Afternoon analysis 06.05.2016

US labor market data missed the expectations. The dollar dropped as the probability of interest rate hikes declined. The zloty did not exploit the weakness of the US currency.

Today's data on the labor market situation missed the forecast. In April, employment increased 160k - the slowest pace since September 2015. The reading was clearly below the 200k forecast. Moreover, the data for the prior two months was revised down by 19k. The unemployment rate stood at 5 percent, which was in line with the expectations.

Only the wages data was positive in the report. The average wage increased 0.3 percent on a monthly basis after rising 0.2 percent in the prior month. The reading was in line with the forecast. The average salary increased 2.5 percent on a yearly basis after increasing 2.3 percent in the prior month. The wage growth is considered an important factor for the expected rebound in inflation due to the need for an increase in household spending.

The dollar dropped directly after the reading. Later, the US currency recouped some losses but remained below the level stated before the publication.

The newest reports suggest a smaller probability of interest rate hikes in the US. Although the latest comments from the Fed suggest two hikes this year, the central bank could be forced to reconsider the plan due to deterioration in data and the situation in the financial markets. This factor may negatively affect the dollar in the longer term.

Weak zloty

The Monetary Policy Council left interest rates unchanged. The basis rate stood at 1.50 percent - the lowest level in history. The decision did not affect the zloty. However, Marek Belka’s press conference today may influence the Polish currency.

In March, reports were clearly below the expectations. Industrial production, retail sales and the PMI index were all weaker than expected. Only the labor market data suggested an ongoing expansion. Moreover, the price index data showed that deflation increased to 1.1 percent against 0.9 percent in the prior month. Given the situation, the MPC may suggest an adjustment of its stance. In such a case, the zloty may decline.

The factor which may affect the zloty in the longer term is the plan that the franc loans conversion may be dropped (source Reuters). A similar proposal is considered among others before releasing the final proposition to tackle the issue. This would positively affect the zloty.

On Friday, the zloty did not exploit the weakness of dollar. Another issue is the high probability that Moody's will lower Poland’s rating. Currently, the probability of a stronger zloty is limited.