Daily analysis 10.04.2017

Inconsistent data from the American labor market was rapidly eclipsed by William Dudley’s relatively hawkish comments. Worse condition of the EM currencies may harm the zloty. The EUR/PLN is within narrow range of fluctuations.

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

• Approximately 22.00: Janet Yellen’s testimony. The Q&A session has been planned.

Dudley’s comments

Last Friday, we took note that the data from the Bureau of Labor Statistics (BLS) was most likely distorted by statistical noise. This is because it gave very little arguments in favor of establishing a consistent view on the American labor market’s condition.

It’s worth keeping in mind that the BLS reports are based on a relatively small sample group. In a group of more than 250 million people, 152 million people have a job and 7.5 million people are looking for a job. However, the data regarding new workplaces is based on surveys conducted among 147k companies and the unemployment rate reading is only based on the data from 60k households. This has been the reason for surprising reports, as well as for inconsistent data.

Even though the BLS report was initially neutral for the USD, the American currency had been gaining value gradually over the passing hours. The dollar’s appreciation accelerated after William Dudley’s comments. His testimony on Friday was not observed widely, because it was said that it will refer to the regulatory matters. However, Dudley referred to the monetary policy at the end of the Q&A session.

Dudley claimed that the current pause in rate hikes is related to initiation of the Fed’s balance reduction, which will be very short. When Dudley previously mentioned about the pause, his statement was interpreted as dovish. However, the suggestion that the pause will be short may mean that a rate hike in a particular quarter may be omitted and the Fed will anticipate the market’s reaction to the balance reduction.

Therefore, the profitability of the American two-year treasury bonds increased (from 1.25% to 1.29%) and the dollar pushed the main currency pair below 1.0600. Tonight, the market will anticipate Janet Yellen’s testimony.

It remains unclear whether Yellen’s testimony will be preceded by its official publication. However, we do know that a discussion between Yellen and Susan Collins is scheduled, as well as the Q&A session. The testimony will most likely include the matters regarding both the pause in rate hikes and the previous labor market report. This may be the most crucial moment for the dollar today. Nevertheless, most likely not crucial enough to change the current sentiment on the American currency.

EM currencies may harm PLN

The main reason that the zloty has been strong over the past few weeks was the positive sentiment towards the emerging market currencies. Currently, some of these currencies are clearly correcting their exchange rates and some of them remain relatively strong.

Since the beginning of Thursday’s session, the Russian ruble and the South Korean won have lost 1.7% and 1.6%, respectively, against the dollar. This was a result of geopolitical tension in both of these regions. The South African rand and the Turkish lira were pushed lower as well. However, the Mexican peso remains stable. Moreover, the Indian rupee, as well as the Indonesian rupee, gained value.

The zloty lost approximately 0.5% against the dollar, but increased slightly against the euro. It’s worth noting that increasing differences between the EM currencies may increase the risk of a more serious correction, in the case of a worse global sentiment. This is a negative factor for the zloty.

Today’s session started quite calm for the zloty. The EUR/PLN is near 4.23, the franc is only slightly above 3.95 PLN and the dollar is testing the area of the 4.00 level. However, we need to keep in mind that the EUR/USD is below 1.06. This level of the main currency pair is causing that the zloty’s condition remains relatively positive.