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Again positive surprise from the USA (Afternoon analysis 7.02.2020)

7 Feb 2020 15:19|Bartosz Grejner

The US labour market remains strong: both employment and average wages (year-on-year) are rising above economists' expectations. Growing disproportions between the condition of the US and eurozone economies may strengthen the dollar. The zloty is in a downward trend: the EUR/PLN is above 4.29 and the USD/PLN is above 3.90.

Good start of new year across the pond

While waiting for the report on the US labour market for January, the dollar gradually appreciated. The Bloomberg dollar index (which also includes the currencies of emerging countries, excluding the main ones) rose to nearly 1207 points, reaching its highest level since December 2nd last year even before the publication of the US Department of Labor report. The appreciation has been progressing since the beginning of this year, although today it may be supported by slightly weaker data from the eurozone economy, which increase supply pressure on the euro.

Contrary to PMI's January survey data, which may have presented a slightly better picture of the economy and expectations towards the eurozone, the hard data on industrial production from Germany and France are slightly cooling down hopes for a rapid recovery. It should also be assumed that the eurozone's economy may be negatively affected by the present situation associated with the Chinese virus.

The US labour market report for January can be considered as better than expected. Although the unemployment rate turned out to be slightly higher than expectations (3.6%), the increase in employment in the non-farm sector has already exceeded these expectations, reaching 225k, 60k above consensus. This reading is not as high as Wednesday's publication of the ADP institute (291 thousand), but it indicates a further upward trend.

The reading of average hourly wages can significantly influence inflation. The average wage increased by 3.1% year-on-year, i.e. by 0.1 percentage point above expectations, and the December data were also revised upward (to 3.0%). Although the month-on-month increase was slightly below expectations (0.2% vs the 0.3% consensus), the overall wage growth is also positive.

Does today's report change anything in the context of the Federal Reserve's interest rate decision? Probably not. The market may be pricing further rate cuts at a slightly lower level, but there is still no argument for changing rates. However, this report, like the rest of recent data, highlights the greater than expected disparity between the US and eurozone economies. As a result, a strengthening of the dollar in relation to the euro can be observed. Eventually, this may also affect the gradual weakening of the zloty over time, if slightly better data from the eurozone do not start to flow in.

The zloty basket was already weaker before the publication of the report from the USA. The EUR/PLN quotations exceeded 4.27 and the USD/PLN 3.90. Immediately after its publication, the changes were limited; the quotations of the EUR/USD changed little, which does not mean, however, that the strengthening of the dollar will not continue in the following hours or days. In such a scenario, the zloty, like other emerging countries' currencies, may be subject to increased supply pressures and depreciate against the main currencies.

Next week's preview

On Tuesday morning a series of data from the British economy will be published, including GDP growth, foreign trade and industrial production. At the time of publication (10:30 a.m.) we can expect a significant increase in pound fluctuations, which are already considerable throughout recent weeks.

On Wednesday, data on industrial production in the eurozone in December will be published. After today's poor data from Germany and France, little good can be expected from an aggregate reading for the whole region. However, if it shows a similar trend in the rest of the eurozone, the supply pressure on the euro may increase slightly, which could negatively affect the zloty.

For the dollar and currency market quotations there will be an important publication on Thursday - the US Consumer Inflation index (CPI) for January will be presented. Although this is not the Federal Reserve's preferred inflation reading (PCE), a core CPI reading may indicate price trends in the economy. A divergence with consensus (currently 2.2% year-on-year) may cause strong market fluctuations, especially with a higher reading, which could slightly increase the likelihood of monetary tightening. However, the current baseline scenario is that there will not interest rate changes in the US at least until the end of the year.

Friday will be a day when GDP data are known. Data on the pace of development of the economies in Q4 will be presented, including Germany and Poland, as well as aggregate data for the entire eurozone. Recently, the readings from the euro area have been mixed at best, which ultimately weakened the euro. Lower than expected GDP growth pace in Q4 may raise concerns about future economic growth, given that the virus outbreak from China is likely to have a negative impact on the economy, at least in Q1. If the data fail (Poland's GDP for the whole of 2019 was also lower than expected), the worsening sentiment in the market may weaken the PLN basket.

7 Feb 2020 15:19|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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