The euro extended yesterday's decline. Industrial production neutral for the Federal Reserve and the dollar. A better than expected labor market report did not help the zloty.
The US industrial production was in line with the forecast. It dropped 0.2 percent on a monthly basis. However, the prior month’s reading was revised up to minus 0.1 percent from the minus 0.4 percent that was reported initially. The report did not affect the dollar.
The latest reports concerning the US economy supported the tightening scenario before the end of the year. Although industry performance is average and retail sales reading was weak, the inflation growth surprised positively. In addition, the labor market performance is solid. Given the situation the recent weakness of the dollar will not last in the longer term.
Inflation in the eurozone was in line with the flash estimate. It dropped 0.1 percent in September. In the prior month inflation increased 0.1 percent. This means that the deflation is back. International trade also missed the expectations. The surplus dropped to 19.8 billion euros from 22.4 billion euros in the prior month. A weaker result than the 22.2 billion euros that was forecast.
Low inflation and reports pointing at a slowdown support speculations that the European Central Bank will expand its bond buying program. Although the possibility of additional tools has been broadly discussed by the ECB officials, yesterday's comment from Ewald Nowotny affected the euro.
Investors believe that a similar scenario is feasible. As a result, in spite of quite vague remarks from Nowotny (more on the issue in our previous commentary) the market reaction was significant. Especially in the situation, when the euro hit the highest level since the end of August.
The Polish labor market is in solid shape. The employment growth stood at 1 percent on a yearly basis. An identical result like in the prior month. And the wage growth exceeded the forecast. It increased to 4.1 percent from the previous year. A result better than the 3.4 percent that was projected.
Steady wage growth should please the Monetary Policy Council. It supports consumption and rebound in the inflation rate. In the context of the latest weak data on inflation this factor will ease pressure on the MPC to take additional actions to support inflation.
The zloty gained slightly after the reading. However, the move range was not significant in comparison with today's overall slide.
The zloty and other emerging market currencies were hit due to a rising probability that the Federal Reserve will eventually increase interest rates this year. This factor will negatively affect these currencies in the longer term. Moreover, the information on the incidents on the Turkish border increased aversion against risk assets.
The final week before the general elections in Poland will be determined by heightened political risk, but it is likely that this factor will only be transitory. However, if it turns out that there will not be a majority government, the impact of this factor may be stronger. Given the situation, the Polish currency may extend the prior week's slide.