Daily analysis 03.11.2017

Stabilisation on the dollar before the data from the US Department of Labor. After yesterday's meeting of the Bank of England, the pound continues to be under strong pressure despite better than expected PMI readings. The zloty reminded stable before the US publications.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

• 1:30 p.m.: Change in the payrolls in non-farm sector of the US economy (estimates: +313k),
• 1:30 p.m.: Change in average weekly wages in the US (estimates: +0.2% MOM and 2.7% YOY),
• 1:30 p.m.: Unemployment rate in the US (estimates: 4.2%),
• 3:00 p.m.: ISM index for the US service sector in October (estimates: 58.5 pts).

Still in consolidation

The morning EUR/USD quotations are around the 1.1650 limit, which shows that the end of the week brought the minor changes in the main currency pair, as the deviations from the current value were mostly in the range plus/minus of 50 pips. As early as Monday, we pointed out that a large number of expected reports from the US could paradoxically cause very limited fluctuations in the dollar.

Yesterday was not different, even though Jerome Powell was officially nominated for the future Federal Reserve President. However, the wide speculation on this choice has led to the situation in which this news announcement by the White House unchanged the US dollar. Similarly, the situation was with the presentation of the tax system reform by the Republicans, although in this case a slightly greater reaction could have been expected.

The plan, as initially introduced, includes a tax reduction for enterprises from 35% to 20%. Also, the number of tax thresholds for personal income tax paying is expected to decrease, and the Republicans claim that family earing the median will benefit from changes in personal income tax of about 1.3k USD a year. The plan is expected to not exceed an additional deficit of 1.5 trillion USD in the next decade. Why, then, has the dollar not gained in value as fiscal stimulus is expected in the coming years, which, given the growing economy as it is expected to be able to generate higher inflation and faster tightening of monetary policy?

The financial media has been rapidly informed that it may be difficult to implement changes from 2018. This is due to the fact that the changes for some enterprises do not have to be beneficial and there is expected a broad opposition to them. There will not be possible e.g. the deduction of the credit costs in full from tax obligations. Repatriation tax for corporations holding profits abroad has been reduced to a lower level than expected. At this point, the repatriation of these funds may, therefore, be more expensive and be less likely. This is a negative signal for the dollar. It seems that until the changes are officially effective, investors may remain sceptical about the chances of Congress voting new taxes (the health law has been remembered).

However, leaving aside the events of the coming weeks, it is worth noting that this early afternoon may bring significant volatility to the dollar. Apart from the increase in payrolls above 300k (high estimate is the result of a rebound in jobs connected with hurricanes), investors will analyze the change in the average wages level. The market consensus is 2.7% YOY and 0.2% MOM. Exceeding these values by at least 0.1 percentage points should be positively received by the market since wages should no longer be distorted upwards in October by weather elements. This could also result in the dollar's strengthening and taking into account those factors that have been ignored in recent days. In turn, published wage report below the line of expectations (2.6% and low, with monthly data close to zero) would reopen speculation on low inflationary pressures and would probably weaken the dollar.

The pound still under the pressure

The British currency is not able to pare some of yesterday's strong losses. The removal, by the Bank of England, of a part of the September announcement "about the possibility of tightening monetary policy to a greater extent than the market expects at present" has sent a signal to investors that the bar of another increase in interest rates is suspended very high. The pound in relation to the dollar or the zloty is more than 1.5% below yesterday's levels.

Even today's, much better than expected PMI data did not help the sterling. The index for service sector rose to 55.6 pts with estimates close to September's readings (53.6 pts). According to Chris Williamson, chief of economists at IHS Markit, data suggests a strong GDP growth of 0.5% QOQ in the fourth quarter. On the other hand, it is possible to perceive a decrease in the entrepreneurs' sentiment for the next 12 months as negative (it is below the long-term trend and the result from the first half of the year). The dovish statement from the Bank of England suggesting very limited pressure on interest rate increases (approx. 0.5 percentage points in the next 3 years) may weigh on GBP for a longer period of time.

The zloty waits for data from the US

The Polish currency, like the global market, is likely to wait for the US data. Changes in recent days on the EUR/PLN pair have been very limited and ranged from 4.23 to 4.24. Better than estimated, the US readings (especially in terms of wages) should lead to an increase in the yield of the US Treasury bonds and the dollar. This would be negative information not only for the zloty in relation to the USD, but also for the EUR. On the other hand, a weak reading could lower expectations for tightening monetary policy.

If the US Department of Labor publications were in line with expectations, the domestic market may start to position itself for next week's Polish MPC meeting. It may be a bit more hawkish than what we have seen in recent months. However, the final reaction to the zloty will depend on the expectations that will be built on since Monday.