Afternoon analysis 05.10.2016

The British Prime Minister’s statement did not increase declines on the pound. Mixed data from the American economy. The zloty is slightly stronger, but its reaction to the data was quite limited.

Theresa May’s statement had no larger impact on the pound

We have noticed in today’s daily analysis that the pound increased its thirty-year minimum and the GBP/USD went below the level of 1.27. This afternoon, Prime Minister Theresa May made a statement at the Conservative Party conference. Even though she spoke more of the UK’s internal situation rather than of Brexit, she seemed to be milder regarding her country leaving the European Union.

“Change” was the main topic of May’s testimony. She reprimanded the elites and entrepreneurs who take advantage of their employees. She also focused on taxes. She said that, “as a Conservative Party, we believe in the economy of low taxes. If you avoid taxes – we’ll come for you. If you’re a tax adviser who assists their clients to avoid taxes – we’ll come for you.”

Theresa May spoke of the EU countries as “friends and allies.” By this, she showed that she wants to achieve an agreement that would not harm the British companies. However, she didn’t speak as much of immigration, as she did on Sunday.

However, she spoke of supporting crucial sectors of the British economy, including the financial sector. Putting the financial sector in the background during her testimony on Sunday was one of the investors’ main anxieties. May’s testimony did not have a large impact on the pound, but it did went further from the 1.27 level on the GBP/USD.

Disappointing data from American labor market and positive surprise from ISM data

The ADP data regarding employment in the non-agricultural sector was worse than expected. It was at the level of 154k, against the 166k consensus. Moreover, the data from August was reviewed from 177k to 175k. The reading from September is the lowest since January 2014, in which the change was at the level of 127k. If we look at the ADP report’s components, the employment was the largest within the services sector (151k from 154k).

This low result was mainly caused by the production sector (an increase in employment at the level of 3k). The final result of this sector was determined by a 6k decrease in employment within the industrial sector. Even though a negative ADP report slightly spoils the picture of industry, the dollar strengthened against the euro and the EUR/USD has tested the level of 1.12.

The ISM data for services appeared to be better than what was previously estimated (57.1 vs 53.0) and reached its highest level since October 2015. The fastest growing subindex were new orders (by 8.6 percentage points) and the weakest subindex were shipments. The latter was the only one to decrease by 0.5 percentage points. The ISM index gave investors an impulse to strengthen the dollar. The EUR/USD went below 1.12 directly after publication of this data.

Zloty is stronger in second part of the day

Even though the decision from the Monetary Policy Council (MPC) was anticipated by the market, the zloty strengthened in the second part of the day. The GBP/PLN didn’t increase its three-year minimum for the time being. The ADP report regarding changes in employment within the American non-agricultural sector appeared to be worse than expected, as well as the worst in more than two-and-a-half years. This should theoretically be favorable for the zloty. However, the dollar strengthened slightly after the ADP data, therefore the USD/PLN returned slightly above 3.83.

As expected, the MPC announcement didn’t leave any space for speculations regarding monetary easing in the near future. The Council mentioned a stable economic growth, as well as a gradually decreasing deflation. According to the MPC, an increase in prices is to be supported by a steady GDP growth, which follows increasing salaries and parental benefits.

Just as we estimated in today’s daily analysis, the decision from the MPC didn’t have a significant impact on the zloty. On the other hand, a positive ISM for the American services sector strengthened the dollar. As a result, the USD/PLN approached the 3.84 level, which is still lower than it was on Tuesday.

Tomorrow’s events

The Swiss Federal Statistical Office will publish the CPI inflation data from September, shortly after the opening of the European stock markets. Inflation was at a negative level in month on month relation in July and August (negative 0.4% and negative 0.1%, respectively). However, the month on month inflation data is historically burdened with a large volatility. If we look at the year on year data, we will see a trend of decreasing deflation since December 2015 (it was at the level of negative 1.4% in November 2015). In August 2016, inflation was at a negative level as well, but it was only negative 0.1%.

Taking this trend into consideration, a positive inflation reading should translate to a stronger franc. However, the Swiss National Bank (SNB) stated in September that the current franc’s exchange rate is too high (Switzerland is a country with dominating export.) Therefore, positive inflation data from September (year on year) may cause an increase in fluctuations, as well as a small depreciation of the Swiss currency. The SNB won’t likely increase interest rates in the near future, because of an anxiety from the deterioration in export and the appreciation of the franc.

Tomorrow at 14.30 (2.30 PM), we will know the new jobless claims data from last week. Even though the market consensus assumes it to increase by 3k (from 254k to 257k), this index has been remaining at its forty-year minimum. Therefore, we don’t expect this data to cause large changes on the dollar tomorrow. Changes are only possible in the case of a significant deflection, which seems rather limited.