Afternoon analysis 07.07.2017

A mixed report from the US labour market caused increased volatility, however, it didn’t give strong arguments in favour of dollar appreciation. Weaker US earnings and unemployment data were theoretically good for the zloty but USD/PLN saw some high fluctuations.

Weak earnings

June’s jobs market report from the US Department of Justice was the most important event in today’s calendar. The private non-farm payrolls which increased by 187k (most since February) and were probably the most positive aspect of the report. Although the unemployment rate rose from 4.3% in May to 4.4%, such a marginal increase from last month’s level didn’t give any reasons for anxiety.

The highest attention was focused on the average hourly earnings data, which could point towards the current inflation pressure. It increased in June to 26.25 USD, which constituted a 0.2% increase compared to the previous month, although 0.3% was expected. May’s data was also revised down from 0.2% to 0.1%. When compared to June 2016, the average earnings rose by 2.5%, which was the lower boundary of relatively narrow market estimations (2.5% - 2.7%).

The yields on two-year US treasuries reacted with a slight decline, probably discount a slightly lower chance of another rate hike by the Federal Reserve. This also caused the dollar to lose value at the beginning. The EUR/USD pair rose from 1.140 to 1.144, although it came back to 1.140 before 3 p.m. CET. A stronger reaction on the dollar could be expected in the later hours of trading when US investors will become more active. However, bearing the report in mind, the chances for the dollar to strengthen remain limited.

Potentially good news for zloty

A mixed US jobs report, especially regarding average earnings, was theoretically positive information for the Polish currency. The risk of the zloty losing its value was lowered but its movements are dependent on the dollar’s behaviour during the next few hours. Should it lose value and the EUR/USD pair move above 1.14 (and in the 1.15 direction), USD/PLN could fall below 3.70.

The USD/PLN, however, saw some relatively high fluctuations directly after the jobs report publication: it fell as low as 3.696 (close to the lowest level in over a year) but rose to 3.720 in the next half an hour. A lower probability of another rate hike in the US could give a positive impulse for the US stock exchange. In such circumstances, the risk of the zloty significantly losing value is relatively limited.

Next week’s preview

Although the macroeconomic data publications planned for next week are of relatively lower importance than this week’s, the currency market could still see some increased volatility. On Wednesday, the British Office for National Statistics (ONS) will share its labour market report. Investors attention will probably be focused on average earnings, which has recently been showing a slowing growth rate – it has been lower than inflation, which negatively impacts real wages. After Friday’s weak industrial growth data, a further decrease in the average earnings could push the pound even lower.

The next Friday could once again turn out to be quite important for the currency market, especially the dollar. At 2.30 p.m., the Bureau of Labour Statistics will publish consumer inflation data for June. Although the PCE inflation index has been more important in the case of the US (the Federal Reserve has been taking it into account when making price growth projections), the last CPI index publications have brought about relatively high volatility.

The consumer inflation growth rate has been gradually decreasing in the last three months and, excluding energy and food prices, even four in a row dropping to the lowest level in nearly two years. The publication could cause an increase in the dollar’s volatility. Its potential appreciation, however, together with a solid CPI reading, could bring about an outflow of some of the capital in the emerging markets, which could hurt the zloty in the process.