Afternoon analysis 23.07.2015:
Very good labor market data support the rate hike scenario in September. The outlook for Greece raising rates pressured the emerging market currencies. The zloty was stable in the second part of the session.
The US labor market has remained in a very good shape. The number of unemployment claims dropped 26k to 255k. It was the lowest level since November 1973. The forecast was for a 278k increase.
However, the Labor Department said, the reading would have been distorted by the seasonal factor. During the summer car industry used to reduce employment due to outages. This year however, the scale of outages could have been smaller as the car industry's expansion is very strong. Nevertheless, the significant drop in the number of unemployed showed that the labor market expansion is very strong. Since early March, readings have remained below the 300k level, the is considered as signal that the situation is improving.
All in all, the hawkish part of the Federal Reserve has obtained additional argument to rise rates. The latest comment from the US monetary authorities point at September, as an appropriate moment for hike.
The Fed Chair Janet Yellen said, that the decision will be based on the assessment of the labor market and the outlook for inflation. Solid situation in the labor market will result in stronger consumption. Household spending will result in higher inflation in the long term. To sum up, today's data increased the likelihood for interest hike in September. The term was pointed by recent surveys among investors.
Surprisingly good report supported the dollar. The US currency recouped losses against the euro and other currencies. The dollar was up against the emerging market currencies. However, in the stock markets there was visible risk aversion. The major indexes in Europe and in the US were down.
Emerging markets under pressure
The first interest rate hike since 2006 will affect the emerging markets. It is very likely, that it will result in capital outflow.
The outlook for a rising dollar puts the currencies of countries that export commodities in a difficult position. The oil price declined below 50 dollar level. Iran returning to the market, the oversupply, falling demand and strong dollar all out the oil price in the position to extend decline. Moreover, the other key commodities are at low level.
Moreover, the major emerging market economies are not in a good shape. China is slowing down and it struggles with the stock market bubble. Russia was hit by sanctions imposed over the Ukrainian crisis. Also Brazil, Turkey and South Africa not perform well.
The zloty, as an emerging market currency, was quite stable. The Polish currency gained against the dollar, the pound and the franc. It stabilized against the euro. However, in the long term, the zloty may be negatively influenced, as the other emerging market currencies.
The major factor to watch is currently the expectation for the Fed next move. In the next week, some important report will be published, that will help to better assess the US economy and the likelihood for interest rate hikes. Nevertheless, the major release will be the Federal Open Market Committee's decision on rates. If the Fed confirms the September term, the euro and the zloty will decline.
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