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Dollar continues its strong appreciation (Afternoon analysis 6.02.2020)

6 Feb 2020 17:22|Bartosz Grejner

The US labour market remains strong: yesterday the ADP indicated an increase in payrolls at the fastest pace in nearly five years, today the number of initial jobless claims was at its lowest level since April, according to the Labor Department. A stronger dollar weakens the zloty somewhat today.

EUR/USD at the lowest level since October

The next day was marked by positive sentiment in the broader market. It was supported by, among others, information from the Chinese Ministry of Finance about the reduction of customs duties by half on imports of goods from the USA worth about 75 billion USD. The dollar also continues its appreciative streak. The EUR/USD quotations fell to about 1.0960, which is the lowest level since October last year. This is a consequence of an increase in the imbalance between the economies of the eurozone and the US. This is reflected in recent economic data, even though data from the common currency area are not necessarily bad in the broader perspective.

Today, however, this disproportion has been highlighted by data from both regions. Machinery orders in Germany fell by 2.1% month-on-month in December, suggesting a somewhat uncertain picture of industrial recovery. In contrast, data from the US economy again exceeded expectations. The weekly labour market report indicated 202k submitted jobless claims, against expectations of 13k higher. This is also the lowest reading since April 2019, and although these are rather secondary data in terms of their impact on the dollar (when presented alone), they are in line with the better-than-expected data from the US in recent weeks, as well as with the strong condition of the US economy.

Today, the US currency appreciated not only in relation to main currencies but also to the currencies of emerging countries. Bloomberg's dollar index, which contains them, rose this afternoon to about 1205 points, reaching its highest level since December 3rd last year. Demand pressure on the dollar weakened the zloty today, which could still recover from yesterday's rapid appreciation.

Today, the EUR/PLN quotations reached around 4.26, although the recently increased volatility indicates that a return to around 4.30 should not be ruled out. In particular, if tomorrow's US labour market report exceeds expectations and supports the dollar. The risk factor for the Polish currency is still the sentiment in the global market. It is supported by the actions of, among others, central banks, good data from the USA and the results of the largest listed companies. This currently removes the threat of coronavirus from China, but the return of negative sentiment or even a correction of growths around the historical records of the main market indexes may in effect worsen the zloty's condition.

Tomorrow's preview

At 8:00 a.m., Destatis will present a set of December data on the German economy. For example, the trade balance, as well as import and export and industrial production, will be presented. The market's attention may be a little more focused on the production reading, due to the mini-recession in German industry and weaker-than-expected data on machinery orders, which were released today. They may suggest a slightly worse picture for this sector. If the production reading is also lower than expected, it may worsen the sentiment slightly.

Deterioration of sentiment over data from Germany could potentially weaken the zloty. However, it should be remembered that the most important publication on Friday will be a report on the US labour market for January, which will be presented by the Labor Department at 2:30 p.m. Attention of market participants should focus primarily on data on the change in the non-farm sector and on the change in average hourly wages. The reading about the number of payrolls will be particularly interesting because on Wednesday the ADP institute indicated a monthly increase of 291k, which was the highest increase in nearly five years.

Confirmation of the strong growth level by the official data (currently the consensus is 162k) could support positive sentiment on the market, especially as recent macro data from the US exceed the expectations of economists. Reading about the change in average hourly wages will be important for the dollar. If the consensus is exceeded (3.0% year-on-year), it may strengthen the already strong US currency, suggesting a slightly higher pressure on inflation. However, the potential for significant dollar increases seems limited, and the probability that the Federal Reserve will tighten monetary policy this year given the still difficult assessment of the impact of the virus on the economy and the still subdued inflation is small.

6 Feb 2020 17:22|Bartosz Grejner

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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