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Daily analysis 06.10.2017

6 Oct 2017 12:40|Bartosz Grejner

The rising opposition against PM Theresa May within her own party has weakened the pound significantly. The dollar is moderately stronger before the labour market report. The zloty remained virtually unchanged, however, data from the US may cause a lot of volatility.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2.30 p.m.: Average September wage for Americans (estimate: +0.3% MOM),
  • 2.30 p.m.: Change in private sector employment (estimate: 83k).

The pound remained weaker and the dollar appreciated

The pound stayed under considerable pressure. In the past two weeks, it has lost almost 4% in relation to the dollar, and today it fell below 1.31 for the first time since September 8th of this year. Its increase of the past two day’s depreciation has been due to reports that some members of Prime Minister Theresa May's party are demanding her resignation. According to Bloomberg, this group amounts to around 30 people, while party rules require 48 people to make a formal no-confidence motion.

Tensions in the Tories party may introduce an even bigger uncertainty about the form that Brexit will take. If May steps down, it may increase the risk of a "hard" Brexit, which could be a more negative scenario for both business and the economy. If support for the UK Prime Minister's resignation grows, the pound may continue to depreciate. This is especially because the chances of rate hikes by the Bank of England would probably be limited.

In turn, more data that highlights the positive state of the German economy has been received. According to the Federal Statistical Office (Destatis) publication, new orders in industry increased by 3.6% in August, compared to July. This was the highest month-to-month increase this year, and it was also significantly above market expectations (0.7%).

This growth was mainly due to foreign orders. Their number increased by 4.3% per month, compared to a growth of 2.7% locally. What is interesting are that the orders from eurozone countries fell by 1% in this period, while orders outside currency areas countries increased by 7.7%.

This publication had little impact on euro trading. The main currency pair (EUR/USD) incurred some losses and fell below 1.17 this morning, although in the next few hours it was moving around this boundary. We have been observing the dollar's appreciation since yesterday morning when the EUR/USD exchange rate was still 1.178. However, later on, it gradually depreciated.

The better condition of the US currency can be reflected in the increased growth of the US index (DXY) to approx. 94 pts. Therefore putting it at its highest level since mid-August. Some market participants expect today's data to be better than the consensus. Wednesday's ADP's reading on employment in the private sector turned out to be above expectations, which may indicate that the impact of the multiple hurricanes on reducing employment growth could turn out to be lower than estimated.

Employment data that is better than the consensus could have a positive effect on the dollar, however, the average wage data is likely to be more important. It may indicate what kind of pressure that wages are currently putting on inflation. Their accelerated growth (above 0.3% per month) could increase the probability of rate hikes in the US and significantly strengthen the dollar and additionally cause a fall in the EUR/USD exchange rate to a level of around 1.16.

The zloty remained stable

Up until midday, we have observed relatively small changes in the zloty's value. The EUR/PLN pair was still moving around 4.30, without much change in relation to yesterday's closing levels. Similarly, the absence of significant changes could be observed in the franc's relation to the zloty - the CHF/PLN pair was at approx. 3.755.

In turn, the weaker condition of the pound caused a further GBP/PLN rate decrease, which fell below the 4.80 boundary. Thusly, it fell to its lowest level since mid-September. The value of a dollar expressed in zloty oscillated around 3.68 level, which is close to the upper trading boundary since mid-July (approx. 3.695).

Today's publication (at 2.30 p.m.) of the US labour market report may also be very important for the zloty. Theoretically, the worst scenario for the Polish currency would be better than expected data on both wages and employment. In such a case, the dollar could significantly appreciate (investors would discount a higher probability of rate hikes in the US), which could put pressure on the zloty where the perspective of monetary tightening after the last MPC meeting still seems to be relatively distant.


6 Oct 2017 12:40|Bartosz Grejner

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.

See also:

5 Oct 2017 15:34

Afternoon analysis 05.10.2017

5 Oct 2017 11:40

Daily analysis 05.10.2017

4 Oct 2017 15:01

Afternoon analysis 04.10.2017

4 Oct 2017 12:25

Daily analysis 04.10.2017

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