Afternoon analysis 05.08.2016

Solid data from the US job market not only pushed the dollar higher but also created significant volatility on the pound. The zloty is slightly stronger after better than expected readings from the US.

The US Labour Department report was fairly solid. New payrolls created in the American economy rose by 255k in comparison to expectations around 180k. Additionally, there was an upward revision for two previous months by 18k.

Despite that the unemployment rate remained at the same level (4.9%) as July, the household survey data should also be regarded as positive as the participation rate increased. Which means that more people are returning to the labour force.

When also looking at the hourly earnings, the readings looks solid. The yearly figure stayed at the previous level (+2.6% y/y) but the m/m data rose above expectations and topped +0.3%. It may also suggest that the upward pressure on wages builds up what should be a positive message for the FOMC in the medium run.

It is also worth noting that the average hours worked increased slightly this week. It means not only a higher pay check, but can also suggest that employees who work part-time have more work or people who work full-time have are pushed for overtime. Both elements suggest a better condition of the job market.

The market reaction is also quite strong. The EUR/USD dropped around 60-70 pips. It is hard to say whether this is only a result of higher payrolls or whether all elements of the Labour Department strengthened the “greenback.” If we compare the ADP and NFP private job creations from the recent months, the average looks quite similar. So, investors should not be surprised that the US economy creates around 150-200k jobs a month on average.

Regarding the future monetary policy, the reaction on the sovereign debt market is quite important. The yields on 2-year treasuries rose around 6 bps to more than 0.7%. This translates to a higher market probability of rate increases by the Fed. As a result, today’s dollar appreciation may be more lasting.

The pound and the zloty

It should not be surprising that the stronger dollar pushed the GBP/USD lower. However, the scale of the move is large, around 150. It also pushed the popular “cable” toward the 1.30 level. There was likely quite large amount of stop loss orders regarding this pair which increased the overall slide and created the broad sterling depreciation.

As a result the pound/zloty pair dropped to new 2-year lows, around 5.03. The CHF/PLN and EUR/PLN reacted fairly calmly, but the Polish currency gained some value due to good sentiment. More global demand on the dollar pushed the USD/PLN toward 3.87, which can be regarded as justified - taking into the account that the labour data pushed the treasuries yields higher.