Afternoon analysis 04.09.2015

, author:

Marcin Lipka

Theoretically investors should have focused on the “payrolls” data this week. The reality turned out to be different. The market attention was brought by surprisingly dovish comments from Draghi and pessimistic ECB projections.

The ECB suggests more QE

Friday's data from the US job market were supposed to give an answer about whether the interest rate hikes in the US would be in September, October or the first monetary tightening since almost a decade should be proceeded in December.

The Labour Department publication turned out to be mixed with a slight leaning towards a better reading. The US economy created 173k jobs in August whereas economists expected 217k. There was however an upward revision for the two previous months by 44k, so summarizing the two numbers we can conclude that this reading was neutral.

From the other survey the unemployment rate dropped more than expected to 5.1%. However, the fall can partly be contributed to a smaller participation rate – less people were looking for work and having a job comparing to the working age population.

The positive element was faster than the anticipated wage rise (+2.3% y/y; +0.3% m/m). Both values were 0.1 of a percentage point higher comparing to the consensus. As a result, we conclude that the readings should be regarded as slightly positive and may not discourage the Fed from monetary tightening in the coming months.

In the background, however, there is still the issue regarding China and other EM economies. The threats were revealed during the ECB meeting and Mario Draghi conference. The central bank significantly revised downward inflation and GDP projections. Lower CPI which may push the ECB to keep a loose monetary policy is bullish for capital markets, but when there are more threats regarding the whole economy it turns to more concerns. As a result investors firstly cheered on the news but the next day the mood reversed.

Lower hypothetical demand for eurozone products combined with a more accommodative monetary policy is a significant fundamental impulse to sell the euro. The EUR/USD fall on Thursday might have been even deeper than 100 pips if the ECB decision didn't push more speculations that the Fed might refrain from tightening due to weaker world economy. However, if the following days show that the Fed dismisses most of the threats, the path towards 1.10 on the EUR/USD should be open.

Calm week for the zloty

Despite many events on the global financial market the zloty reacted calmly to most signals. The behaviour of local currency was also balanced after weak manufacturing readings from the Polish economy. The dovish message from the ECB and suggestions on more QE pushed the zloty higher and the EUR/PLN briefly touched the 4.20 mark.

The optimism on the zloty didn't last long and with some downside pressure from European equities the euro returned to 4.22-4.23 zloty. Currently there are no reasons to expect significant volatility on the Polish currency. Only a strong deterioration of the sentiment fueled by another wave of weaker data from China may create an impulse to push the euro above 4.25 PLN and dollar above 3.85 PLN.

There is also a chance that a few days after the G20 meeting China will decide to push for some fiscal stimulation. If it turns out to be true then we can expect a higher chance for the EUR/PLN to be pushed below the 4.20 mark.

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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