Afternoon analysis 08.01.2016

The dollar moved higher after the US labor market report. Philip Lane from the ECB sees room for more quantitative easing. The zloty resumed decline after a brief pause on Thursday.

In December employment growth in the US economy was very strong. In a non-farm sector companies added 292k new workers. A result clearly above the forecast 200k. In the prior month employment increased 252k (revised up from 211k reported initially).

In 2015 employment increased by 2.65 million workers after rising 3.1 million in 2014. It was the best period in the US labor market since the end of 90s. As expected, the unemployment rate stood at 5 percent.

However, other numbers in the report were less optimistic. The major issue is that the wage growth remained limited. In December wages stagnated against the prior month against plus 0.2 percent forecast. Wages increased 2.5 percent on a yearly basis against 2.7 percent that was expected. The participation rate rose slightly to 62.6 percent form 62.5 percent.

After raising the interest rates in December, the Federal Reserve said it will give more attention to inflation data. In this context, today's numbers were slightly disappointing. In spite of strong employment growth wages increase remains constrained. As a result, the chance for a stronger consumption growth enough to spur inflation is limited.

A similar view prevails in the market, which was reflected by the EUR/USD move. After a brief gain after publication, the dollar gained, but later it started to drop against the euro. This move was strengthened by the risk aversion in the market.

More stimulus

The European Central Bank has room to provide additional stimulus if the next data suggest it will be needed - according to Irish Central Bank Governor Philip Lane (according to Reuters). Lane said that the decision to leave the asset purchase program size unchanged (currently 60 billion euros monthly) was justified given the data available. Regarding the Chinese turmoil Lane said the government has tools to calm the situation.

The futures market shows that the probability of additional interest rates cut increased. On Thursday the probability of a cut in March exceeded 50 percent as the Chinese tensions escalated.

Moreover, the factor that supported a similar scenario is weak inflation. It stood at 0.2 percent against 0.4 percent expected. In addition, the price pressure was limited as the consumption data disappointed.

Zloty resumed decline

The zloty returned to declines on Friday. The Polish currency remained under influence of risk aversion spurred by the situation in China. The Swiss franc and the US dollar returned above the 4 zloty level. The euro hovered above 4.35 zloty. Given the current market environment, the probability of a stronger zloty is limited.