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Afternoon analysis 08.12.2017

8 Dec 2017 15:17|Bartosz Grejner

The US labour market report failed to meet market expectations in the case of the most important issue, the average hourly wage. The zloty was slightly stronger after the publication of data from the US.

Is it the end of dollar's good situation?

Today, the US Department of Labor published November's report on the labour market, which was the most expected by the market this week. As expected, the unemployment rate remained at 4.1%, while employment in the non-farm sector positively surprised. In November, the number of payrolls increased by 228k, in comparison with market expectations by 28k lower. On the other hand, October data was revised downward by 17k to 244k.

It is estimated that the most important data from this report was that on wage levels, as it may have the greatest impact on inflation. The month-on-month increase of 0.2% turned out to be 0.1 percentage points lower than expected - the data for the previous month was also revised downward from 0% to -0.1%. Also, the increase in the average wages level by 2.5% per year failed to meet expectations, as the median of expectation suggested a 2.7% increase.

Today's publication of the labour market report may have a negative impact on the dollar's quotations, especially in the context of its strengthening in recent days. The data resulting from the report does not indicate, first of all, an increase in pressure on inflation, which, taking into account the already uncertain fate of rate hikes next year, may further reduce the probability of their happening.

Soon after the publication, the dollar reacted negatively to it, although the drops in its value were limited. The EUR/USD quotations increased from 1.1740 before the publication to approx. 1.1770 around 3.00 p.m. However, the scale of US dollar changes may increase in later hours, when US investors are more active.

Unfavourable data for dollar means positive one for zloty

The Polish currency's quotations were relatively stable before the US labour market publication. Worse than expected wages data helped the zloty. The USD/PLN exchange rate fell from around 3.58 to 3.57, which was the level observed at the end of yesterday. The zloty's valuation in relation to the euro has improved - the EUR/PLN fell below 4.20 around 3.00 p.m., although a level close to 4.21 was observed in the morning.

The probability of the zloty's depreciation in subsequent hours seems to be limited. Despite the US data, which supported the Polish currency, a positive sentiment on the market was observed, which also increased demand for it. If in the following hours a further weakening of the dollar is observed, the zloty may gradually gain in relation to the main currencies.

Next week's preview

On Tuesday, November's data on core inflation (excluding energy and food prices) in Poland will be published. Initial estimates of the headline index indicated a 2.5% price increase in the Polish economy (0.2 percentage points) above market expectations. However, this reading was not enough for the MPC members to slight sharpener the message and suggest the possibility of the rate hikes before the end of 2018. However, if core inflation showed a significant increase and grew by more than 1% (in October it was 0.8%) on an annual basis, then the probability of a change in the Council's view could increase - in such a scenario the zloty might gain.

Next day, data on consumer inflation (CPI) for the USA in November will be published. Although PCE inflation data, which the Federal Reserve is taking into account in its projections, seem to be more important for the US economy, the CPI may give an indication of inflation trends in the economy. In particular, its core reading, without energy and food prices. In October, it unexpectedly increased to 1.8% per year, after 5 months at 1.7% level. The market consensus assumes a return to this level. Around the publication time, an increase in USD fluctuations may be observed, although its appreciation could probably only occur after exceeding the 1.8% boundary.

On Wednesday in the evening, the monetary committee of the Federal Reserve (Fed) decision regarding the level of interest rates will be released. The consensus assumes that the main interest rate will increase by 0.25 percentage points to the range of 1.25-1.5%. This increase has probably already been calculated into the dollar valuation, therefore the Fed stance in the statement and press conference of Janet Yellen may be more important. So far, a marked increase in inflation hasn't been observed, which may hamper the continuation of the increases cycle in the following year. Therefore, the increase in rates does not have to strengthen the dollar at all, or may even weaken it a little if we get a dovish statement.

On Thursday, the monetary committee of the Bank of England will present a decision on interest rate levels in the British economy. The market consensus assumes that the main rate will remain unchanged (0.5%) in the same way as the bond purchase program. However, as with the Fed, the members' expectations regarding the future level of interest rates will be important. During last month's rise, the Bank of England suggested that another increase might not be made quickly. Tightening of this view could strengthen the pound, especially if Tuesday's reading of inflation in November exceeds 3%. This can be another week of significant fluctuations in the pound value.

Also on Thursday, the European Central Bank (ECB) will publish decisions on monetary policy in the eurozone. As in the aforementioned case, no changes in interest rates or in the bond-buying program are expected. The ECB's view is also unlikely to change, given that there are no significant changes in the inflation readings. The asset purchase program is currently planned to be until September (or longer) at 30 billion EUR per month, with little chance of suggesting a change in the timeframe or scale at December meeting. Although the statement publication and the subsequent conference by Mario Draghi, President of the ECB, may increase the fluctuation range of the euro, the final changes in its valuation are likely to be limited.


8 Dec 2017 15:17|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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Daily analysis 08.12.2017

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