Afternoon analysis 31.01.2017

31.01.2017 16:43|Marcin Lipka

Peter Navarro’s statements overvalue the dollar and boost the EUR/USD above 1.0750. Positive data from the euro zone. The zloty gained value due to the dollar’s depreciation. Record high budget deficit in Poland for 2016.

Navarro overvalues the dollar

The discussion regarding the American currency returns. The vision of the strong dollar is consistent with expectations from the majority of economists, who claim that fiscal stimulation will cause a more rapid monetary tightening and appreciate the dollar. However, President Donald Trump wishes to decrease the trade deficit, which may be difficult with a strong currency.

An increase of the EUR/USD this afternoon, has been caused by Peter Navarro’s commentary for The Financial Times. Chairman of the National Trade Council said that, Germany has been using significantly undervalued euro to take advantage of its American and European partners.

Similar statements have been appearing among economists for years. However, the euro has been undervalued due to a weak condition of the peripheral economies and the necessity of stimulating them by a mild monetary policy from the ECB, rather than due to a surplus on the German current account. Moreover, the German ECB representatives have been against the QE operation for many years. We also need to take note that the Germany economy is simply more competitive.

The EUR/USD growth was also caused by positive data from the euro zone. The GDP increased by 1.7% in 2016, which is by 0.1 percentage point better than expected. The American GDP was by 0.1 percentage point lower last year. Moreover, unemployment rate in the euro zone was at the level of 9.6%, which was its lowest level since mid-2009.

Theoretically, the market should be molded by the American macro data until the end of this week. ADP, the industrial ISM and the Federal Reserve meeting are strong signals. However, taking into consideration a strong impact of statements from Trump’s administration, they may push aside even so significant economic information.

Polish budget deficit

In today’s daily analysis, we took note that the GDP reading for 2016 should be interpreted negatively. More than one-third of the economic growth was a result of a positive supply contribution (1 percentage point out of 2.8%). Investments decreased by 5.5%, which is their largest decline in fourteen years. This means that a potential rebound in 2017 may not be as intense as expected. Reconstruction of investments may move on to the second half of 2017. Moreover, positive effects of consumption may begin to fade out. Each quarter will bring an increasing likelihood of a negative supply contribution.

Today, we also received an interesting, as well as disturbing information from the Ministry of Finance. According to Leszek Skiba, who was cited by the Polish Press Agency, the budget deficit for 2016 was at the level of 46.3 billion PLN. This is its largest value in history. What’s more surprising is that its value was at the level of 27 billion at the end of November. Even if we take into consideration that the income from the LTE auction was not included (approximately 10 billion), a deficit boost at the level of 10 billion in December may be surprising.

Moreover, according to Skiba, the public finance deficit was approximately 2.8-2.9%. This is also plenty, because the forecasts at the end of November were at the level of approximately 2.0% (approximately 2.5% excluding the LTE). We also can’t rule-out that if not for a slowdown in the public investments, the deficit would most likely exceed 3.0%, which is the EU limit. This is a negative information for the zloty, especially taking into consideration the forthcoming reviews of Poland’s loan credibility.

However, the zloty is not showing any reaction to the local data for the time being. Lower evaluation of the dollar reduced pressure on the emerging market currencies. The dollar is closer to the 4.00 level and the EUR/PLN is near the level of 4.32. However, the zloty’s appreciation potential should wear-off soon. Hence, it will be difficult to gain better results in the forthcoming days.



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