Afternoon analysis 29.11.2016

Revision of the American GDP growth from 2.9% to 3.2% was mainly caused by consumer expenses. Investors no longer believe in the Polish currency.

Positive information for the American economy

According to the latest data from the Bureau of Economic Analysis, the American GDP growth for the third quarter was at the level of 3.2% QoQ (annualized). This is positive for the American currency, as well as for the dollar, because the first reading from October 28th (2.9%) received an enthusiastic feedback from investors. This is because the GDP growth was better than expected (2.6%). Moreover, this result was the highest since the second quarter of 2015. Growth was at the level of 1.6% in comparison to the third quarter of 2015, as well as 0.3% higher than in the previous quarter.

The revision was mostly caused by higher consumer expenses. This index increased by 2.8% QoQ in the third quarter against the 2.1% growth, which appeared in the initial reading at the end of October. This growth was partially limited by a negative revision of foreign investments. Export of goods and services increased significantly as well ((10.1% QoQ (2% YoY) vs 1.8% QoQ in the previous quarter)). Moreover, an import of goods and services increased by 2.1% QoQ, which was also a 1.9% increase in comparison to the second quarter. As a result, the net export added 0.87% to the general growth (3.2%).

Investments continue to burden the GDP growth. This index decreased by 0.9% QoQ and by 2.9% YoY. However, it was at a relatively high level over the past few years because of investments related to slate oil mining. When the prices went down below 30 dollars per barrel, production appeared to be unprofitable for the majority of companies. Thus, the resulting decreasing investments.

Investors hope that this factor will be increased after the election of the new American President. This could contribute to a higher economic growth, as well as a higher inflation, which would cause interest rates to become higher. This is positive information for the dollar. The EUR/USD is currently near the level of 1.06, the USD/JPY is at the level of 113 and the dollar index is above 101.

Supply pressure on the zloty

Recently, investors haven’t had too many arguments in favor of buying Polish currency. Both internal and external information has been unfavorable for the zloty. This situation remains the same today. A stronger dollar caused the depreciation trend on the zloty to be sustained.

The euro costs 4.44 PLN. The zloty’s weakness, combined with a stronger pound (due to positive data regarding mortgage loans), caused the British currency to reach the level of 5.23 PLN. This is the upper limit of the range, which has been observed during the past two weeks. The dollar is currently 0.03 PLN away from its fourteen-year maximum and is at the level of 4.18 PLN.

Tomorrow’s events

Tomorrow at 11.00 AM, Eurostat will present the CPI data from the euro zone for November. This index has been increasing since mid-2016 (from negative 0.1% YoY in May to positive 0.5% YoY in October). The market expects this trend to be continued in November as well, and the growth will be at the level of 0.6% YoY. This would be the highest reading since March 2014. Increasing oil prices may have contributed to inflation growth in the past few months. A sustained inflation upper trend could support the euro. On the other hand, the future inflation will be determined by the situation regarding OPEC. The oil production limit should support inflation growth in the euro zone.

At 2.15 PM, ADP will publish the data regarding employment in the American private sector for November. The data from October was disappointing (147k vs 165k), as well as was the lowest since January 2014. This year, there were only two months in which the growth was above 200k. However, we need to emphasize that historically this data has been relatively volatile. Eventually, the reading within the range of 150k-200k should have a minor impact on the dollar. This is due to the fact that is the range of the market expectations. The market consensus for November is at the level of 165k.

At 2.30 PM, the Bureau of Economic Analysis will publish the PCE inflation data for October. This index is important, because the Federal Reserve uses it as reference point regarding prices in the American economy in its forecast. Moreover, it has been gradually increasing for more than a year. Taking into consideration that interest rates will be raised in December, the market is beginning to estimate the future rate hikes. Therefore, we may expect relatively large fluctuations on the currencies after this reading.

Tomorrow, the OPEC meeting will be held in Vienna. At the end of September, the Cartel announced in Algiers that an initial agreement regarding the oil production limit to the range of 32.5 million – 33 million barrels per day has been achieved. The details of it were to be revealed tomorrow. In order for this agreement to impact the oil market, Russia would have to participate. However, press agencies have been informing for the past few days that the OPEC countries wish to achieve an agreement within the Cartel first and then make offers to the outside countries.

Even though the decision from OPEC is not directly related to the currency market, it has a significant impact on it. This is mostly because the oil price is expressed in the American dollars, which is the currency of the majority of the international trade exchange. Higher oil prices (in the case of achieving an agreement) will most likely cause inflation to grow. This could strengthen the dollar because of expectations regarding higher interest rates in the future. Moreover, this could increase the profitability of the American treasury bonds. This would lead to a similar situation as the one from shortly after the American presidential elections, when the emerging market currencies (including the zloty) were losing value significantly. However, the scale of the agreement within OPEC, as well as its impact on the currencies, will be definitely smaller than in the case of Trump’s victory.