Slightly weaker dollar supports zloty (Afternoon analysis 6.12.2018)

The foreign exchange market continues to react in a very limited way to the dramatic falls in the equity market. The dollar loses due to on worse than expected US data, but falls are limited. The changes in the zloty's quotations in relation to the main currencies also remain relatively small.

EUR/USD close to 1.14 handle but it means

The drops in the global equity market, which we have also seen today, had a small impact on currencies. The franc and the yen appreciated, but the changes of 0.1-0.2% were practically insignificant, with a 2.5% drop in the main European indexes. The scale of the discount has recently been so large that the main index (DAX) of the largest European economy - Germany - has even fallen below 10.900 points, reaching the lowest level in two years.

On the other hand, if we look at the euro/dollar, the range of its fluctuations was even gradually becoming smaller and smaller. Today, until 3:00 p.m., the EUR/USD exchange rate was within a narrow range of approx. 1.132-1.137. In comparison to yesterday's close, the dollar was slightly weaker (approx. 0.2 per cent to the euro), partly due to worse than expected macro data from the US economy.

November employment growth by 179 k in the non-farm sector according to ADP turned out to be 18 k lower than market expectations. The number of weekly initial jobless claims increased to 231 k - 5 k more than consensus. In the Q3, productivity in the non-farm sector increased as expected by 2.3% compared to the previous quarter, but the rate of increase in unit labour costs dropped from 1.2% to 0.9% q/q, although the reading was expected to be 0.2 percentage points higher.

The US trade deficit increased to 55.5 billion USD in October. This is only 0.3 billion USD more than the market expected, but it was enough to reach the highest level since October 2008. Time is not the best either when concerns about US-China relations have increased significantly following the arrest of the Chief Financial Officer (CFO) and daughter of the founder of a Chinese telecommunication company. In addition, the trade deficit with China has unfortunately risen to record levels (38.2 billion USD).

However, the combination of worse than expected data and increased investor activity in the US after 3:00 p.m. led to strong declines in yields of the US Treasury bonds. The market clearly signals to the Federal Reserve (Fed) that it expects interest growth pace to slow down, which has put natural pressure on the dollar. The EUR/USD quotations rose to 1.14 after 3:00 p.m. The Fed is unlikely to do too much about it, and the most important for both the market and the Federal Reserve itself in the context of monetary policy will be the upcoming macroeconomic data, especially the one on inflation, GDP growth pace and the labour market.

The zloty remained stable taking into account significant changes in the equity and bond market. Further weakening of the dollar helped the Polish currency additionally. Apart from the fall of the USD/PLN exchange rate to approx. 3.76, very little changes. The EUR/PLN is still quoted in the range of 4.28-4.29, and the CHF/PLN approx. 3.78-3.79. Unless we observe a significant increase in the equity market depreciation (around 3.30 p.m., the main indexes in the USA and Europe have already lost even around 2-3%), and the zloty's basket should remain relatively stable, supported by generally relatively small changes on the currency market and a slightly weaker dollar.

Tomorrow's preview

At 8:00 a.m., Destatis will present data on industrial production in Germany in October. Today's better than expected data on orders in this sector (up 0.3% compared to a consensus of 0.4% month-on-month decline) may give hope to investors that tomorrow's production data will also surprise them positively. The median of market expectations indicates an increase in production by 0.3% m/m. A reading above this level could be a positive stimulus for the euro, proving the good condition of Europe's largest economy, although potential changes in the euro valuation on this account will not be significant.

Three hours later Eurostat will publish the second reading of GDP growth. The worst-case scenario for the euro would be lower growth pace than preliminary data (1.7% year-on-year), which could raise concerns about the faster than expected economic slowdown in the eurozone.

However, the final impact of tomorrow's publications will not be known until 2:30 p.m., when the US Department of Labor will publish November report on the labour market. Apart from data on employment changes in the non-farm sector (consensus: +200,000), the most important may be data on changes in average employment. The median of expectations indicates that the average hourly wage growth pace from the previous month has been maintained (3.1% per year). A deviation of as little as 0.1 percentage point may result in significant changes in the dollar, especially an increase of 3.2% or more, as it would be in line with the relatively hawkish speech made two days ago by John Williams, chairman of New York's Federal Reserve.