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Afternoon analysis 03.11.2014

, author:

Piotr Lonczak

A growing divergence between major economies spurred a vantage for the dollar. The USD/PLN hit its highest since August 2012.

The US economy has been showing some good results lately. In the previous week we saw a high reading of Chicago ISM and significant improvement in consumer sentiment measured by University of Michigan index. But above all, the gross domestic product growth topped all forecasts by rising 3.5 percent against 3 percent expected.

A solid performance of the major world economy was confirmed by today's data. The ISM manufacturing rose to 59, exceeding expectations for 56.1. Moreover, the analogous manufacturing PMI from the US economy was slightly lower, but clearly remained at a level reflecting expansion.

The data from the US contrast readings from other parts of the world economy. Today we saw somewhat poor reports from China (the manufacturing and service PMI reports) after quite weak government manufacturing PMI on the weekend.

Additionally, the euro zone data is also rather poor. Although one can spot some bright places but the overall landscape is rather negative. Only data from Germany gave some hope for a near improvement as the PMI report pointed at strong exports and solid performance of the labor market. Quite good data were from Netherlands, Ireland and Spain. However, the other two major economies next to Germany – France and Italy – posted poor results.

The latest data highlighted the growing discrepancy between performance of the major economies. As a consequence, we have seen a move toward tightening of the Federal Reserve and an opposite decision of the Bank of Japan that announced unprecedented easing. In a case of the European Central Bank we will surely see a loosening of its policy rather than any tightening.

Developments in recent weeks have paved the way for the dollar to significant gains. As a result, the USD/JPY hit its highest level in seven years and the EUR/USD fell at its lowest since August 2012.

Ukraine poses risk

After elections conducted by the authorities in Kiev earlier in September on the weekend people went to ballots in the easternmost regions of the country. The elections conducted by pro-Russian separatists was a violation of the agreement from Minsk, but it didn't stop Moscow from saying that it will acknowledge the results. Neither Kiev, nor the West will do similarly.

The Ukrainian crisis is again loading risk in the region of Central and Eastern Europe. The peace process in getting more distant what depreciates the probability that sanctions against Russia may be diminished. Thus, this factor will still negatively weight on trade in the CEE region. As a consequence, the zloty may be more susceptible for increasing risk aversion, as we have seen in the earlier stages of the crisis. It may also hurt the euro.

The manufacturing PMI from Poland was a positive surprise. It rose to 51.2 points from 49.5 points in the previous month, above 50 points expected. The measure surpassed 50 level that separates contraction from expansion and posted the highest gain in six months. The report was positive as it pointed at improving output and solid labor market, but it also showed some deterioration in exports orders albeit the overall orders measure was up.

On Wednesday the Monetary Policy Council will decide on interest rates. Given the recent economic data we may expect a 25 basis points cut that will probably conclude this easing cycle. If the MPC fulfills this scenario and signals the end of easing, the zloty may gain as the market expectations are rather dovish (7 out of 37 economists surveyed by Bloomberg expected a 50 basis points cut).

Today the dollar hit its highest since August 2012 against the zloty - the USD/PLN rose as much as 3.3925. The EUR/PLN hovered near 4.22.

The strength of the US economy and lackluster performance of other major economies resulted in discrepancy in the main central bank's approach. Today the dollar is the major recipient of this situation. Given this circumstances, the USD/PLN will probably continue to rise and the EUR/PLN will stabilize above 4.20.


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 Cinkciarz.pl Sp. z o.o is prohibited.

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