Daily analysis 07.10.2016

Last night’s breakdown of the pound is consistent with a fatal element towards the British currency. Industrial production data and foreign trade data from the United Kingdom is pessimistic. The market anticipates the Labor Department data. The zloty is stable against the euro, but weaker against the dollar. The pound is in the area of 4.75 PLN.

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

• 14.30: Situation in the American labor market. New workplaces in non-agricultural sector (estimations: positive 170k). Change in salaries (estimations: positive 0.3% m/m and positive 2.6% y/y). Unemployment level (without changes, 4.9%).

Pounds problems are increasing

Today’s session should theoretically be dominated by speculations regarding the American labor market. However, the events from the opening of the Asian session caused the market to focus on the pound. Last nigh, the British currency decreased unexpectedly by approximately 5-6% against the majority of currencies.

The sentiment on the pound has been week the entire week. This was caused by the statement from Theresa May. The British prime minister suggested that she finds immigration control more important than the access to the EU market on current rules. Therefore, anxiety of a danger known as “hard Brexit” has started dominating among investors, as well as most likely caused the pound’s exchange rate to breakdown last night.

The GBP overvalue was most likely caused by Francois Hollande’s statement, which was published in the Financial Time bulletin, as well. The context of the French president’s statement suggested that France will not make attempts of a mild divorce between the UK and the EU. The Financial Times emphasized that the pound’s depreciation has started in the exact minute of the bulletin’s publication.

The British journal also emphasized that there are many information monitoring systems. However, it’s worth noting that such a large overvalue of one of the basic global currencies, would require more than just one factors.

Primarily, one order, or a series of orders, were most likely of a relatively large value. Secondly, the liquidity at the opening of the Asian session not only was small due to the hour, but also because of the fact that payrolls will be published on Friday. Therefore, very little investors were eager to take their position.

The third reason was constantly increased minimum on the pound-related currency pairs. This suggests that demand for the pound has been limited, as well as that there was not much purchase orders. On the other hand, most likely many investors made a stop loss on the GBP. Activating a stop loss later than planned, only increased the scale of overvalue.

Combination of the above factors brought the GBP/USD below 1.20 and the GBP/PLN tested the area of 4.60. Even though the pound worked-off a portion of its losses after a few minutes and returned to the area of 1.24, last night’s events may have a long-term consequences for the British currency.

Weak data from UK

At 10.30 AM, we received weak data from the British economy. The deficit of the trade account was approximately one billion pounds higher than estimated and was at the level of 12.1 billion pounds. Looking at the data from past eight months, there’s a large chance for exceeding last year’s record deficit at the level of more than 120 billion pounds (7% GDP). It seems that a low pound is not supporting the British economy to balance (according to our expectations).

Industrial production was also worse than expected. Instead of increasing by 0.1% m/m, it decreased by 0.4% m/m. This weak data most likely caused the pound to overvalue yet again. The GBP/USD went down to the area of 1.22 and the GBP/PLN reached the range of 4.71-4.72. Moreover, statement from the Bank of England’s spokesman (cited by Bloomberg) that was to calm down the situation, had an opposite effect. He claimed that the BoE is analyzing the reasons for the pound’s recent depreciation.

Since yesterday, we are also dealing with a visible overvalue on the EUR/USD. This is partially caused by moves on the pound. However, some of investors may expect the American labor market data to increase chances for rate hikes in December. It’s worth keeping in mind that the data regarding salaries from the USA should be the most crucial for investors. If it’s above the consensus (2.6% y/y) and other readings from the Labor Department are neutral, the EUR/USD may go below the level of 1.1100.

Zloty is relatively calm

The situation on the zloty remains stable, not counting the changes on the pound. Also, the American dollar is slightly more expansive in comparison to its level from yesterday. Currently, it’s near 3.85. Moreover, the USD/PLN is more exposed on today’s data from the Labor Department.

If the American readings are significantly better (payrolls above 200k and salaries above positive 2.6%), we can expect the USD/PLN to reach the range of 3.88-3.89. On the other hand, the dollar may wear off to the level of 3.82 PLN in the case of significantly worse data. However, the recent data suggests that today’s readings will be consistent with the consensus, or better.