Daily analysis 01.10.2015

The US stocks rebound and rumours on monetary easing both in Japan and China disturbed a negative outcome from the Asian economic readings. Weaker data from the domestic economy may fuel discussions on rate cuts and push the zloty lower.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30: Weekly jobless claims from the US (survey: 270k)
• 16.00: Manufacturing ISM from the US (survey: 50.6 points)

Weak data but high level of optimism

The US stock market finished the day with strong gains which markedly strengthened the US dollar. Additionally, the S&P 500 contracts started a further upside move during the Asian session. As a result, the EUR/USD dropped below 1.1150 at the beginning of the European trading day.

Weak economic data from Asia were not a reason to push stocks higher. Leading indicators from China's manufacturing still show a contraction in the sector. Also, the Japanese leading indicators suggest further economic deterioration in production.

Cited by the “Financial Times” senior analyst JPMorgan Masamichi Adachi claims that Japan might already be experiencing technical recession. He claims that after the GDP contraction in Q2 the economy is heading for another quarter of negative growth at a rate of 1% on an annualised basis.

It is also worth pointing out that besides the falling industrial indexes, the services sector is moving in the wrong direction. The services PMI compiled by Markit and Caixin dropped to 50.5 points from 51.5 points and was the lowest in 14 months. It may be contradictory to the theory that the Chinese tertiary sector in the economy may be fueling the economy.

Regarding the weaker readings it is worth asking a question about where the optimism comes from. It is mainly a result of speculations that such weak data might provoke the Bank of Japan to push for monetary stimulation as early as this month. It is also possible that China may further cut both the interest rates and reserve rate requirements. Some also claim that additional fiscal stimulus can be expected from Beijing especially if the incoming data fail to meet expectations.

How might the EUR/USD pair behave in such an environment? Fiscal and monetary stimulation from Asia should be bullish for the US currency as it decreases the odds for “hard landing” in China and will not disturb the Federal Reserve plans on monetary tightening. As a result, the EUR/USD should remain under pressure at least during the better equity sentiment.

On the other hand, when the optimism disappears we can see some moderate increases on the EUR/USD. But strong European currency appreciation is not probable because with much weaker economic reports the ECB would be more eager to increase/lengthen the QE operation which should be a much stronger signal for the euro move than unwinding the carry trade operations.

The foreign market in a few sentences

Today important data from US manufacturing is scheduled. During the recent months the ISM readings were deteriorating due to weaker export and worsening condition of the mining industry. Also taking into account the weak Chicago PMI readings and manufacturing payrolls reduction, it is possible that the ISM may even drop below the 50 mark. That would cause short term correction on the USD.

However, if the publication remains above the contraction/expansion line and turns out to be in line with economists expectations at 50.6, then the dollar rising scenario would not be significantly disturbed and the EUR/USD might even finish the week below 1.1100.

Another negative surprise from Poland

The condition of Polish manufacturing described by the PMI reading worsened again. The index dropped to 50.9 points, which was the lowest reading in 12 months. It is also worth noting that Markit which compiles data noted a decrease in export orders for the first time since October 2014. The other key components also look disappointing – production rose slightly and employment rose at the lowest level in 8 months.

Today's readings combined with deeper than expected deflation and negative retail sales might increase the expectations for further interest rate cuts despite the fact that the current MPC rules out such a scenario. However, most of the members will be changed at the beginning of the year and if the inflation and growth path will be pushed downwards in both November and March NBP macroeconomic projections, the cut might be possible at the end of the first quarter of 2016.

It is worth noting that the morning reading didn't push the zloty lower because it was published in a risk on sentiment on the global market. However, when the sentiment deteriorates the market may quickly push the EUR/PLN above the 4.25 mark.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: