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Daily analysis 24.10.2017

24 Oct 2017 12:17|Marcin Lipka

The dollar's slight weakening pushed the EUR/USD somewhat higher. PMI for the eurozone remained high, but the peripheral countries have clearly failed. The new Federal Reserve President may be announced within the next few days. The zloty depreciated in the morning. The EUR/PLN pair close to the 4.24 boundary.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

  • 3.45 p.m.: Preliminary PMI readings for October from the US (estimates: 53.5pts for industry and 55.2pts for services)

EUR/USD under pressure

A significant part of yesterday's session was beneficial for the US currency. The dollar index (DXY) tested the 94 pts level, which brought it closer to the two-month highs. However, the rather weak closing of the New York market's session and declines in yields of Treasury bonds in the US (by 2-3 basis points depending on maturity) did not allow the previous increases to be maintained. As a result, around today's midday, the EUR/USD is above 1.1750 boundary.

The eurozone PMI indexes should also have a positive impact on the main currency pair, although their overall overview seems to be less optimistic than a month ago. However, starting with good information, it is worth noting that the payrolls creation (for services and industry) in the eurozone has been observed as the fastest in a decade. Export orders have also accelerated despite the appreciation of the single area currency. Producer prices, on the other hand, have risen at the fastest pace since June 2011.

The PMI for the eurozone industry reached 58.6 pts, establishing the new 80-month highs (consensus 57.8). The service component was much weaker and compared to September, it decreased by less than 1 point to 54.9 points. IHS Markit's preliminary data covered only the two main eurozone economies (France, Germany) and a collective reading for the whole eurozone. Data from other countries is presented only in the form of a graph. However, it shows that apart from France and Germany, the situation seems to be much worse. The production index has fallen to its lowest levels in almost a year.

In the data's summary, Andy Harker of IHS Markit writes that the PMIs suggest an expansion pace of the eurozone of 0.7% of GDP in the Q4. He also suggests that a hypothetical reduction in quantitative easing in the second part of the week will be "justified on the basis of recent PMI data". Overall, therefore, the PMI data is rather positive for the euro, although the situation's deterioration outside the main single currency area may be disturbing.

Election of the new Fed President

According to news agencies (including Bloomberg), President Trump is due to announce his nomination for the new Federal Reserve President before his visit to Asia, which starts on November, 2nd. Among the names that have the highest chances to be nominated are Jerome Powell, John Taylor and Janet Yellen. Although the market is more or less aware of the individual candidates' views, "the Financial Times" decided to analyze their statements using artificial intelligence ("AI offers clues to hawks and doves circling the Fed").

On the basis of 600 statements, interviews and documents published by the candidates and examined by the "Financial Times", it appears that the most dovish is Jerome Powell, the present governor of the Federal Reserve (the sentiment index of minus 0.2). According to the Financial Times' survey, more hawkish than Powell is Janet Yellen with a result above +0.2. The most hawkish of the three selected candidates is John Taylor with a result above +0.7.

However, it is worth noting, that the trends of recent statements clearly bring individual candidates closer to each other. Taylor is becoming less hawkish and Powell is less dovish. According to the Financial Times analysis, Yellen's most recent statements suggest a monetary policy approach analogous to Powell's ones. In general, therefore, it can be concluded that the election of Yellen or Powell to the highest position in Fed should not result in significant reshuffles on the dollar. Only a decision to nominate Taylor would probably support the US currency.

Zloty under pressure

Since the beginning of today's session, the Polish currency has been declining. The euro, franc and the dollar grew by around 1-2 gr. The zloty has also been weak in relation to the forint. In comparison with yesterday's closure, the PLN/HUF pair incurred some losses and is about 0.3% lower. It is difficult to point out a specific reason for the zloty's weakening, although it is not excluded that some foreign investors may be afraid of the government reconstruction announced by the Polish Prime Minister Beata Szydło on TVN 24.

Despite the news from the world of politics, the national market was affected by economic reports, but their impact has been limited. The overall tone of PMI indexes from the eurozone shows a maintenance of positive trend in the single currency area. In addition, the Polish Central Statistical Office (GUS) provided data on the percentage of registered unemployed people. It amounted to 6.8% at the end of September, which was 0.1 percentage points below the economists' consensus. There is also no significant pressure on the dollar growth in the global market. Therefore, if no extraordinary information is released in the following hours, the zloty should not noticeably deepen the morning weakening.


24 Oct 2017 12:17|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.

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