Afternoon analysis 06.10.2017

Wages in the US rose at the fastest pace in September, starting from January 2016, and the unemployment rate fell to over 17 years of lows. The Polish currency quotations remained relatively stable, but dollar's appreciation in the following hours may intensify sales pressure on the zloty.

A set of positive data for the US currency

Today, the Bureau of Labor Statistics (BLS) published the long-awaited September's report on the US labour market. Even before its publication, it was expected that hurricanes that hit some parts of the US may disturb the data for this month. Today's reading indicated a decline in employment by 40k in non-farm sector, against the expectations of growth of 83k (Wednesday's ADP's data indicated an increase of 125k). However, BLS admitted in the commentary that Irma and Harvey's hurricanes have lowered the estimates of changes in employment.

Therefore, the negative impact of employment data is relatively limited. The rest of the report was much better. The unemployment rate fell to 4.2%, although the unemployment rate was expected to be 4.4%, the lowest for over 17 years. This was accompanied by an increase in the participation index to 63.1%, by 0.2 percentage points above last month's level.

Possibly, the most important data was that one on average hourly wages. Economists' estimates pointed to their increase by 0.3% MOM and 2.6% YOY. However, they have increased by 0.5% compared to August (and 2.9% YOY), with the highest increase since January 2016.

To September's labour market report positively reacted the yields of the US Treasury bonds, and additionally, the dollar appreciated. The EUR/USD quotations fell to 1.167, the lowest level since mid-August. The dollar index (DXY) in turn, increased above 94 pts to the highest value since the end of June this year.

The reaction on government bonds may suggest that investors are discounting a higher probability of rate hikes by the Federal Reserve, which should support the dollar in the following hours. However, it should be noted, that both hurricanes could have disturbed the wages' data, therefore, some part of market's participants may be cautious about today's report, which in turn, may limit the potential dollar's appreciation.

The zloty dependent to the dollar

The US labour market report appeared to be mainly positive, which may support the dollar's appreciation, especially, that the yields of Treasury bonds are gaining value. The US currency appreciation in the context of dovish tone of the Polish MPC may exert pressure on the zloty in the coming hours.

After the initial reaction to this report, in which the dollar rapidly gained in value, in the following minutes it returned to levels before the publication. An increased movement can be expected in coming hours, when the US investors will become more active.

Given the positive tone of the aforementioned report, it is likely, that the dollar in the subsequent hours will appreciate and the zloty will incur some losses. However, it seems, that the strong dollar's appreciation may be limited due to concerns about the report's accuracy in relation to September's hurricanes, that influenced some of the readings.

The next week's preview

Taking into account the current pound's depreciation, Tuesday seems to be an important day for its valuation. Even before midday, August's industrial production data and its components will be published, as well as the foreign trade deficit. Last month's readings were above the expectations and if August's data turned out to be also favourable, the British currency could get support and appreciate.

However, a lot depends on the UK's political situation - if the support grows for Tori's group that demands PM Theresa May to resign, the pound could remain under the pressure of positive macroeconomic data.

Probably on Friday, another week in a row, the most important data will be published. The Bureau of Labor Statistics (BLS) in the US will present September's data on consumer inflation (CPI). August's data turned out to be slightly better (by 0.1 percentage points) than expected for both the headline reading and core one (excluding energy and food prices).

During the past two weeks, the dollar clearly appreciated due to, i.a. higher probability of monetary tightening in the US. The median of market expectations currently points to a further inflation growth by 0.1 percentage points. In the case of other positive readings, the chance may increase for the further monetary tightening in the US, which may be favourable to the yields of the US Treasure bonds and additionally help the dollar.