The dollar is losing value and the odds for further rate increases in the US are lower. Higher valuations on the EM currencies. Real wages in the UK are negative but the labor market remains fairly strong. The zloty is giving back most of its gains. The EUR/PLN returned to a 4.20 level before the MPC conference.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
16.00: Press conference and a statement after the Polish MPC meeting.
EM currencies on two-year highs
Markets have started to pay more and more attention to what is happening in Washington, D.C.. Investors are concerned that reports from the US media may delay the legislative process of the tax reforms. As a result, it can reduce the attractiveness of the stocks, weaken the pace of economic growth and offset the path of monetary tightening.
On May 11th, the yield on 5-year treasury bonds were at 1.95%. Now, they are traded at 1.80%. This also increases the pressure on the dollar, although data from the US is far from being disappointing. Weaker than expected readings from US housing were reported, but industrial production rebounded markedly in April.
The Federal Reserve will probably raise interest rates in June, but if the tax reform is actually postponed, then further deterioration in sentiment in the US market can be expected. In such a scenario it is hard to count on the acceleration of the monetary tightening. Investors would then start speculating on less than two rate increases for the rest of the year. This would further weaken the USD regardless of macroeconomic data.
The weaker dollar is helping emerging markets currencies to gain value. The MSCI EM Index, which takes into account the return on investments in developing-country currencies and the difference between their interest rates and the USD is currently at its highest levels since late 2014.
For the EM FX, less pressure to increase interest rates in the US or weaker dollar is beneficial. On the other hand, if there is a significant deterioration in the sentiment towards US stocks, investors can expect the appreciation trend on the EM to be halted or at least we may see a stronger correction.
Solid data from the UK
Yesterday, we noted that since April the real wages in the UK are set to fall. Today's figures confirmed it as weekly pay growing at 2.4% y/y and inflation last month reached 2.7% y/y. It is worth noting, however, that the other parameters of the labor market are fairly solid.
Firstly, in the last three months, the number of new payrolls increased by 122k. That's almost 5 times more than the economists surveyed by Bloomberg projected. In addition, the unemployment rate dropped to 4.6%. It is the lowest number since 1975.
Moreover, other labor market indicators in the UK are also encouraging. The employment rate relative to the working-age population (16-64) rose to 74.8%, the highest level since its publication began in 1971. The number of inactive people (not looking for and not having a job) decreased by 40k compared to the fourth quarter of 2016 and by 80 thousand in relation to the same period last year.
Generally, the data is not entirely negative for the pound. If the Brexit issue did not exist, it would most likely have been received rather positively. So far, the labor market, despite falling real wages, has not showed major economic problems in the UK.
Euro returned to 4.20 PLN level
The evening slide of the dollar towards 3.75 PLN or the EUR/PLN depreciation below the 4.17 level was quickly reversed in the morning. Additionally, most of the PLN appreciation in relation to the forint was given back. It confirms the rule that the Polish currency is not able to gain more value than the Hungarian one. The PLN/HUF is currently traded at the levels witnessed last month.
In the afternoon, the market’s attention will be focused on the MPC meeting. Theoretically, the negative real interest rates, decline in unemployment rate, and the acceleration of economic growth stimulated most likely by a strong increase in consumption should change the tone of the MPC to slightly more hawkish. The Council, however, will rather want to wait for the July NBP Inflation Report and only if it shows the upward pressure on prices, we can expect a very gradual change in attitude towards a tightening . Until then, we do not foresee the hawkish suggestions in the statement. For the zloty, today’s event should also be relatively neutral.
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.
The dollar is losing value and the odds for further rate increases in the US are lower. Higher valuations on the EM currencies. Real wages in the UK are negative but the labor market remains fairly strong. The zloty is giving back most of its gains. The EUR/PLN returned to a 4.20 level before the MPC conference.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
EM currencies on two-year highs
Markets have started to pay more and more attention to what is happening in Washington, D.C.. Investors are concerned that reports from the US media may delay the legislative process of the tax reforms. As a result, it can reduce the attractiveness of the stocks, weaken the pace of economic growth and offset the path of monetary tightening.
On May 11th, the yield on 5-year treasury bonds were at 1.95%. Now, they are traded at 1.80%. This also increases the pressure on the dollar, although data from the US is far from being disappointing. Weaker than expected readings from US housing were reported, but industrial production rebounded markedly in April.
The Federal Reserve will probably raise interest rates in June, but if the tax reform is actually postponed, then further deterioration in sentiment in the US market can be expected. In such a scenario it is hard to count on the acceleration of the monetary tightening. Investors would then start speculating on less than two rate increases for the rest of the year. This would further weaken the USD regardless of macroeconomic data.
The weaker dollar is helping emerging markets currencies to gain value. The MSCI EM Index, which takes into account the return on investments in developing-country currencies and the difference between their interest rates and the USD is currently at its highest levels since late 2014.
For the EM FX, less pressure to increase interest rates in the US or weaker dollar is beneficial. On the other hand, if there is a significant deterioration in the sentiment towards US stocks, investors can expect the appreciation trend on the EM to be halted or at least we may see a stronger correction.
Solid data from the UK
Yesterday, we noted that since April the real wages in the UK are set to fall. Today's figures confirmed it as weekly pay growing at 2.4% y/y and inflation last month reached 2.7% y/y. It is worth noting, however, that the other parameters of the labor market are fairly solid.
Firstly, in the last three months, the number of new payrolls increased by 122k. That's almost 5 times more than the economists surveyed by Bloomberg projected. In addition, the unemployment rate dropped to 4.6%. It is the lowest number since 1975.
Moreover, other labor market indicators in the UK are also encouraging. The employment rate relative to the working-age population (16-64) rose to 74.8%, the highest level since its publication began in 1971. The number of inactive people (not looking for and not having a job) decreased by 40k compared to the fourth quarter of 2016 and by 80 thousand in relation to the same period last year.
Generally, the data is not entirely negative for the pound. If the Brexit issue did not exist, it would most likely have been received rather positively. So far, the labor market, despite falling real wages, has not showed major economic problems in the UK.
Euro returned to 4.20 PLN level
The evening slide of the dollar towards 3.75 PLN or the EUR/PLN depreciation below the 4.17 level was quickly reversed in the morning. Additionally, most of the PLN appreciation in relation to the forint was given back. It confirms the rule that the Polish currency is not able to gain more value than the Hungarian one. The PLN/HUF is currently traded at the levels witnessed last month.
In the afternoon, the market’s attention will be focused on the MPC meeting. Theoretically, the negative real interest rates, decline in unemployment rate, and the acceleration of economic growth stimulated most likely by a strong increase in consumption should change the tone of the MPC to slightly more hawkish. The Council, however, will rather want to wait for the July NBP Inflation Report and only if it shows the upward pressure on prices, we can expect a very gradual change in attitude towards a tightening . Until then, we do not foresee the hawkish suggestions in the statement. For the zloty, today’s event should also be relatively neutral.
See also:
Afternoon analysis 16.05.2017
Daily analysis 16.05.2017
Afternoon analysis 15.05.2017
Daily analysis 15.05.2017
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