The market is waiting for Friday's events (Afternoon analysis 3.01.2019)

03.01.2019 16:24|Bartosz Grejner

Apart from the stronger yen, Thursday's session on the foreign exchange market was relatively calm. Limited changes on the global market also have an impact on the stabilization of the zloty. However, Friday may be different. Volatility may increase significantly due to the rich macroeconomic calendar.

Mixed data from the USA

Yen was globally stronger and gained 1 per cent at 3 p.m. in relation to the dollar. Yesterday, less than two hours after the closing of the session on the U.S. stock exchange, there was a rapid appreciation of the yen, which then gained even more than 5 per cent. Apart from the case of the Japanese currency, the changes in the currency market were limited today. This is partly due to the calendar of macroeconomic publications, which was not as rich today as it will be tomorrow.

Dollar was a bit weaker on Thursday, giving up part of what it gained yesterday. The EUR/USD rose from 1.13 to almost 1.14 even before noon (yesterday it was at about 1.15). Mixed data came from the U.S. economy. ADP published payrolls report in the non-farm sector in the US. Employment in the sector increased by 271,000 in December, well above expectations of 180,000). This is a good sign for the economy, but ADP data are often not very well correlated with the official data from the Department of Labour, which will be published tomorrow.

On the other hand, the number of initial jobless claims in the last week has increased above expectations. The number of claims was at 231,000, 11,000 above the market consensus. It is still relatively close to over 4 decade record (202,000) from September, but at the same time it was the third consecutive week of increases in a row and the highest level in five weeks, as well as close to the upper limit of readings from nearly a year (242 ,000).

At 4 p.m., ISM published December's PMI data for the U.S. manufacturing sector, which came in significantly below expectations. The index fell from 59.3 to 54.1 points (57.7 was the market consensus), the lowest reading in two years. A decline was recorded in virtually all index components, with the exception of a slight increase in new export orders and consumers' inventories. As a result, the dollar has weakened slightly again and the EUR/USD exchange rate has risen to 1.14.

All in all, Thursday's session on the currency market was relatively calm on the currency market (excluding the yen) as the market awaits tomorrow's events, which has also contributed to the stabilisation of the Polish currency. On Friday, however, we can expect an increase in volatility in principle from the morning, when data on inflation from Poland and eurozone will start to flow in gradually.

Tomorrow's preview

Given the recent relatively large changes in the value of the euro, Friday is likely to be an important day for the euro and volatility may remain high. At 8:45 a.m. (CET) we will see preliminary December data on consumer inflation (CPI) in France, the second economy of the eurozone. The market consensus indicates that inflation will be at 1.8 per cent per year. At 10:00 a.m. similar data will be available for the entire euro area - the median of market expectations indicates the reading of the main inflation rate at the level of 1.8 per cent year on year. However, the core index (excluding energy, food, alcohol and tobacco prices), which is estimated at 1.0 per cent, as in the previous month, will be more important. A deviation of as little as 0.1 percentage point may increase the range of fluctuations of the euro, although it is only if the core index goes beyond the range of 0.9-1.1 per cent, that we can expect more significant changes in the value of the eurozone's currency.

In the meantime, at 10:00 a.m., the Central Statistical Office (GUS) will also publish data on consumer inflation for the Polish economy. The market consensus points to a decrease in inflation from 1.3 to 1.1 per cent year on year. If the CPI reading turned out to be such, it would mean the lowest level of inflation in two years. A drop even below this level could only further strengthen the argument of the dovish part of the Polish Monetary Policy Council to maintain a mild policy in the coming year (or even longer). More important, as in the case of the euro area, will be the core index, which will be published next week.

At 2:30 p.m. probably the most important report of this week will be published. The U.S. Department of Labor will present a labour market report for December. Payroll data will be important, but the most significant - in the context of the dollar - will be data on the average hourly wage. The median of market expectations indicates an annual increase of 3.0 per cent (previously 3.1 per cent) and 0.3 per cent per month (previously 0.2 per cent). Although today the dollar no longer gained, it strengthened significantly during yesterday's session. And a change in earnings deviating from the consensus by as little as 0.1 percentage points (or more), can significantly affect the US currency.

On the other hand, at 4:15 p.m. an event will start, which is also worth paying special attention to. During the meeting of the American Economic Association in Atlanta, and interview by the New York Times will be conducted with the current head of the Federal Reserve, Jerome Powell, together with the former heads - Benem Bernanke and Janet Yellen. Powell's statements can be analyzed in particular by the market and the events of recent months show that they can cause significant changes in the dollar's value.

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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 the written permission from Sp. z o.o is prohibited.

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