Zloty supported by better sentiment (Afternoon analysis 2.11.2018)

The US labour market report did not trigger a significant market reaction. This was partly because the increase in wages was in line with expectations. A good global sentiment maintained the EUR/USD slightly above 1.14. The suspension of the dollar appreciation helped the zloty, which pared some of the losses incurred in the previous days.

USD/PLN below 3.80

The US Department of Labor published a monthly report on the US labour market today. This is one of the most expected publications and usually causes large fluctuations in the dollar and, indirectly, in other currencies. Today, however, the reaction was very limited, at least until 4:00 p.m..

The report itself showed that the US labour market is still in a very good condition, although the increase in average hourly wages was in line with expectations (3.1% per year, 0.2% per month). The unemployment rate also turned out to be similar to the median of market expectations and amounted to 3.7% in October. A positive surprise was recorded in employment growth in the non-farm sector, which increased by 250,000, i.e. by 50,000 above the median of market expectations.

The subdued reaction was not only a result of wage data. Market sentiment improved markedly yesterday and the dollar was gradually weakening, following reports of a possible agreement on Brexit (a service and Irish border issues) and a potential easing of the trade conflict between the US and China.

The EUR/PLN exchange rate remained above 1.14 in the afternoon today, although yesterday it was close to falling below 1.13. Lower pressure to increase the dollar's value is good news for the zloty. On Wednesday and Thursday, the EUR/PLN exchange rate exceeded 4.34, reaching its highest level since mid-August, while today it has already fallen to the vicinity of 4.31. Also, the USD/PLN pair fell from the last highs of about 3.84 to 3.77.

The zloty's appreciation is caused almost entirely by the global dollar weakening and the euro strengthening, which is likely to be only temporary. If there is no clear strengthening of the dollar in the afternoon, the zloty should oscillate around current levels, although in the long run (perhaps already next week) the pressure on the zloty's declining value should be maintained.

Next week's preview

Next week may be very difficult for the Polish currency. On Wednesday, after a two-day meeting, the Monetary Policy Council's statement on interest rates will be announced. The interest rates will not change, but the slowdown in economic growth in the eurozone, the fall in oil prices from recent highs (the fall in the WTI price by 13 USD per month), may weaken the position of the Monetary Policy Council.

Hard macroeconomic data from Poland, which has recently been coming in, turned out to be below expectations, which may also suggest a faster economic slowdown than was expected in Poland. A more dovish approach to monetary policy, especially if the issue of potential interest rate cuts is addressed, may weaken the zloty.

On Thursday, the Federal Reserve (Fed) will publish a statement after the meeting, but this time the rates are not expected to change. However, the market's attention may be attracted by the Fed's statement, especially since the minutes of the last meeting suggested that interest rates could be raised to a higher level than previously expected (to avoid overheating of the economy). Slightly more hawkish than recently the rhetoric of the Federal Reserve may contribute to the dollar's appreciation, thus causing additional pressure on the zloty.