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Data from Italy surprisingly weak (Daily analysis 8.02.2019)

8 Feb 2019 13:08|Marcin Lipka

Strong decline in Italian industrial production and average data from France. The pound is relatively strong despite the mild stance of the Bank of England and the uncertainty regarding Brexit. The zloty weakened due to the eurozone problems. The dollar is quoted close to 3.80 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Dreadful data from Italy, weak from France

2018 still brings weak data from the eurozone. Italian industrial production for December fell by 5.5% over the year. This is the worst result in almost six years. Monthly data also showed a continued downward trend (fourth consecutive decline in production in the month-to-month terms, seasonally adjusted). All of the categories of industrial groups recorded declines, which illustrates the wide slowdown in the Italian economy.

In addition to industrial production data, Istat also published a monthly report in which it can be read that "the leading indexes recorded a strong decline, suggesting a worsening of Italy's cyclical position in the coming months."

The situation in France, which also published production data for December, looks slightly better. According to a statistical study by Insee, production fell by 1.4% year-on-year, but in monthly terms, there was an increase by 0.8% (in the case of manufacturing even by 1.0% month-on-month). In France (e.g., in comparison with Germany), the production of the automotive industry was surprisingly good (an increase of 2.6% month-on-month). On the other hand, the data on the production of investment goods looked relatively weak (decrease by 2.3% month-on-month). Generally, it can be seen that, contrary to Italy or Germany, the slowdown in France is less pronounced.

The overall impact of the data on the euro is negative, even though the EUR/USD exchange rate stopped falling above the 1.1300 boundary. After yesterday's EC data, where forecasts for Germany or Italy were very clearly downgraded, the chances for a rebound of the main currency pair remain limited, especially given the relatively better situation in the US.

Favourable conditions for the pound

The downward revision of the British economy's estimates or the Bank of England's CEO's suggestions about the growing risk of a chaotic Brexit does not have a negative impact on the pound. Also, the decreasing likelihood of rate hikes in the UK does not have a negative impact on sterling either.

It is clear that investors believe in a 'last-minute' agreement between London and Brussels on Brexit, and actually at this point only on the backstop issue. Does this hope make sense? It depends on whether they base their expectations on current events or the final solution.

If the first answer dominates, it does not make any deeper sense. The proposal of the Labour Party is unacceptable to the Conservatives (customs union and therefore the disappearance of the backstop problem). Since the indefinite backstop has been rejected, the official establishment of a common customs policy in both areas (the UK and the EU) will not be supported by the Tories. In such a case, they would choose a new election or even a Brexit without an agreement, because the customs union contradicts the referendum result.

However, in the end, an agreement will be reached, as the issue has a strictly political dimension and a compromise enabling a fallback mechanism on the Irish island in the absence of a new trade agreement is possible. It is also doubtful that politicians will deliberately lead to such chaos like leaving the EU in less than two months without any adjustment period. In this context, therefore, high (and even much higher than at present) valuations of the pound are justified. However, until March 29th, there may still be a lot of negative information for the pound and signals of a chaotic exit from the EU. The pound may then still be experiencing strong declines, especially as it has recently strengthened quite clearly.

Weaker zloty

The Polish currency is clearly weakened by the worsening economic situation in the eurozone. Slow economic growth in the single currency area may mean that the ECB has no chance of raising interest rates, which at the same time pushes this process further away in Poland as well. Regional problems may also have a negative impact on the country's investment and attractiveness in the region (e.g., in Asia, where the slowdown is much less pronounced). This is not conducive to the inflow of capital to Poland, so it is negative for the zloty.

As a result, the dollar is moving around the 3.80 PLN limit, and there are still arguments for further increases. As long as there is no series of signals suggesting that the eurozone has already experienced the most significant decline in economic forecasts, the zloty may be under pressure, and the dollar is likely to remain strong.

8 Feb 2019 13:08|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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