Afternoon analysis 30.12.2016

The CPI inflation in Poland turned positive for the first time in nearly two and a half years. Very small capital transfers from the EU seen in the newest Poland’s Q3 current account data.

Good inflation data helped support the zloty

Central Statistical Office said today that the CPI inflation in December was 0.8% YoY and 0.7% in relation to November. It was the first time we’ve seen a positive inflation reading in Poland on a year-to-year basis. The preliminary December reading also exceeded expectations of 0.4% YoY and 0.1% MoM. In theory, this was good news for the Polish currency that was visibly weaker in recent days.

Złoty recovered some of its losses after midday in anticipation of the aforementioned inflation data. The EUR/PLN pair fell from 4.43 to 4.41. Zloty appreciated the most against the dollar – the relation USD to PLN relation was on the lowest level since 14th December. During the European trading day, the dollar cost ca. 4.18 – 4.19 PLN (during the Asian trading hours it cost even 4 gr less, as a result of the spike in EUR/USD).

The Polish currency’s reaction was limited, though. That was due to the stance of the Monetary Policy Committee and its chief who repeatedly stated that the MPC didn’t foresee raising interest rates before the beginning of 2018. However, if the rising above expectations inflation persists and the MPC members would more broadly express a possibility of a rate hike in 2017, it could support the recently weakened zloty. Taking into account that the European Central Bank’s monetary policy is expected to remain accommodative in 2017, the euro to zloty relation could permanently decrease below the 4.40 level.

The National Bank of Poland published today a report regarding the third quarter balance of payments. The current account was lower in this period by 15 bn PLN in comparison to the second quarter of 2016 and amounted to -9.46 bn PLN. However, it constituted a 1 bn PLN increase when comparing it to the similar period of 2015. The second quarter in a row of very low inflow of European funds to Poland also draws much attention. The balance of transfer with EU was positive, although it only at 1 bn PLN (capital transfer saw an inflow of a mere 0.4 bn PLN).

Next week’s preview

On Monday we’ll learn the December’s manufacturing PMI data, published by IHS Markit. In the middle of December, flash readings were published that pointed to over 5.5-year highs for the Euro Zone and nearly 3-year highs for the German economy.

The same day manufacturing PMI for the Polish economy will be published as well. After October’s disappointing reading of 50.2 (lowest level in two years), the index rose above expectations in November to 51.9. A good reading of this index could help the Polish currency which has remained relatively weak in recent days, independently of the global scenario. We shouldn’t expect much changes in the PMI data for the Euro Zone or Germany, though, as it’ll be a second reading.

The Tuesday’s ISM manufacturing index for the U.S. economy will certainly be an important event. This index has been on the rise each month starting August when it was 49.4. In November it reached 53.2 and neared 2-year highs. The market consensus currently points to a December reading of 53.7, which would be its highest value since January 2015.

Taking into account that this will probably be the first important news regarding the U.S. economy, it could add significant volatility to the dollar. We’ve been observing a slight weakening of the dollar in recent days – should the PMI data proved to be above consensus, we could expect an appreciation of the dollar towards recent highs.

The data regarding the US. labour market will probably be the most import event in the next week. On Wednesday ADP will publish the change in private non-farm employment. The data will presumably invoke more volatility in the market, although a reading in the range of 150k – 200k should be relatively neutral for the dollar (the consensus points to 170k; 216k in November).

However, the most important event of the next week will occur on Friday – that will be the U.S. Department of Labour’s data regarding the state of the labour market in December. We’ll learn the unemployment rate that dropped unexpectedly to 4.6% in November – the lowest level seen in over 9 years. The markets will also focus on the average hourly earning and change in private sector non-farm employment.

Considering that the improvement in the labour market was one of the reasons behind the recent interest rate hike by the Federal Reserve, the next Friday’s labour market data could be crucial for the dollar (and other indirectly other currencies) because they may set the course the dollar will take in the next few weeks.