Afternoon analysis 14.07.2017

The US data missed expectations - both the yields on government bonds and the dollar lost as a result. However, this scenario was positive for the Polish currency, which was the strongest to the dollar since October 2015.

No support for the dollar

Again, the dollar was under pressure after worse-than-expected inflation and retail sales' data were published. Although core inflation (CPI) in annual terms turned out to be in line with expectations and the previous reading (1.7% YOY), the main inflation rate dropped from 1.9% in May, to 1.6% in June (1.7%). Both indicators also proved to be below expectations when compared to the previous month.

Retail sales did not provide support to the dollar either - its decline in June by 0.2% on a monthly basis was worse than the market consensus, which assumed a growth of 0.1% - it was also the worst reading since February. Excluding the relatively variable vehicle sales, the core rate also decreased by 0.2%, while the expected result was 0.4 pp higher.

The dollar reacted negatively to this data. This is reflected in the recently observed trend of easing inflation pressure and further declining rate in the US. The EUR/USD pair rose before 3.00 p.m. to approx. 1.146, while yesterday its price was below the 1.14 level. It is likely that during the afternoon session today, when US investors will be more active, that the dollar may continue to lose value and the EUR/USD to move towards 1.15.

The dollar could be safeguarded by solid US industrial output data and a positive preliminary reading of the consumer confidence index from the University of Michigan, which we will learn today. Although, it seems that the readings would have to significantly exceed expectations after weaker-than-expected inflation and retail sales readings in order for the dollar not to lose value.

Good information for the zloty

This weak data from the US could mean a good scenario for the Polish currency, which was somewhat stronger today. The likelihood of keeping its recent appreciation and even further strengthening has increased as well. The strongest reaction today was seen in the USD/PLN pair, which rate fell even below the 3.68 level, setting the lowest exchange rate between the currencies since mid-October 2015.

The value of the Polish currency in the near term is dependent on the dollar - should it weaken even further, the entire zloty basket may gain. It is worth noting that the aforementioned weak US data significantly reduced the yields on the US Treasury bonds. Yields of 2-year Treasury bonds fell to the lowest level since almost a month (about 1.327%). Such a reaction also reduces the probability of capital outflow from the emerging markets, which as a result, may weaken the zloty.

Next week’s preview

On Monday, important data from the eurozone about June's consumer inflation (CPI) will be published. According to a preliminary reading, the inflation was 1.3% compared to the same month last year. Taking into account the recent rapid appreciation of the euro as a reaction to speculation about the closure of the asset purchase program from early next year, deviations from the above could cause a relatively large fluctuation. However, after yesterday's inflation data for the eurozone's largest economies, which did not diverge from the preliminary readings, the probability of a revision for the eurozone dropped significantly. Hence, the reading will probably have a neutral impact on the euro.

More important inflation data will come the next day. At 10.30 a.m. the Office of National Statistics (ONS) will share June's level of consumers’ inflation (market consensus points to 2.8% YOY). Also, in the case of the British central bank (Bank of England), there has been speculation about the need for a faster monetary tightening. Another high inflation reading (which has gradually been growing for a year and a half) could increase the chances of such a scenario. On the other hand, it could generate greater pressure on real Britons wages, which according to the ONS have also been declining (the rate of inflation has been higher than the growth rate of wages), which could limit their consumption, therefore negatively impacting the economic growth.

On the same day, the Polish Central Statistical Office (GUS) will also publish June's data on wages and employment in the corporate sector in Poland. In the past few months, employment has grown at the rate of 4.5% - 4.6%, while wages in this sector recorded the highest annual increase in May in over 5 years (5.4% YOY). Although this data may confirm a relatively positive trend currently taking place in the Polish labour market, the following day’s data will be more important for the valuation of the zloty.

GUS will publish data on the industrial output, retail sales and producers’ inflation (PPI) on Wednesday. The first two readings are especially important in the context of the economic growth in 2017, given that the Polish government assumed a GDP growth rate of 3.8% YOY in their budget and the National Bank of Poland forecast even 4% YOY.

The growth rate of retail sales will likely be maintained at a high level thanks to the Family 500+ child benefit program. However, its impact in the second half of 2017 will be gradually diminishing. The reverse situation should occur in the case of the industrial production - its very low level in the second half of 2016 should translate into an increase in pace in the back half of 2017. The market consensus currently assumes an increase to 3.8% in industrial output and 6.9% in retail sales on a yearly basis. Readings below these levels could negatively affect the Polish currency, although the risk of worse-than-expected data is relatively limited.