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Eurozone clearly weakened (Daily analysis 24.10.2018)

24 Oct 2018 11:53|Marcin Lipka

Fatal PMI data from the eurozone. Leading indexes for European industry recorded at long-term lows. The zloty weakens slightly after surprisingly weak data from the eurozone, which is visible in relation to the franc and the dollar. In both cases, the exchange rate rises to around 3.77 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.

Fatal PMI data from the eurozone

Although yesterday the US market pared serious losses from the opening of trading, today the investors received another strong blow. PMI indexes from the eurozone failed globally. However, this was particularly evident in the case of industry, where production in the common currency area fell to almost 4-year lows and reached only 51.2 points.

In industry - in both the leading and peripheral countries of the eurozone - it was difficult to find a single bright point. The more detailed the data, the worse the situation. German production has fallen to its 47-month low. For the first time in four years, pessimistic expectations concerning the situation in the industry in the next 12 months dominated in the case of entrepreneurs, according to IHS Markit. The industry's expectations for the eurozone as a whole have fallen to almost six-year lows.

The issue of goods export also looks very weak. New orders for the eurozone as a whole in this sector fell for the first time since June 2013. Chris Williamson, head of the IHS economists, commented that the weak export situation is linked to the threat of a trade war, worsening prospects for the global economy and increasing risk aversion.

Moreover, in today's IHS Markit preliminary readings, there is no detailed data on the other eurozone countries (except France and Germany). The situation there may look even worse. Growth fell to its lowest level since November 2013, both in services and industry. Looking also at historical relationships, it is very likely that the index for Italian industry has dropped noticeably below the 50 point limit, suggesting a contraction of this sector in Italy.

Very weak PMI indexes coincide with the prospect of the ECB QE tapering. This is a significant dilemma for the central bank (meeting tomorrow). Overall, PMI indexes identify with accommodating the monetary policy (noted by Chris Williamson) rather than a tightening of it. IHS Markit estimates that GDP in Q3 in the eurozone could only grow by 0.3% q/q. Therefore, tomorrow's ECB meeting may be very interesting.

If the data from the eurozone is combined with readings in the USA, where the leading indexes are at long-term highs, it is not surprising that the EUR/USD rate depreciates (GDP in Q3 in the USA is expected to grow by 0.8 % Q/Q). In the morning, the main currency pair fell by more than 0.5% and fluctuated slightly above the 1.1400 limit. This shows that quotations are only 1% above annual lows.

Zloty insensitive to external pressure

The zloty remains calm despite the drops in the EUR/USD pair and weak PMI data from European economies. However, the situation of the forint and the Czech koruna is similar, which is why it is not due to the relatively strong zloty, but rather a positive perception of the entire region by investors.

External pressure is slightly better visible in the case of the franc or the dollar. They appreciate against the zloty by about 0.5% and reach levels of about 3.77 PLN. However, it is also worth remembering that apart from the PMI indexes, the rejection of the Italian budget plan by the European Commission has a negative impact on the euro, and thus positively on the dollar or the franc. The conflict between Rome and Brussels and the Italian administration insisting on absurd ideas could lead to a rating cut by S&P on Friday. This would be another reason to be worried about the situation in the single currency area and indirectly in the EU as a whole.

24 Oct 2018 11:53|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:

23 Oct 2018 16:15

Zloty stable despite drops in shares (Afternoon analysis 23.10.2018)

23 Oct 2018 13:15

Russia will buy Italian bonds (Daily analysis 23.10.2018)

22 Oct 2018 16:19

Pound and euro depreciate (Afternoon analysis 22.10.2018)

22 Oct 2018 13:22

Moody cuts Italy's rating (Daily analysis 22.10.2018)

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