Afternoon analysis 17.11.2017

October’s data point to the highest increase in Poles’ earnings in over 5.5 years, which could increase the likelihood of earlier monetary tightening. The dollar traded in a narrow range, however, better-than-expected data from the real estate sector could support its value.

Earnings in Poland above expectations

The growth rate of average earnings in the Polish corporate sector hit 5.5-year highs in August with a reading of 6.6% year-on-year. The following month it was 6.0% and the market consensus pointed towards an increase of 6.5%. However, the Polish Central Statistical Office said today that the average earnings increased by 7.4% compared to October 2016 and reached 4574 PLN a month. It also meant an increase of 2.4% compared to September.

The above data could reignite speculation about a possible interest rate increase even before the end of 2018, due to higher wage pressure on inflation. It could be positive for the zloty in terms of today’s trading. The Polish currency was slightly stronger even before the aforementioned publication – the EUR/PLN pair was at approx. 4.2350. The zloty gained about 0.3% on the dollar and the pound, and also pared some of the losses to the Swiss franc sustained earlier today.

If the market sentiment doesn’t deteriorate during the afternoon session, the Polish currency could slightly appreciate. In such a scenario, the EUR/PLN could test the 4.23 level and CHF/PLN move closer to today’s lows.

Minor changes in the dollar’s value

The dollar was still somewhat lower than yesterday, however, an improvement in its valuation could be observed. Improving sentiment on the market (relative to the early trade today) helped as well. The dollar index (DXY) increased from 93.5 points in the morning to approx. 93.8 pts. Also, the EUR/USD pair after rising above the 1.18 level gradually fell below it.

The US currency could be supported by the data published today from the real estate sector, which markedly exceeded market expectations. Building permits increased by 5.9% month-on-month in October and housing starts by 13.7%, while the median of market expectations pointed towards a growth rate of 2% and 5.6% respectively. The number if issued permits grew to the highest level in slightly over two years, while building permits were at their highest since February.

After the publication of this data, the EUR/USD pair moved towards 1.1770. However, the probability of the dollar significantly appreciating is rather limited due to the uncertainty associated with the Senate vote on the tax bill. The main currency pair should then move in the range of 1.1760 – 1.1820, as seen during today’s session.

Next week’s preview

The first day of next week could already prove vital for the zloty. At 2 p.m., the Polish Central Statistical Office will publish data on industrial output and retail sales in October. The latter remains the engine to the Polish recent rapid economic growth. Between July and September its growth rate even increased (in June it was 6% year-on-year whereas in September it was 8.6%). The median of market expectations points toward an increase in retail sales by 8.2% compared to October 2016.

The industrial output data, however, might be more important. A low base from 2016 could cause this year’s remaining readings to be relatively high. The market consensus assumes a growth rate of 10.4% year-on-year. Such an increase, with a retail sales reading between 7.5% and 9%, could increase the likelihood of sustaining the high growth rate of the Polish GDP in Q4 and, in effect, boost the zloty. In such a scenario, the EUR/PLN could move towards the lower boundary of the last month trading, i.e. 4.22.

Thanksgiving will be on Thursday, so lower liquidity could be observed (due to the absence of some US investors). After that day, the Senate will probably vote on the tax reform bill, which could cause an increased level of volatility in the currency market, should the vote happen on Friday during the session. If the Republicans manage to pass the bill, which would mean lower corporate taxes in 2018, the dollar could markedly gain. This could happen at the expense of emerging markets currencies, including the zloty, which could lose value due to a fast appreciating dollar.