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Afternoon analysis 23.11.2017

23 Nov 2017 15:14|Bartosz Grejner

Good condition of the Polish currency due to the weaker dollar and very good data from the eurozone. The EUR/USD rose above 1.1850 in the absence of US investors. The pound incurred some losses - better than expected November sales in the retail sector, although the following months may be slightly weaker.

Zloty gained due to better global sentiment

After falling to 4.2050 and determining the lowest level since mid-July, the EUR/PLN quotations were around 4.21 level today, while the USD/PLN exchange rate fell to approx. 3.55, reaching the lowest level since September 13th. The zloty also strengthened in relation to the franc or the pound.

The good condition of the Polish currency is still a result of the fall in the dollar's value combined with the improving condition of the eurozone's economy (today's PMI, German GDP). This supported the sentiment on the market, although after yesterday's negative closing on the market exchanges and almost a 3% drop on the Chinese market, it could have been expected that it would slightly deteriorate.

Today, the Polish Monetary Policy Council published a record of the discussions at the last monetary meeting. Most of its members continue to forecast that inflation will remain below the inflation target in the coming years. Therefore, "keeping interest rates at the current level favours the Polish economy to maintain a path of sustainable development".

Only (a smaller) number of members suggested the possibility to consider rate hikes in subsequent quarters if the data and forecasts indicate a more significant increase in inflationary pressures. However, this is what we have heard from previous statements and press conferences after Council meetings, therefore, the impact of today's minutes will be limited.

It is unlikely that there will be significant changes in the zloty’s value over the next hours due to, among others, an empty calendar of scheduled macroeconomic publications and Thanksgiving in the US. However, further dollar depreciation may also improve the zloty's valuation.

EUR/USD pair highest in a month

The euro's appreciation continued during today's session. While yesterday's inflation results were caused by a lower than expected inflation perspective in the US (both in the sentiment index of Michigan University and in the minutes from the last FOMC meeting), today Europe's data helped the euro.

The multi-year records of PMI indexes for the industrial and service sectors, as well as good components of the German GDP (including a high investment contribution), helped the euro to reach the highest value in relation to the dollar for just over a month. Today, the EUR/USD pair was traded close to 1.1860, but the minutes' publication after November's ECB meeting did not cause any significant price fluctuations.

The Council members, while recording its slight increase (in relation to the end of 2016), still point to subdued inflation in the eurozone. In their evaluation, the continuation of such trends will still require an accommodative monetary policy and an asset purchase program of 30 billion EUR per month until September 2018 or longer if necessary. In connection with Thanksgiving and the closed stock market in the USA (and as a result, lower liquidity), we are likely to observe consolidation around the current levels in the following hours.

Retail sales upwards, but prospects are already worse

After October's decline in retail sales volume, British retail companies recorded a rapid growth in November. According to the latest CBI survey data, 39% of the surveyed companies recorded an increase in sales, while only 13% recorded a decrease. Moreover, the annual price increase in that month was the strongest in over 26 years.

However, retail sellers expect a deterioration in business conditions in the next three months, for the fourth consecutive quarter. Also, employment in the sector decreased for the fourth quarter in a row. Persistent high price pressure due to the weak pound may still result in a reduction in employment, which may also have a negative impact on the UK's economic growth pace.

Today, a second reading of the GDP data was published.The UK economy grew according to both preliminary estimates and market consensus at the pace of 1.5% YOY and 0.4% YOY in Q3 compared to the previous quarter. On the other hand, business investment turned out to be worse than expected - its growth by 0.2% compared to Q2 was the lowest since the end of 2016, while expectations were twice as high; also, business investment increased by 0.5% in the previous quarter. The 1.3% annual growth was somewhat disappointing as well - the consensus suggested 1.4% and 2.5% was noted in the previous quarter.

The pound remained under slight pressure today, losing to most main currencies. In relation to the dollar, it maintained its value around the 1.33 level, although this was primarily a result of the global dollar's weakness. In the near future (until the end of the year), the British currency can first and foremost react to issues related to the Brexit negotiations and the bill that Britain would have to pay for it. Moving closer to a consensus between the government of Theresa May and EU negotiators on this issue could open the way for talks on a trade agreement. This could strengthen the pound as it would reduce the risk of a more chaotic exit from the EU ranks.

Tomorrow's preview

At 10:00 a.m., the Ifo Institute will present data on investor's confidence index in Germany. This index reached the highest level a month ago since its creation, i.e. since the reunification of Germany (116.7 points). The market consensus shows a similar reading in November (116.6 points). A good sentiment dominating in German companies has been in sync with both "hard" data from Europe's largest economy (better than expected GDP growth pace, a significant increase in manufacturing production and high level of investment) and "soft" data (as 81-month highs of the most recent manufacturing PMI index). The Ifo index will probably confirm these trends, which may contribute to improving the sentiment on the market. In effect, the condition of emerging countries currencies may strengthen, including the zloty.

At the same time, the Polish Central Statistical Office (GUS) will present data on the unemployment rate in the Polish economy in October. In the previous month it fell below 7% for the first time since February 1991 to 6.8%. The median of market expectations currently points to a further decrease of 0.2 percentage points, which would even the result for January of the mentioned year. Although this is not the most important measure of the Polish labour market and its impact on the zloty is likely to be limited, it may confirm the positive changes that have recently been observed in it.

At 3:45 p.m., the IHS Markit will publish preliminary PMI data for both industry and services for the US economy. The market consensus assumes a slight increase in both cases (0.2 points for industry and 0.3 points for services). In the context of these indexes for the US, readings from ISM are more important and have a greater influence on the dollar. The impact of data from IHS Markit may be less significant due to early closure in the US and the absence of some US investors.


23 Nov 2017 15:14|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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