Afternoon analysis 05.05.2016

, Autor:

Piotr Lonczak

The dollar gained before the labor market data. The pound dropped on the Brexit uncertainty. The zloty exceeded losses against all its major pairs. The EUR/PLN hit the highest level since February.

Uncertainty associated with the Brexit scenario has negatively affected the economy. The service PMI index dropped to the lowest level in three years. In April the gauge decreased to 52.3 from 53.7 in the prior month. The forecast was for the 53.5 level.

Earlier the data on construction and industry suggested some slowdown. The GDP growth estimated on the basis of the PMI indexes dropped to 0.1 percent in April against 0.4 percent in the first quarter.

In the latest statement the Bank of England said the risk associated with the Brexit has started to negatively impact the economy. In the case of a negative scenario the economic consequences may be very severe. Moreover, the market volatility will rise.

The latest polls did not give a clear answer about the referendum outcome. Still, there is some tendency to rising support for the Brexit. Given the situation, today's voting in local elections may provide some insight on support for both sides. As a result, the pound posted losses. In addition, this factor negatively affected the broad market sentiment.

Stronger dollar

The latest reports from the US economy, although they were mixed, they eventually supported the dollar. In addition, the US currency was supported by hawkish comments from the Fed. Thus after falling to the lowest level since January 2015 against the euro, the dollar posted strong rebound.

This move was not limited even by worse than expected report on the unemployment claims. The number increased to 274k against the 260k that was forecast. A more important release will be tomorrow's report on the labor market situation. An increase of 200k jobs is expected after 215k increase in the prior month. The unemployment rate is expected at 5 percent.

The zloty exceeded losses

Rising risk aversion negatively affected the zloty. The Polish currency dropped against all its major pairs. The EUR/PLN move near 4.43 - the highest level since February.

The finance ministry said that in March foreign investor increased their holding of the Polish debt by 3.6 billion zlotys. Although there was some improvement, the amount is lower by 16.6 billion zlotys against the end of 2015. Still, the situation may suggest that there was a brief relief.

In this context the crucial issue will be the release of Moody's rating. Currently, the probability that the agency will cut rating is quite high. In January the zloty was under pressure and foreign investors sold debt after the S&P agency lowered Poland's rating. The risk of a similar scenario is quite high. As a result, the tendency in the debt market will not be sustainable.

The next issue is the deterioration of economic reports and stronger deflationary pressure. Given the situation, on Friday the Monetary Policy Council may signal that it may adjust its stance. Taking into account current factors, the probability of a stronger zloty is limited.

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