Afternoon analysis 14.04.2017

The dollar was lower due to inflation and retail sales data missing expectations. The Polish currency slightly strengthened – the impact of the US data was limited mainly to USD/PLN.

Weak data from the US

Today’s volatility was fairly low (due to most markets being closed) until the scheduled US inflation data were published. A report on consumer inflation (CPI) by the Bureau of Labor Statistics (BLS) showed that inflation was 2.4% YOY in March, which was lower than both expectations (2.7%) and February’s reading (2.6%). The more important core CPI index failed to meet expectations as well – a 2% YOY price increase was 0.3 percentage points below market consensus and 0.2 percentage points lower than in February. That was also the lowest level for this index since November 2015.

At the same time (14.30 CET), the Census Bureau’s data on retail sales showed a decrease by 0.2% MOM (-0.1% was expected). The index without the fairly volatile automobile and fuel prices remained the same as in the previous month, even though a 0.1% increase was the market consensus. The data on retail sales was only just below expectations so the inflation data had a greater impact on the dollar. The visibly lower March reading could decrease the probability of future rate increases by the Fed. However, let’s not forget that in the case of the US economy, the PCE inflation data is relatively more significant than CPI, as the Federal Reserve uses it for future inflation projections.

The American currency lost some value after both reports. The biggest drop was in relation to the Japanese yen. The USD/JPY dropped by as much as 0.5%, deepening the 5-month lows. This was also due to a slightly stronger yen today – the Ministry of Trade, Economy and Industry in Japan revised February’s growth in the industry sector from 2% to 3.2% MOM. The dollar weakened in relation to the euro as well – the EUR/USD went up from about 1.0614 up to 1.063 around 15.00 CET.

Stable zloty

Holiday trading was noticeable in the case of the Polish currency. The zloty has gained in relation to the main currencies, even though the increase in value was marginal and the trading range was fairly limited. As expected, the impact of the US data (mentioned above) was limited mainly to the dollar-zloty relation. The USD/PLN fell by around 0.25% and tested the 3.99 boundary. Taking into consideration that the US inflation data failed expectations substantially, the reaction was very restrained.

Next week’s preview

Next week could prove crucial for the Polish currency. The Polish Central Statistical Office (GUS) will publish data on Wednesday regarding the change in average wages and employment in the corporate sector in March. Wages increased in the two first months of 2017 by 4.3% and 4% in January and February respectively. The market consensus points to an increase of 4.3% YOY. The first two months were also positive in terms of employment in the sector. In January, it was up by 4.5% and in the next month by 4.6%, which was the highest growth rate in over 8 years. The median of market expectations suggest this rate will be maintained in March as well.

On Thursday, GUS will also report the March level of industrial production, retail sales and the producer price index (PPI). An increase with regard to the previous month is expected in all three cases. The zloty has appreciated in recent weeks mainly due to a positive sentiment towards emerging market currencies, despite a dovish Monetary Policy Committee stance, which in theory could weaken the Polish currency.

The data mentioned above could, therefore, play an important role for zloty valuation should they deviate from the consensus – weaker data could cause the zloty to lose value. The sentiment towards emerging market currencies has lately been playing a deciding role in the valuation of the zloty. However, the data mentioned above are influential enough to increase its volatility, if they deviate from the consensus.