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Daily analysis 11.07.2016

11 Jul 2016 12:57|Marcin Lipka

The American data from Friday was optimal for more risky assets. The Bank of England meeting on Thursday is this week's most significant event. The new NBP economic projections show a weaker GDP growth for the following years, as well as a significant slowdown of investments. The zloty was relatively stable this morning.

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

  • No macro data that could significantly impact the analyzed currency pairs.

Optimal data from USA

We can say that the Friday data from the American labor market was optimal for more risky assets. This includes shares, as well as currencies of the emerging markets. Payrolls reached approximately 300k, however the salaries growth was slightly lower than the forecasts. Thus, the publication from the Labor Department decreased the risk of a slowdown in creating new workplaces in the USA in the future. However, due to a slower growth of hourly wage the publication does not cause a strong pressure on the Federal Reserve to raise interest rates.

Thus, the Fed meeting in July is most likely to be rather calm. The FOMC will appreciate the return of payrolls to decent levels (147k on the three-month median and 172k on the six-month median). However, it will continue to take under consideration the possible dangers regarding Brexit, as well as the emerging markets. Without the price pressure, we will see a wider analysis not sooner than in September. Moreover, speculations regarding potential rate hikes are most likely to appear in September as well.

Positive sentiments from Friday have moved to today's Asian session as well. This morning, the terminal contracts on the S&P 500 have touched the highest level in their history. Profitability of two-year treasury bonds increased by a few base case points. However, this movement was not sufficiently strong to raise evaluation of the dollar. Thus, the following weeks should be favorable for shares, as well as the emerging markets currencies, at least when it comes to signals from the USA.

Bank of England decision

The Thursday Bank of England meeting is most likely to be this week's main event. According to the Bloomberg survey, thirty out of fifty-four economists expects Mark Carney to announce a decrease in interest rates in three days. The decrease median is at the 0.25% level. However, some of economists claim that interest rates may drop from the current 0.5% to 0.05-0.10%. Currently the market estimates the decrease at the level of approximately 19 base case points. This is slightly less than the expectation median.

Investors also speculate that the Bank of England may increase the assets purchase. For the time being, this move is predicted by only three out of fifty-four economists that were surveyed by Bloomberg. In our opinion, the likelihood for such aggressive reaction to occur three weeks after the referendum is rather small. The Bank of England will probably want to have more time to estimate the scale of changed perspectives for the British economy.

However, the above information is negative for the pound. Today, we are yet again below the 1.29 level on the GBP/USD. Cutting interest rates by 25 base case points, combined with a dovish announcement, as well as the suggestion of an increase in the QE, may take the cable even by 200 pbs lower. If this happens, the GBP/USD would yet again increase its thirty-year minimum.

A weak global condition of the pound reflects in the GBP/PLN rate as well. The pair is near its two-year minimum at the 5.15 level. The deeper than expected easing of the monetary policy on the meeting in July or in August, may cause a depreciation of the British currency to the 5.00 limit.

Stable zloty. Inflation report

Trade on the zloty is relatively stable during the European session. The euro is by 0.01-0.02 PLN above the 4.40 level and the dollar is moving near the 4.00 level. Considering a relatively positive global sentiment, as well as optimal data from the American economy for the emerging markets currencies, the PLN has a chance for a minor appreciation in the next few weeks.

Of course, there are some dangers for the above scenario. They are the government meeting tomorrow (with a discussion regarding the presidential project of the pension act) and the Fitch rating review on Wednesday. However, if none of these risks comes true, the next months may be favorable for the PLN.

On the other hand, the NBP Inflation Reports contains a rather disturbing scenario. We are not talking about a 0.6% decrease in the GDP growth for 2016 (to 3.2%), but about a visible decrease in investments. In March, the NBP expected the investments to increase by 5.1% in 2016 as well as in 2017, and by 5.2% in 2018. Currently, the growth is at the level of positive 1.2%, positive 4.1% and positive 4.4%, respectively.

Regarding Brexit, the NBP estimates that, “its impact on the Polish economy should be limited in the short-term, as well as the long-term.” However, it has also been noticed that, “estimating its consequences is burdened with a large uncertainty that is a result of an unprecedented character of this phenomena.”

11 Jul 2016 12:57|Marcin Lipka

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:

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Afternoon analysis 07.07.2016

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Daily analysis 07.07.2016

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