Daily analysis 02.11.2015

Slightly better final PMI from the eurozone decreases fears about manufacturing conditions in the following months. An interview with Williams. Erdogan AKP regains power in Turkey. Comments from Kowalczyk and Gowin on the budget. Polish PMI above market consensus.

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

• 14.00: Preliminary CPI reading from Poland (survey: +0.2% m/m, minus 0.7% y/y)
• 16.00: Manufacturing ISM from the US (survey: 50 points for October)

Eurozone PMIs and comments from Williams

The EUR/USD has been fairly stable this morning and is quoted around 1.10. There were slightly better PMI manufacturing readings from the eurozone (final: 52.3; preliminary: 52.0). Markit also noted some improvement in export, which decreases fears about the demand from China and other EM economies. On the other hand, the figures are not strong enough to change the ECB view regarding the monetary policy.

The other side of the EUR/USD pair – the dollar, is also not prone to significant moves. Comments from John Williams in the presentation for the Brookings Institution didn't mention the current monetary policy conditions, but on Friday afternoon the San Francisco Fed president talked with the Associated Press (AP).

He told the AP that in the recent weeks volatility decreased and the uncertainty of risks is lower. Williams also noted that there had been many comments since the last FOMC meeting pushing the hike towards the next year. Changes in the October statement were supposed to draw attention to the fact that “December is very much a live meeting”. It means that Williams, who is close to the Fed's consensus would like to tighten the monetary policy if the macroeconomic data doesn't worsen.

AKP takes all. Lira markedly stronger

The AKP victory finishes the election campaign which lasted for around half a year in Turkey. During June's voting, the presidential Erdogan party, which has ruled for the last 12 years, didn't get the majority and the coalition talks failed to meet consensus. As a result, an early election was called. This time the election gave the AKP around 315 out of 560 seats in parliament, which allows it to govern.

Turkish lira investors cheered the AKP victory for the following reasons. Firstly, it ends the political uncertainty and secondly the Erdogan party didn't get enough votes to change the constitution. It is also worth noting that Ankara still has to deal with many problems – an unstable geopolitical environment and mediocre economy.

Turkey has to deal with a high current account deficit which tops almost 6% of the GDP. It means that Ankara needs significant external financing. Additionally, the country has problems with high inflation and foreign investors are concerned with the central bank’s independence.

In the short term, however, it is expected that the lira may remain stronger and there is a low probability that the USD/TRY will test the 3.00 level again. In the following months, it is crucial how the government will deal with the economy and geopolitical issues. There is a higher chance that the lira will return to the depreciation trend, especially to the dollar, not only due to local issues but also regarding the monetary tightening in the US.

The foreign market in a few sentences

The neutral rate on the EUR/USD is currently around 1.10. Today's ISM publication would be important for the dollar. If the manufacturing increases towards 51-52 points it would be positive for the dollar. On the other hand, if the publication fails to meet expectations around 50 points it would put pressure on the US currency. In our opinion, there is a higher chance that the first scenario turns out to be true due to solid Chicago PMI and the preliminary Markit PMI. It may even push the EUR/USD towards the 1.0950 level.

Politics and PMI

Before the European capital market opened foreign news outlets were reporting comments from MP Gowin for daily newspaper “Rzeczpospolita” that “a few billion more on the deficit would not be a problem”. On the other hand, in an interview for PAP, MP Kowalczyk kept his promise not to increase the budget deficit. Additionally, according to Kowalczyk the new finance minister will be announced this week. It is getting clearer that some uncertainty regarding the next budget will weigh on the market for the next several days but on the other hand there is a higher chance that the new government would rather withdraw from earlier promises than risk a budget deficit, which is too high.

Some positive news came from the most recent PMI reading. The leading indicator for Polish manufacturing published by Markit rose to 52.2 points, which is the highest reading since July. It is positive that both export orders and production rose. Moreover, Trevor Balchin, senior Markit economist notes that the job market is still in good shape and the 27-month-long trend of rising employment is the longest since 1998.

Today the market will observe the flash October inflation reading. If the data remains close to the market consensus, around minus 0.7% y/y, the EUR/PLN should stay close to the 4.25 level. Also the franc should not significantly deviate from the 3.90 level.

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

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