Afternoon analysis 22.11.2016

Orders within the British industry were better than expected. However, comments regarding Brexit from the European politicians wore-off the pound. Slightly better sentiment strengthened the Polish currency.

Relatively positive data, but pound is under pressure

In the November report from the Confederation of the British Industry regarding orders, 23% of surveyed producers have quoted positive data, whereas 23% have reported negative data. This leaves us with the balance at the level of negative 9, which is above the market consensus (negative 17 in October). Moreover, this is this index’s highest result since June. Last time this index was at positive level was in March 2015.

Surveyed entrepreneurs indicated that industrial production (in quantitative interpretation) was increasing, even though its pace was slightly lower than it was during the past three months. It appeared that 28% of surveyed have indicated growth in this period and 24% have indicated decline. On the other hand, producers are expecting a strong Quarter over Quarter production increase (38% vs 15%, which gives a 24% balance – the highest since February 2015).

The market also expects the highest increase in prices since January 2014, which would mainly be caused by the overvalued pound. This may impact inflation for the last quarter of 2016. However, this may not be favorable for the pound, taking into consideration announcements from the British Central Bank, regarding tolerance towards higher inflation. Higher goods prices would also limit consumption. This would translate to lower economic growth. Combination of higher inflation and lower economic growth, may cause stagflation in the British economy, which could complicate the Brexit process.

Today, the pound wore-off after statements from the European politicians, who have criticized the British Prime Minister Theresa May for the lack of preparation. According to Bloombert, the Slovakian Prime Minister Robert Fico claimed that, the United Kingdom doesn’t know what it wants. Manfred Weber, member of the European Parliament demanded that Theresa May would make a clear offer, because there is no new information regarding the British government’s plans regarding Brexit. These comments caused the pound to overvalue and after yesterday’s strengthening against the dollar (1.25), it went down near the level of 1.24.

Zloty is slightly stronger

This afternoon, the value of the Polish currency remained slightly stronger in comparison to yesterday’s closing. The zloty was gaining relatively much against the pound, which was the result of the British currency’s global wear-off. At 4.00 PM, the pound was at the level of approximately 5.18 PLN, which was 0.05 PLN less than during its peaks from yesterday.

The American currency began to gain value since noon. The dollar index has yet again crossed the level of 101. Therefore, the dollar reached the level of approximately 4.17 PLN (0.02 PLN more than this morning). The franc, as well as the euro, remained at the same level in comparison to this morning (4.12 PLN and 4.42 PLN, respectively).

Tomorrow’s events

Tomorrow, Markit will publish industrial PMI for several of regions, including Germany, the euro zone and the USA. At 9.30 AM, we will know the PMI for the German economy. This index was increasing recently (from 50.5 to 55 between February and October) and reached its highest level since January 2014. Expectations place the reading for November near the previous reading and are at the level of 54.8. Regardless of the previous negative industrial production reading (which is relatively volatile), trust indexes (Ifo, Sentix, GfK) are showing that sentiment in the German economy is positive. This should translate to relatively positive PMI readings.

Increasing PMI in Germany was recently a fuel for growth of industry within the euro zone. This index reached the level of 51.2 in February, only to increase to the level of 53.5 (the highest since January 2014) in October. The market consensus assumes that this reading will be at the level of 53.3. Markit will publish the euro zone data thirty minutes after publication of the German data. Therefore, there is a large likelihood that the German data will give investors a hint regarding the result from the euro zone. If the German PMI is slightly higher than expected, this would determine a higher level for the euro zone, as well as strengthen the euro.

At 10.00 AM, Markit will publish services PMI for the euro zone. This index has been in depreciation trend since December 2015 (54.2). In September, it reached the level of 52.2, which was the lowest since December 2014. However, the index reached the level of 52.8 in October, which was the same result as in August. The expected result for November is at the level of 53.0. This would be the highest reading since May. Another positive result for this index would be an attempt to change the above mentioned negative trend. This would also mean that the euro zone’s services sector is in a better shape.

At 3.45 PM, Markit will publish the American industrial PMI for November. The market expects this index to remain unchanged in comparison to the past month (53.4).The reading from October showed a large growth in comparison to September (53.4 and 51.5, respectively). At the same time, this was the best result since October 2015. However, the American industrial ISM is more significant for investors. Therefore, reactions regarding the PMI will most likely be relatively limited. Only a strong deflection of this index would cause a more serious reaction on the dollar. Moreover, this would suggest a similar trend for ISM (this index will be published in approximately two weeks.) The American currency can be sensitive to the economic data. This is taking into consideration the dollar’s growth after the presidential elections, as well as before the forthcoming FOMC meeting, on which the Fed will most likely raise interest rates.