k. However, lost months weak data were revised down from +89k to +77k.

The participation rate was slightly down on March – it fell by 0.1 percentage point to 62.9%. The number of people not in labor force increased by 162k. The data that generates the most focus has usually been the average hourly earnings. In April it increased by 7 cents to 26.19 USD, which constituted a 0.3% growth month-over-month and was in line with market expectations. However, if we compare it to last year’s April, the growth rate was only 2.5% - below both March reading and market consensus (2.7% in both cases).

That could have probably been the deciding factor in the weakening of the dollar in reaction to the report. The main currency pair (EUR/USD) rose to 1.0990. Although in next minutes the dollar weakening impulse somewhat diminished and the EUR/USD fell back to ca. 1.0970 (slightly above the level before the report’s publication), the 1.10 boundary could be tested in the next few hours. The US currency has remained under pressure – the dollar index (DXY) has been below the 99 points level and close to six-month lows.

Zloty regains strength

After yesterdays sell-off caused by a drop in commodities prices (started by a fall in oil prices), the Polish currency made up for yesterday afternoon’s losses. The aforementioned mixed US data gave zloty a positive impulse. EUR/PLN returned to the 4.21 level and USD/PLN tested the 3.83 barrier, deepening over six-month lows.

Zloty was also in good condition in relation to the Swiss franc – the CHF/PLN fell to 3.88, close to the lowest level in one year. The next few hours of trading will probably be the result of movements on the dollar and oil markets. A further weakening of the dollar could be positive for the Polish currency. On the other side, the highly volatile oil prices could cause risk aversion to increase, including towards a currency such as zloty. There could be substantial price movements in the afternoon session when the American investors are most active. Hence, zloty’s prices in relation to other currencies could be exposed to relatively high volatility later today.

Next week’s preview

The second round of the French election (held on Sunday) could prove a significant driving force in the beginning of the week. According to OpinionWay, Macron has a substantial advantage over Le Pen (61-39 at the moment) so the end result seems to be pretty certain. However, Macron’s win would remove the uncertainty over the EU and the eurozone future which could positively influence the euro and the European indexes. One has to remember, though, that this result is widely expected and to large extent discounted by the market. So the positive influence could be short-lived.

Next week’s most important events are planned for the last two days. UK’s Industrial production March data will be published on Thursday. After reaching a year-over-year growth rate of 4.3% in December, it started to fall in the next two months and a further decrease in the growth rate is expected in March, as well. After a few hours, Bank of England will publish its monetary policy decision.

Although no change is expected in the interest rates or in the monthly asset purchase program, the pound could be influenced by the “minutes” published alongside the aforementioned decision. Should the tone be more hawkish suggesting a faster monetary policy tightening, the British currency could appreciate. The probability of such a scenario seems to be limited, though. It is also probable that one of the committee members will vote in favour of a rate hike, as was the case during the previous meeting. However, if yet another committee member voted in favour of a rate hike, this could be a positive signal for the pound.

Data regarding the March consumer inflation (CPI) and retail sales will be published on Friday. February’s data were below what the market expected, particularly with regards to core readings (which exclude most volatile factors). The core CPI was at the lowest level in nearly one and a half year (2% YoY) and retail sales (excl. vehicle sales) hadn’t noted a monthly growth for the first time since August 2016. The current market consensus points to both mentioned indexes to increase in relation to February’s levels which, taking into account the recent dollar depreciation, could cause the dollar to add value.