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Afternoon analysis 30.11.2017

30 Nov 2017 15:38|Bartosz Grejner

The awaited reading of PCE inflation in the USA was in line with expectations. The US currency is waiting for reports on the US Tax Act. The zloty has been stronger after higher than expected inflation data.

Inflation in the USA in line with expectations

After testing the 1.18 boundary in the morning, the main currency pair's quotations returned to 1.185 (almost to the same level observed yesterday). The data on PCE inflation in the USA for October, which was published today by the BEA, will probably not help the US currency quotations. It is a type of inflation that the Federal Reserve (Fed) takes into account when making inflation projections or making decisions about interest rate levels.

Core inflation (excluding energy and food prices) proved to be in line with expectations and in October amounted to 1.4% in annual terms similar to a month ago, while the headline index (including all prices) fell from 1.7% to 1.6%. These levels are still strongly below the Fed's inflation target and are unlikely to increase the possibility of rate hikes next year in the US. Therefore, the impact on the dollar should be limited - around 3.00 p.m., the EUR/USD quotations have risen to approx. 1.187.

However, the vote in the Senate on the tax system reform, which can take place today, may have a significant impact on the US currency quotations. Nevertheless, it is difficult to say in which direction the dollar's quotations will go, as the details of the Republican senators' plan (CIT rates and the moment of their introduction are still unknown).

Stronger zloty

November's preliminary data by the Polish Central Statistical Office (GUS) on consumer inflation was 2.5% in comparison to November last year, compared to 2.1% a month ago. At the same time, it was the highest reading in nearly 5 years. Moreover, in comparison with the previous month, average prices increased significantly for the second consecutive month by 0.5%. Although the preliminary data means that there is no breakdown by categories, it can be said with a high probability that food and fuel prices continued to rise significantly (through higher oil prices).

However, the core inflation is still unknown (excluding energy and food prices) for November, which better reflects the real trend of price changes in the economy, the zloty clearly gained after today's GUS publication. In relation to the franc, new records have been stated since mid-January 2015. The CHF/PLN price fell in the vicinity of approx. 3.585, while EUR/PLN decreased again close to 4.195 (around midday it was near to 4.21).

Higher than expected inflation by 0.2 percentage points may increase the likelihood of a broader discussion in the Monetary Policy Council about the need to tighten monetary policy even before the end of 2018. However, it seems that in order for this to happen, inflation would have to be at similarly high levels in the following months, with a simultaneous increasing core reading.

On the other hand, the absence of positive surprise in the PCE inflation data in the USA helped the Polish currency to maintain most of its earnings. Better than expected data could have an impact on the significant dollar's appreciation, which would probably have a negative impact on the Polish currency. The USD/PLN pair was located just under the 3.54 boundary around 3.00 p.m., i.e. about 0.3% lower than yesterday. The news from the Senate in the USA may be important news for the quotations of this pair as well as the zloty. If the dollar had strengthened significantly afterwards, the USD/PLN quotations could have increased significantly and the entire zloty basket could have depreciated slightly.

However, the fiscal stimulation by lower taxes would probably improve the market sentiment. In recent months, it has been a positive factor for the Polish currency and could limit the potential loss in relation to other currencies, especially in the context of today's better than expected GDP growth and inflation data.

Tomorrow's preview

At 9.00 a.m., the IHS Markit will publish November's PMI data of the Polish industrial sector. A month ago it dropped slightly from 53.7 pts to 53.4 pts (0.6 pts more were expected), although the perspectives for this sector was still positive according to the report. The median of market expectations again points to a reading of 54 pts. The index which is close to the consensus and still has a positive description will probably be relatively neutral for the zloty. The Polish currency currently reacts mainly to external factors, therefore, if the reading does not deviate significantly from the previous value and consensus, the impact of this publication on its quotation is likely to be limited.

Until 10.00 a.m., IHS Markit will also publish PMI data for the eurozone, Germany and France. However, this will be the second reading of this data, therefore, the probability of significant deviations from the initial values is limited.

November's PMI data for the UK industry sector may have a slightly greater impact on the pound (the only reading). Taking into account the recent pound's appreciation that was caused by reports of a possible agreement on a "Brexit account", the publication in the event of a significant deviation from the market consensus could increase the pound's volatility. The median of expectations forecasts the reading to be 56.5 points, i.e. 0.2 points more than a month ago. In the previous three months, the readings fluctuated in a relatively narrow range of 56 - 56.7 points and it seems that only a clear break from this range could cause a significant reaction on the pound.

ISM will present PMI data of the US industrial sector in November at 4 p.m for the US economy. In the context of the dollar, this is a relatively more important reading than that of IHS Markit (which will be published 15 minutes earlier). Two months ago, it reached 13-year-old highs (60.8 pts.), after which it fell to 58.7 pts in October, slightly below expectations of 59.5 pts. The market consensus is showing a further decrease to 58.4 pts in November. Although currently, the fate of the Tax Bill in the Senate has a much more significant impact on the dollar, higher than expected, in the vicinity of recent records the reading could further support the dollar.


30 Nov 2017 15:38|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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