Afternoon analysis 12.01.2018

December's US core inflation was above expectations, two-year US Treasuries were the highest since September 2008, but the US dollar response was mixed. The zloty close to maintaining recently earned profits, if the US currency does not appreciate.

Inflation positively surprised

Today, December's consumer inflation (CPI) data for the US was published, it is probably the most important set of data. The headline index was in line with expectations, reaching 2.1% per year. The core reading excluding food and energy prices (probably the most crucial one) increased to 1.8% per year (0.1 of a percentage point higher than expected). Therefore, the core inflation level for October was levelled.

A reaction to high inflation was the higher than expected results of the US treasury bonds - the yield of two-year maturing bonds breached 2% for the first time since September 2008. EUR/USD quotations increased to 1.215, the highest rate since December 2014.

Increased volatility on the main currency pair quotations was observed, and around 3.00 p.m. it was close to 1.212. In most of the cases, this data supports dollar appreciation, however, due to its recent fluctuations, it is uncertain. The minutes published after the last ECB or surprising news on the CDU/CSU + SPD coalition in Germany supported the euro.

Although this weakens the dollar in a natural way, today's inflation data, as well as maintaining the yield on treasury bonds, may imply an increase but it may be relatively limited. The core inflation rate was not higher than 1.8% since April 2017. It is likely that only a subsequent reading (in January) above the current level could suggest an upward trend in inflation and strengthen the dollar.

USD/PLN near 3-year lows

The dollar cost 3.43 PLN due to its weakening and significant increases in the EUR/USD exchange rate. The dollar's price was close to the lowest level since December 2014. However, the globally stronger euro caused that the EUR/PLN rate stabilized near 4.17. Moreover, the euro's increase compared to the franc also caused decreases on the CHF/PLN pair, whose exchange rate fell by about 0.3% to 3.54 PLN.

A significant dollar depreciation led to the situation where the GBP/USD quotations rose to nearly 1.37 today, setting the highest price since the referendum outcome on Brexit (before the referendum, the exchange rate was 1.49). As a result, the pound's value in relation to the zloty also increased - the GBP/PLN quotations rose to about 4.71 today, although a level of 4.67 was observed at the beginning of the trading session.

The dollar's behaviour once again will be crucial for zloty trading. Very often, inflation data is supported by a drop in the EUR/USD exchange rate, which put negative pressure on the zloty. An increase in yields of the US Treasury bond may confirm such a scenario, although recently those two factors (the dollar quotations and yields behaviour) were not correlated well. If we do not observe dollar appreciation and the main currency pair depreciate (EUR/USD), the zloty should stabilize around current levels.

Next week’s preview

On Monday, at 2.00 p.m the Polish Central Statistical Office (GUS) will publish December's data on consumer inflation. Although the zloty's valuation has recently depended on the external factors (the dollar's fluctuations, market's sentiment), the data may be crucial for the zloty's quotations. This will be the second reading - preliminary data increased from 2.5% to 2% (compared to 2.1% expected).

Including in the data the categorisation helps in assessing the influence of the most volatile factors (energy, food). Moreover, it gives hints on the inflationary trend. At the same time, the National Bank of Poland (NBP) will release November's current account data. October's data was a positive surprise (surplus 575 million vs. 165 million euro) - the market consensus indicates positive balance at 165 million EUR level.

The zloty can appreciate if the aforementioned data positively surprises (somewhat better than consensus, less impact on the average price level by the most changeable factors). On Wednesday, wages and employment change data in the enterprise sector for December will be published. Employment has been growing in recent months at a stable 4.4% to 4.5% per year pace (consensus assumes 4.4% in December).

Wage growth accelerated at a pace of 7.4% year-on-year in October (the highest in almost 6 years). In November, it dropped to 6.5%, but the median expects it to grow to 7.1%. If the reading reached the higher level, it could result in a slightly higher inflationary pressure and further strengthen the zloty.

The very accommodative MPC message should still be considered as a crucial factor. Only a few months of a higher than expected inflation pace (especially core inflation) would be able to change the MPC members' message slightly.

Until it happens, the core scenario assumes leaving interest rates at an unchanged level until the end of 2018. In the case of weaker macroeconomic data, it could be extended until the beginning of 2019, as was suggested by Adam Glapiński (the MPC President) at the latest press conference.