Afternoon analysis 07.09.2016

Weak, but not tragic data from the British economy have a negative impact on the pound. The zloty is gaining value to the main currencies, due to a positive sentiment towards emerging markets.

Pound under relatively limited pressure

Today, the Office for National Statistics (ONS) has published the data regarding the British industrial production. It went up from 2.1% y/y, while the estimated value was by 0.2 percentage points lower. Theoretically, this is a positive information that should be another signal that Brexit had a minor impact on the United Kingdom's economic activity.

However, reality is slightly worse, although not fatal. An improvement in the mining sector (mainly oil and gas) had a large impact on the production growth. Activity of this sector has increased to 7.2% in comparison to July 2015. This increased the entire production index by approximately 1 percentage point.

However, mining sector is not an ideal index of economic activity. Therefore, it's definitely better to focus on industry. The result is not as optimistic here. The index only went up 0.8% y/y, against the positive 1.7% y/y consensus. Moreover, a large portion of this growth has been made by transport (positive 0.55 percentage points), which sometimes is excluded, in order to clear the index from more volatile components.

The production of pharmaceutics and computers was weak as well. These categories went down by 5.3% y/y and 1.9% y/y, respectively. On the other hand, the beginning of the second half of the year was not favorable for production of many developed countries. Moreover, contribution of production in the United Kingdom's GDP is very low and is at the level of approximately 14.2%. In Germany, it's approximately twice as much.

Therefore, it's still too early to estimate a real impact of Brexit on the British economy. However, taking into consideration its structure, the forthcoming data will most likely be positive and show that consumers, as well as entrepreneurs, are returning to their regular activity. The retail sales reading, scheduled for September 15th, will be very important regarding this matter.

On Friday, we will know the balance of foreign trade. This will be the data from July. We will see the impact of a lower evaluation of the pound on the balance of goods and services. If there is a significant limit in deficit, this may be another positive information for the pound. On the other hand, if the differences in comparison to June are small, investors may interpret it as a danger for keeping a significant internal imbalance, despite a wear-off of the currency. This would be a negative signal for the GBP.

In conclusion, the pound's wear-off today is a result of weak macroeconomic data. However, we do not verify our view that the British currency may exceed the area of 5.20 against the zloty in the following weeks. Taking into consideration a large internal imbalance which equals more than 7% of the GDP in the current account, as well as the risk of long and tough negotiations with Brussels, the perspectives for the pound remain negative in the long-term. This includes an increase in its many-years minimum.

Zloty remains under pressure of global trends

The zloty remains stable in the afternoon. The MPC didn't decrease interest rates. We also don't expect a clear impact on the PLN from the Council's press conference. Currently, the zloty is under the influence of a global sentiment towards emerging markets. It's beneficiary for the Polish currency and the Polish treasury bonds.

A danger regarding the decision from Moody's continues to have a negative impact on the zloty. Therefore, if rating remains unchanged (according to our estimations), the EUR/PLN may start next week slightly below 4.30.