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Daily analysis 01.04.2016

1 Apr 2016 13:09|Marcin Lipka

Sentiment on the currencies should be determined by the situation in the American labor market. Dudley shares the views from Janet Yellen’s recent testimony. The zloty takes advantage of the positive sentiment as well as better data from Poland.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.30: New workplaces in the American non-agricultural sector (estimations: positive 205k).
  • 14.30: Unemployment level in the USA (estimations: 4.9%).
  • 14.30: A change in the average hourly wage in the USA (estimations: positive 2.2% y/y).
  • 16.00: ISM reading for the American industry (estimations: 51.0 points).

American labor market

Just like they do each Friday, investors are anticipating the publication from the American labor market. However, it is worth noting that the reaction might be asymmetrical, due to the recent comments from the Federal Reserve members. This means that if the reading is weaker than expected, the dollar will be weakened further, as well. Moreover, the dollar's appreciation would be smaller, if the data exceeds economists' consensus.

According to the surveys presented by the Bloomberg agency, the American economy created 205k workplaces in March. Additionally, unemployment will remain at the level of 4.9%, and the average hourly wage increased by 2.2% y/y in the past month.

The amount of new workplaces was crucial information for the market for many years. However, we are currently experiencing anxieties from too low inflation. Thus, it is possible that wages will play a more significant role in estimating the condition of the labor market. This may happen if the other factors are near expectations.

It is possible that a visible weakening of the dollar may be caused by a slower than 0.1% increase in hourly wage. However, if the readings are at the level of 2.0% y/y or lower, it is possible that the EUR/USD could go to the area of 1.15.

Of course, the components of the report from the Labor Department will also be significant. In our opinion, publication of payrolls that are at the level of 250k (including revisions) could visibly strengthen the American currency. On the other hand, data within the range of 180k or less would be a further danger for the USD condition.

Looking at the distribution of forecasts from the particular economists, there is a big chance for a decrease in unemployment, possibly to the level of 4.8%. However, the market rarely focuses on this data. They are based on surveys from households, and the reading from a single month can contain many mistakes.

Dudley is clearly dovish

Yesterday we took note of the statement from William Dudley. His speech did not refer to the current monetary policy, but the Q & A session did. The chairman of the New York Fed department said at the beginning, “I agree with everything that Janet Yellen recently said.” However, his further statements confirmed the recent dovish suggestions from the Fed chairwoman, as well as the suggestions from Charles Evans.

Dudley took note that due to the uncertainty regarding the global economy, the matter of the hikes needs to be approached carefully. He also mentioned asymmetrical risks for the monetary policy, which is the matter that Charles Evans focused on. It is easier to withhold increasing inflation because the Fed can increase interest rates. However, it is more difficult to revive inflation since interest rates are already near zero.

Thus, we can expect that Dudley actually supports a significantly slower pace of the monetary tightening. Moreover, the chances for more than two hikes this year are very limited. The pressure on the dollar should continue. It should last until a clearer acceleration of an increase in inflation/salaries in the USA, and a longer period of worldwide stabilization.

Further strengthening of zloty

The zloty remains strong against the main currencies. Today, the EUR/PLN is testing the area of 4.23, and the USD/PLN is getting near the level of 3.70. Appreciation of the PLN is mainly caused by very mild global monetary conditions. This also includes the recent comments and decisions from the Fed. Another reason is a relatively good sentiment in the shares market.

Investors also recall the announcements from the MPC. The Polish national monetary authorities keep interest rates at an unchanged level. Moreover, the zloty is supported by a good reading of the PMI index today. It increased to its highest level in eight months, and reached the level of 53.8 points against expectations within the range of 52.5 points.

Markit (the company preparing the studies of the Polish companies) takes note of a quicker increase in production, and the amount of new orders from export. Moreover, PMI shows that, “in March the Polish companies hired more employees, and an increase in the level of employment was the fastest for twelve months.”

In the end, it is worth focusing on data about deficit in sector of government and self-government institutions for 2015, provided by the Polish Central Statistical Office (GUS). Initial information indicates that it was at the level of 2.5% of the GDP, which is definitely below the limit of 3%. This is a positive information, because it may take us further from the return to the procedure of excessive deficit. Thus, the new data is positive for the zloty. If today's readings from the USA are slightly below expectations, and the EUR/PLN remains near the current levels, the dollar may go below the limit of 3.70.

1 Apr 2016 13:09|Marcin Lipka

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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