Afternoon analysis 21.10.2016

Strong dollar is causing large fluctuations of oil quotations. The Russian minister of oil, Alexander Novak, sees the necessity of freezing the production. The Polish currency continues to lose value.

Large oil price fluctuations

Yesterday’s sudden strengthening of the dollar was one of the main reasons for the evaluation of oil by approximately 3%. Two days ago, we were observing an increase in prices, which was caused by higher than expected oil supplies (API and EIA). A new decline has been caused by today’s decrease of EUR/USD to the level of 1.087. This affected the WTI price, which went down from 51.02 to 50.22. Today, the oil quotations are very strongly dependent on large fluctuations on the EUR/USD.

More positive news for oil came from Alexander Novak. Bloomberg informed that the Russian minister of oil claimed that freezing oil production is still necessary. Novak is also expected to present certain solutions during his meeting with the Saudi Arabian minister of oil, Al-Falih. The meeting is scheduled for Sunday, and it will concern investments in the oil sector.

The WTI price remains above the level of 50 dollars per barrel. Despite the declines mentioned above, this is a positive sign for oil in the mid-term. This at least until the OPEC meeting in Vienna at the end of November, where the details regarding oil production limits will be discussed.

Weaker zloty

The EUR/USD is at its lowest level since the 10th of March (1.087). This also translates to the weakness of the Polish currency. Even though the weaker euro should be theoretically favorable for the zloty, the EUR/PLN went down to the level of 4.324. On the other hand, the dollar increased by more than 0.5% against the zloty (3.98).

Next week will be crucial for the evaluation of the EUR/USD, as well as for the USD/PLN. The data from the American economy should set a new direction of the dollar for the forthcoming period. If the readings are worse than expected, it’s possible that the EUR/USD would return to 1.10. However, if the macro data is better than estimated: the 1.05 level is possible (not observed since December 2015). Moreover, the dollar would cross the level of 4 PLN.

Monday’s events. Quarter GDP data from UK and USA

At 9.30 AM on Monday, Markit will publish the industrial and services PMI from the German economy for October. The market consensus estimates that the industrial index will be at the level of 54.3 (the same as one month ago) and that the services index will be at the level of 51.5 (by 0.6 higher than in September). Growth tendencies have been observed in the German PMI industrial sector since the year’s beginning. This index was at the level of 50.2 in January (the level of 50 separates progress from regress). On the other hand, the situation was quite the opposite in the services sector. The PMI reading from January was at the level of 55 and was gradually decreasing down to the level of 50.9 in September.

At 10.00 AM, Markit will publish the PMI data for the euro zone. Due to the fact that the German economy is the largest within the euro zone, its PMI will have a significant impact on the final reading. The market expects the industrial PMI to remain at the level of 52.6 and the services PMI to reach the level of 52.5.

At 15.45 (3.45 PM), Markit will also publish the American industrial PMI from the USA for October. The market consensus assumes that the result will be at the level of 52.3, against 51.5 last month. However, the ISM reading, which is scheduled for November 1st, is more significant for the American economy but the PMI readings may contain clues on what the ISM result will eventually be. The American PMI has been showing declining tendencies since August 2014. However, we have also been quoting higher values since the pit in May (50.5 in May vs 52.9 in July).

This data may be significant for the euro regarding its overvalue, which was caused by Draghi’s press conference on Thursday (the EUR/USD went to the 1.09 level). Positive PMI readings from Germany, as well as from the euro zone, could help the euro to work-off a portion of its losses. Taking into consideration the most recent data from Germany and the eurozone, this scenario is quite likely.

Next week, we will also know the data regarding the GDP growth in the United Kingdom (Thursday) and in the USA (Friday). The dollar and the pound can both be significantly susceptible to the macro data regarding recent events. Despite the Brexit decision, the British economy has recently been sending relatively positive signals. This could suggest that the GDP growth in the third quarter will be positive as well. On the other hand, the data regarding the American GDP could impact the decision regarding the rate hikes in December (the likelihood is currently estimated by the CME for approximately 68%.) This could also impact the dollar’s evaluation.