Afternoon analysis 09.12.2016

A weaker pound helps the British export: the October’s deficit in the balance of trade in goods is the lowest since July. The Polish currency is amongst the weakest today.

Relatively good information for the pound

Office for National Statistics (ONS) shared a report today in which it said that the balance of trade in goods with EU countries amounted to -8.1 bn pounds. That constituted a 0.5 bn increase in comparison to September. An even higher decrease of the trade deficit was noted with non-EU countries: it fell by 3.7 bn pounds (from -5.3 bn in September to -1.6 bn in October). It gave -9.7 bn pounds in total trade of goods, 4.1 bn less (deficit) than a month earlier. At the same time, it was the lowest deficit since July (deficit with non-EU countries was the lowest in over a year).

Month-over-month export rose in October by 8.7% (or 2.1 bn pounds) to a record level of 26.8 bn pounds. The biggest increase was observed in the export of machinery and transport equipment (by 0.6 bn) and also of material manufactures and chemicals (by 0.3 bn). In contrast, the import in October declined by 5.3% (or 2 bn pounds) to 36.5 bn pounds. There was a significant decrease in import of aircraft and ships (by 1 bn pounds in total) and material manufactures (by 0.4 bn pounds).

ONS published today, apart from the trade report, data regarding the construction output in October, which turned out to be relatively positive. Construction output grew by 0.7% in comparison to October 2015, while a 0.1% decrease was expected. However, last month’s data was quite considerably revised upwards – from 0.2% to 2.5% YoY. On a monthly basis, the output decrease by 0.6% (a gain of 0.2% was the consensus), but it was partially due to an upward revision of the September data from 0.3% to 0.9% MoM. The biggest gain in October (comparing to September) was observed in private housing (+0.4%) and non-housing Repair & Maintenance (+0.3%), which compensated a 0.2% decrease in housing R&M. The biggest decline was seen in infrastructure construction which dropped 0.5%. The private commercial sector decreased its output by 0.3%.

The Brexit issue has been weighing heavily on the pound sterling since late June, although, today’s data caused the British currency to post gains against most currencies – the euro, Swiss franc and yen among them. The GBP/USD was the testament to the strength of the pound today – the exchange rate was close to 1.26, around the same level as yesterday’s close, even though the dollar was significantly stronger today in relation to most currencies. USD/JPY exceeded 115 for the first time since 9th February and EUR/USD was around 1.0560. This resulted in the dollar index climbing to a level above 101.5, the highest since the start of the week (yesterday’s low was at 99.5).

Zloty weaker yet again

Zloty’s recovery from the beginning of the week turned out to be short-lived. The Polish currency was one of the weaker currencies today, even though yesterday’s ECB decision was positive for the currency. The negative sentiment towards it is most likely the upcoming FOMC meeting during which a decision regarding the level of interest rates will be made (as well as projections of 2017 rate hikes).

There is a worry that in the case of increasing the number of expected rate hikes in 2017 from two to three, there will be yet another outflow of capital from emerging market countries (including Poland), similar to what was observed after a new president was elected in the U.S. As a result, zloty has relatively limited appreciation power until Wednesday’s FOMC statement.

Monday’s preview

At 2.00 p.m. the Central Statistical Office will publish November’s CPI inflation data. It remained negative from July 2014. However, deflation has gradually been diminishing since March 2015 – in February that year it was -1.6% YoY and -0.2% in November this year. Last Wednesday CSO reported a flash estimate of the CPI inflation in November. The report said that prices didn’t change in November (in comparison to Nov 2015) and even increased 0.1% on a monthly basis.

Should the Monday data confirm this, it would mean the end of deflation in Poland for the first time in over two years. If this trend continues, this would be goods news for the country, whose economic growth could draw near the potential (growth). In theory, a more robust inflation growth could support the zloty. However, during the Wednesday’s press conference, Adam Glapiński (chief of Monetary Policy Council in Poland) admitted that the Council doesn’t expect to raise interest rates before 2018. Hence, the Polish currency could appreciate more if the inflation growth rate would be higher than in MPC projections.

After yesterday’s surprise decision of the European Central Bank regarding lowering the monthly asset purchase program from 80 to 60 bn euro beginning April 2017, the markets await yet another important (probably even more so) long anticipated event. The Federal Reserve of the U.S. will publish at 8.00 p.m. (Polish time, GMT+2) the current levels of interest rates. The market consensus expects the base rate to be raised by 25 bp. As this has been entirely predicted for some time now, greater attention will be focused on the optimal level of interest rates for the next year.

Currently, the median in Fed’s projections indicates two rate hikes by 50 bp in 2017. However, after electing a new president and his announcement regarding an increase in infrastructure spending, lowering the taxes and simplification of the financial regulations, inflations expectations significantly increased (which translated into higher yields on U.S. government bonds and a stronger dollar). Higher commodity prices (especially oil) contribute to higher expectations as well.

That could be good enough reasons for the median of 2017 rate hikes to increase to three. Particularly because in September 8 out of 17 Committee members opted for three (or more) rate hikes in the next year and that was even before the U.S. elections and higher inflation expectations. Consequently, there’s a high probability that the median of expected raises of the interest rate in 2017 will go up, which should in turn further strengthen the dollar.