Afternoon analysis 20.10.2015

Solid housing market data did not support the dollar. Comments from the Federal Reserve's members also were neutral to the US currency. The zloty dropped on the heightened political risk.

Today's report from the housing market was quite positive. The number of housing starts stood at 1.21 million in September. A result above the forecast. In that case, a weaker than expected reading on building permits was ignored. Overall, the report showed an ongoing expansion in the housing market, which supports the tightening scenario in the US.

Yesterday's speech of John Williams from the Fed supported the case for tightening. His view is that the labor market expansion is strong and the economy expansion in steady (more on the issue in our previous commentary). Today William Dudley and Jerome Powell spoke in public. However, their remarks were not regarding the monetary policy.

More importantly, Federal Reserve Chair Janet Yellen is also scheduled to speak today. The Fed Chief will make opening remarks during the Labor Department conference. Given the place of her speech, it is very likely she will touch the issue of the labor market situation. As a result, it may affect the markets.

Broad weakness of the zloty

The National Bank of Poland's report on the companies' situation confirmed that the third quarter was weak. However, the deterioration of the situation probably was only transitory.

Companies expect improvement in the fourth quarter in employment and sales. The NBP's report suggests that firms from almost every sector are planning to increase employment. However, lack of qualified workers is forcing companies to compete with higher wages. Companies are going to limit investment. In spite of that, the investment growth remains relatively robust. It is not the case in industrial sector.

Companies consider deflation as a positive situation. Due to low commodities prices it is easier to limit cost and keep high margins. However, companies are not going to cut prices.

The latest reports showed deterioration in the Polish economic landscape. As a result, it is positive that the fourth quarter may be stronger. All in all, positive signals from the NBP did not help the zloty. The Polish currency dropped under pressure of heightened political risk.

The latest comments from the financial institutions are clearly negative. Credit Agricole said that if the PiS wins (the party is leading in opinion polls), it will be a threat to the economic expansion. The GDP growth may drop 0.5 percentage point, if the party's program is realized. Moreover, the MPC will be pressured to cut interest rates. In that scenario, the zloty may decline. And BNP Paribas said that if the PiS wins, the autonomy of the central bank will be in threat.

Combined with the heightened risk aversion, the zloty posted broad decline. The Polish currency declined against all its major pairs. If the government is formed without an unnecessary delay after the elections, the political risk will diminish. As a result, the zloty may gain. However, given the coming tightening in the US, the appreciation potential is rather limited.