Daily analysis 04.03.2016

The American labor market is at the center of attention after yesterday's mixed readings of the ISM index from the services sector. Can changes in salaries create a bigger volatility than payrolls? The EUR/PLN returns to the area of 4.33, even though the quotations of the zloty are quite unstable.

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

• 14.30: A change in employment in the USA (estimations: positive 195k).
• 14.30: A change in the hourly wage in the USA (estimations: positive 2.5% y/y, and positive 0.2% m/m).
• 14.30: Unemployment rate in the USA (estimations: 4.9%).

Slight deterioration of sentiments

During the past 24 hours, we observed a clear wear off on the dollar. It was observed in relation to the euro and the pound. The entire basket of currencies lost approximately 0.7% to the USD. However, there were no clearer changes in the debt market and shares at that time.

This isolated move on the USD may suggest that the currency investors are more nervous than those investing in different assets, and they are clearly afraid of the publications from the United States. However, these anxieties were confirmed to a limited degree in the ISM reading. This index was relatively good (53.4 points), against expectations at the level of 53 points. The business activity increased to 57.8 points, and new orders dropped slightly at 55.5 points. Both of these readings are good.

On the other hand, the employment sub-index decreased quite clearly. It depreciated below the limit of 50 points (49.7), and was the lowest since February 2013. However, considering the ADP publications, as well as the weekly jobless claims, there are no negative tendencies in the labor market for the time being. Thus, it is possible that this may be a one-time low reading. Especially considering that the other crucial ISM components were clearly above the limit of 50 points.

However, the ISM subindex caused even more anxieties than today's reading from the Labor Department. Especially given that the dollar was under pressure already before this data. This caused a further sale of the American currency. Growth on the EUR/USD, which currently reaches 1.10, can be a result of the necessity to close the positions by these market participants, who previously assumed an appreciation of the USD.

Are payrolls really that important? Focus on salaries

We wrote many times that the amount of new workplaces in the American non-agricultural sector will be significantly inconsistent with the consensus; even if the American labor market is stable, the ADP publication is good, and unemployment benefits are low. This is a result of a survey study. Slight disturbances of the sample group translate to significant changes for the entire market. Despite the fact that this information is commonly known, the disturbances of readings cause serious changes on the currencies. This is a result of a “herd instinct,” and rather small market liquidity.

However, it is possible that this situation might change soon. The American economy is reaching a moment of full employment. It is impossible that it will consistently produce 200k new workplaces, because it would cause the unemployment level to depreciate by approximately 0.7% per year. That kind of depreciation is impossible in the forthcoming years. After some time, the unemployment would have to drop to a negative level. According to the Federal Reserve calculator, 111 thousand new workplaces per month is needed to sustain the current unemployment level.

As a result, the market may focus more on the matters related to an increase in salaries, especially if the amount of new workplaces stays above 150 thousand. Even if the payrolls are near the consensus, it is possible that the majority of reactions on currencies will be based on publication of the average hourly wage.

The market consensus assumes that the salaries will increase by 2.5% y/y, and 0.2% m/m. If this growth is 0.1-0.2% higher, it may suggest a higher wage pressure in the USA. This could also be a good argument for the Fed to sustain the perspective of raising interest rates in the first half of 2016, and could be a positive sign for the dollar.

On the other hand, in an alternative scenario (assuming weaker than expected salaries, and a visible weakness of the dollar), we can expect a further depreciation of the American currency, and the EUR/USD going clearly above the level of 1.10.

Volatile zloty

Last afternoon, the zloty was reaching the area of 4.35. Theoretically, a higher evaluation of the EUR/USD may cause an increase in the EUR/PLN. However, it is happening more often in the situation of appreciation of the European currency, rather than an overvalue of the American currency. Moreover, the forint was relatively stable for the past few hours, and we also had hawkish comments from the new MPC representative, Kamil Zubelewicz.

On the other hand, during today's trade the EUR/PLN returned to the area of 4.33, although there is a certain nervousness over the main zloty pair. This may be the signal that the changes can be more sudden than expected in the forthcoming days. The publication from the Labor Department should, on the other hand, have a relatively limited impact.

Better readings from the USA are a chance to improve the sentiment. However, it may also cause a return to the perspective of monetary tightening by the Fed, which is disadvantageous for such currencies as the zloty. In the opposite case, the market may expect a milder monetary policy from the FOMC, but this positive impact on the PLN, can be reduced by an increase in risk aversion. It is possible that only the readings clearly inconsistent with the prognoses, may disturb the zloty's quotations so significantly that the effect will be still seen in the following days.