Afternoon analysis 07.01.2016

The Chinese turmoil hit the global markets. The dollar exceeded decline before the labor market report. In spite of adverse environment the zloty limited losses.

On Friday, the US labor market data are scheduled. The forecast is for 200k new jobs in non-farm sector. The probability of even better result increased after very good ADP reading. The report showed 257k increase in private sector employment - a result clearly above the forecast.

In December the Federal Reserve raised rates for the first time since 2006. Yesterday minutes from that key meeting were released, which showed that the US central bank is going to watch more closely inflation data. Some Fed members, that were not very eager to raise rates as inflation is very low, was assured by the other that from now the price developments will influence the monetary policy in larger extent.

The Fed's stance signals that even if the labor market remains strong, there will be no certainty of interest rates hikes as the inflation rate is still very low. It was observable on Wednesday, when the dollar drop against the euro in spite of very good ADP reading.

Moreover, the Chinese turmoil may limit the pace of hikes. In September it was the major reason to postpone the initial hike as uncertainty over the global economy mounted. Currently, the situation is similar, which limits the probability of additional hikes.

Given the situation, even if tomorrow's data is very good, the dollar's increase will not be certain. The EUR/USD rebounded from 1.07 on Wednesday to near 1.09 today due to risk aversion. Negative sentiment supports the euro that is used in carry trade transactions.

Unemployment dropped

In November the unemployment rate in the eurozone was better that expected. It dropped to 10.5 percent from 10.6 percent in the prior month (revised from 10.7 percent). The forecast was for 10.7 percent. It was a next report that suggests an ongoing improvement in the labor market.

However, retail sales data missed the expectations. It increased 1.4 percent on a yearly basis against 2 percent that was forecast. In the last month it increased 2.4 percent. A weak consumption limits inflation pressure. As a result, the European Central Bank's goal of 2 percent inflation is getting more distant. The latest data on inflation were also weaker.

Monetary policy measures which the ECB introduced since mid 2014 has started to support the economy. However, labor market and industry improvement still haven't supported the inflation rate rebound. Given the situation, the ECB may decide to use additional tools to spur inflation. The next ECB meeting is scheduled on 21 January.

Zloty limits decline

Today the oil price hit new lows. It dropped as low as 32 dollars. It was the lowest level since 12 years. The oil prices dropped due to the Chinese turmoil, that increased the probability of global economic slowdown and drop in commodities demand. Moreover, the conflict between Saudi Arabia and Iran limits the probability that the OPEC will decide to cut output to support prices.

This factor negatively affects the currencies of oil exporting countries. The Norwegian crown, the Russian rubble and the Canadian dollar posted losses. The USD/RUB moved above the record level 75.8.

The risk aversion negatively affects the zloty. Although in the second part of today's session the Polish currency limited decline, it still remains at very low level. The dollar, the frank were steady above the 4 zloty level. The euro hovered above the 4.35 zloty level. Strong risk aversion and weaker than expected data on inflation are factors that limit the probability of the zloty's rebound in the near term.