Afternoon analysis 19.10.2016

Data from the American real estate market had no impact on the dollar. Weaker readings from the Polish economy were unable to wear-off the zloty.

Mixed data from American real estate market

The Census Bureau indicated that there was a 6.3% m/m increase in building permits for September. This index is currently at the level of 1.225 million, against the estimated 1.165 million. This was the largest month on month increase, as well as the highest amount of building permits since November 2015. On the other hand, the American housing starts index went down by 9% m/m (currently at the level of 1.047 million). This result appeared to be definitely worse than the consensus at the level of a positive 2.9% (1.175 million). Moreover, this depreciation appeared to be the highest since March and the amount of housing starts was the lowest since March 2015.

Both indexes are quoting an appreciation trend. However, they still lack approximately one million each, to reach their levels from before the crisis. These extremely different readings had no impact on the dollar. They may also indicate measurement problems, which may cause the scale of their changes to be exaggerated. A relative calmness may also be explained by the fact that investors are anticipating the ECB decision regarding interest rates and QE tomorrow.

Slightly disappointing data from Polish economy

The Polish Central Statistical Office (GUS) revealed data, which appeared to be disappointing. Retail sales increased by 4.8% y/y in September (the consensus: 5.9%). Despite the data being slightly weaker, this result was the second best in 2016, next to the data from August (positive 5.6%). Industrial production increased by 3.2% y/y (the consensus: 3.5%) and was definitely lower than the record reading from August (positive 7.5%). The industrial processing increased by 4.1% y/y (and 10.5% m/m). However, construction and assembly production declined less than it was expected to (15.3% y/y vs 17.8% y/y). A weak annual reading was caused by the category entitled “production and supply of electricity, gas, steam and hot water.” This category experienced a 11.6% y/y decrease.

Reaction of the Polish currency was relatively positive. The euro, the franc and the dollar cost 4.31, 3.97 and 3.93, respectively. The zloty will most likely remain stable until the decision from the ECB tomorrow. Also, the press conference may cause an increased volatility of the Polish currency. Our base case scenario assumes a relatively dovish message from the ECB chairman, Mario Draghi. This should cause the return of the EUR/PLN below the level of 4.30.

Tomorrow’s events

At 10.30 AM, the British Office of National Statistics will publish the retail sales data for September. The market consensus assumes that its base case reading (excluding cars and fuel) will be at the level of 4.4% y/y (vs 5.9% for August) and 0.4% m/m (vs negative 0.2% for August). The recent positive data regarding the economic activity, substantiates the retail sales reading to be consistent (or even slightly above) the consensus. This would be positive for the pound, which worked-off a portion of its losses after the “flash crash” from October 7th.

This week’s most important market event will occur on Thursday. This is the decision from the European Central Bank regarding interest rate in the euro zone (currently, deposit rates are at the level of negative 0.4% and interest rates are at the level of 0%.) The market expects interest rates to remain unchanged. At 14.30 (2.30 PM), the press conference of the ECB chairman Mario Draghi will take place. Recently, press agencies have been informing of speculations regarding the limits in the quantitative easing program (QE). However, their significance was slightly dimmed by the previous ECB minutes, which didn’t contain anything concerning this matter. The recent inflation readings from Eurostat were relatively positive for the euro zone. This could be an argument for limits in the QE. However, their low level, slow growth pace and continuously distant inflation target (current 0.4% vs 2%) will most likely substantiate the scenario that the ECB will not limit the QE yet. What’s even more likely is that investors will receive information, whether the QE will be extended beyond March 2017 or not.

Tomorrow, we will also receive the data from the American economy. At 14.30 (2.30 PM), the American Labor Department will publish the weekly jobless claims. The market consensus assumes that this index will increase from 246k to 250k. However, we need to keep in mind that this level is still near this index’s forty-year minimum. Even though the results should not be significantly dissonant with the consensus, a larger change on the dollar would be caused by a worse reading, rather than by a better reading. This is because of how low the jobless claims index currently is.

At 14.30 (2.30 PM), we will also know the value of the Philadelphia Fed Index. This index estimates the general business sentiment in Philadelphia. The data from August was at the level of 12.8, which was this index’s highest level since May 2015. Currently, the consensus is at the level of 5.3. The past few days showed the EUR/USD near the 1.10 level. Positive data (near the consensus or better) combined with a relatively dovish attitude from the ECB chairman, would most likely strengthen the dollar and move the EUR/USD closer to the 1.09 level.