Afternoon analysis 09.11.2016

Expectations regarding trade deficit in the United Kingdom were not fulfilled, because weaker pound didn’t support export in September. The zloty is weaker.

Deficit is worse than expected

Today, the Office for National Statistics published the data regarding the British foreign trade for September. Despite the fact that the pound has been significantly weaker recently, the deficit appeared to be worse than expected (12.7 billion pounds vs 11.3 billion pounds). However, the data from August was revised from 12.11 billion to 11.5 billion. The deficit of trade with non-EU countries was worse than expected, as well (negative 3.97 billion pounds vs negative 3.35 billion pounds). Both of the above results were the worst since June.

Import of partially created goods (excluding chemicals) increased the most in month on month relation (by 535 million pounds). Their export went down by 95 million pounds. Import of capital goods also increased (by 322 million pounds) and their export went up by 67 million pounds. The weak pound has not been able to support the British goods export.

However, services trade balance increased in September to 7.5 billion pounds (vs 7.4 billion in August). This caused the deficit of goods and services trade balance to increase from 3.8 billion pounds (August) to 5.2 billion pounds (September). Even though the general result was weak, it show the significance of services in the United Kingdom. Surplus of services was at the level of 22.2 billion pounds in the third quarter (10.1 billion belonged to the financial sector, which contributed the most to the final result.)

The lack of positive impact of the weak pound on export may be a proof that the British government would have to limit import significantly, in order to improve the trade balance. However, this could limit consumption, as well as investment level. Brexit will most likely also result in a decrease in the number of the international institutions in the United Kingdom. This would be negative for services sector, which supports the trade balance.

Zloty is weaker

Lower risk appetite caused investors to search for safer assets. Therefore, they are showing more aversion towards the emerging market currencies, including the zloty. However, the Polish currency was also losing against the forint, which was the strongest since June 19th. The PLN/HUF is below 70, which could suggest going towards its minimum from February. This could wear-off the zloty within the other currency pairs as well.

According to our previous expectations, the largest fluctuations were observed on the USD/PLN today. The initial wear-off of the dollar due to the news of Trump’s potential victory, took the pair to the level of 3.85, which was its lowest level in one month. However, the dollar’s strengthening within the following hours caused the USD/PLN to go to the level of 3.94 PLN.

The other currency pairs wore-off a swell. The franc is above the level of 4.03, which is its highest since August 2nd. The EUR/PLN was moving within the range of 4.34 – 4.35.

The Monetary Policy Council left interest rates unchanged today, which was consistent with expectations. This decision had a minor impact on the zloty, taking into the consideration the American presidential elections. At 16.00 (4.00 PM), the NBP published its commentary of this decision, which also contained the Council’s forecasts of inflation, as well as of the GDP growth, in consistency with the NECMOD model.

There is a 50% likelihood that inflation will move within the range of negative 0.7% - negative 0.6% in 2016 and within the range of 0.5% to 2% in 2017 (forecasts from July assumed the range of negative 0.9% - negative 0.3% for 2016 and the range of 0.3% - 2.2% for 2017.) There is also a 50% likelihood that the year on year GDP growth will be within the range of 2.5% - 3.4% in 2016 (against the range of 2.6% - 3.8% in the previous forecast) and within the range of 2.6% - 4.5% in 2017 (against the range of 2.4% - 4.5% in forecasts from July). The Council mostly explained a lower GDP growth with a lower receptivity of the EU resources. The MPC assumes that inflation will remain at a negative level this year, because of a low increase in prices abroad, as well as a negative demand gap in Poland.

Tomorrow’s events

At 10.00 AM, the International Energy Agency will publish its monthly report regarding the oil market. This consists of description of the current situation, as well as the future projections. History shows that this report has been causing significant fluctuations in the oil quotations, because it gives investors clues regarding oil’s demand and supply. Currently, the WTI oil price is slightly below the level from before the OPEC agreement in Algiers.

Tomorrow at 14.30 (2.30 PM), the American Labor Department will publish the data regarding last week’s jobless claims. The market consensus assumes that this index will be at the level of 260k. Last week, jobless claims data was worse than expected (265k vs 258k) and achieved its highest level since the beginning of August.

Even though these levels remain historically low (the lowest in four decades), three previous readings were worse than the market consensus. The number of jobless claims increased by approximately 20k since the beginning of October. If the data is slightly worse than the consensus, negative reaction on the dollar should be limited. However, if the reading is near 300k, this could wear-off the dollar by a slight limit in the likelihood of rate hikes in December.