Afternoon analysis 14.09.2016

, author:

Bartosz Grejner

Labor market in the United Kingdom remains strong. The Bank of Japan is considering to continue cutting interest rates. The Polish currency is supported by the global sentiment, as well as underestimation.

Labor market is not that negative after Brexit

Anybody who has expected a sudden breakdown in the British labor market after Brexit, can feel disappointed. Unemployment rate remains at its 11-year minimum and is at the level of 4.9%. However, we must keep in mind that this level includes three past months (including July). Therefore, we need to wait a few more months in order to see the Brexit effects more clearly. We also need to emphasize that unemployment rate in July alone was at the level of 4.7%. This goes to show that the labor market's reaction shortly after the referendum was not negative. At the end of July, the amount of employed increased to its record levels to 31.8 million (by 174k).

The forthcoming months will most likely show a lower increase in employment, due to increasing anxieties from employers regarding negative effects of Brexit. Moreover, inflation may appear the main problem during the coming months. Combined with the weak pound and increasingly expensive import, inflation may negatively impact consumers' expenses, as well as wear-off an increase in the GDP. We don't expect changes in the monetary policy after the Bank of England meeting tomorrow, but weaker data will cause pressure on this institution to limit negative Brexit-related factors during the coming months.

Commotion yen's wear-off by Bank of Japan

Reuters informs that the Bank of Japan (BoJ) is considering a decrease in interest rates to negative 0.2%. Moreover, this might be the main aspect of monetary easing in the future. Recently, investors were afraid of possibilities of economic stimulation by BoJ to exhaust. We also need to keep in mind that the possible lack of decision regarding rate hikes by the Fed in September would wear-off the dollar, as well as strengthen the yen. This is not favorable for the BoJ, because a stronger yen means a weaker export, which fuels the Japanese economy. Even thought the representatives of the BoJ, as well as of the Japanese prime minister have suggested that they will wait for the Fed's decision, it seems that we may expect monetary easing in Japan by the end of September. This decision is most likely dependent on the exchange rate of the yen.

Zloty is strengthening

The zloty was moving chaotically within a narrow range during the first part of the day. Later, we could observe a clear strengthening of the zloty. One of its reasons is underestimation of the zloty (depreciation against the forint by approximately 2% over last month, for example). Due to a deterioration of the global sentiment, the zloty did not manage to strengthen after a positive lack of changes in Poland's rating by Moody's. Another factor that might have caused today's strengthening is a decrease in profitability of the two-year American treasury bonds. This has been caused by a decreased probability of rate hikes by the Fed.

Tomorrow's events

Tomorrow may appear to be a crucial day for some currencies. It may have a possible impact on their quotations during the coming weeks. This is why it's especially important to look at the most significant Thursday's events.

The Swiss National Bank will reveal its decision regarding interest rates at 9.30 AM. It's very likely that they would remain unchanged (negative 0.75%). However, crucial decisions such as this, may cause increased fluctuations in franc's exchange rate. The power of these fluctuations may by additionally strengthened by a larger uncertainty in the markets.

At 10.30 PM, we will receive first crucial data regarding the British retail sales in August. The expected decline is at the level of 0.4% (positive 1.4% in August). The market will look specifically carefully at the British data, because it concerns the period after the Brexit referendum. In historical interpretation, retail sales readings from August were rarely above zero (only once over past five years). Therefore, information about an increase in retail sales would impact the pound's quotations positively.

At 13.00 (1.00 PM), we will know the decision from the Bank of England regarding interest rates and quantitative easing program. This is this week's main event. Therefore, we expect large fluctuations on the British currency, regardless of the decision. The market estimates that interest rates would remain unchanged (0.25%), as well as that the current quantitative easing program will remain at the level of 435 billion pounds. We also expect no changes in both indexes. However, this decision may not be unanimous. The Bank of England's MPC chairman, Mark Carney, emphasized in his statement from August that the majority of the Committee's members see space for a further decrease in interest rates, in the case of deterioration in the economic condition. Statements from the MPC members themselves show the lack of unanimity regarding interest rates, but they agree about the uncertainty of the future economic condition, as well as that cautiousness is required. The data from the British economy after the referendum don't indicate its sudden deterioration. Moreover, inflation is also at its similar level. Therefore, we don't see why the majority of the MPC members should vote for cutting interest rates tomorrow. It's more likely that the Bank of England would be cautious and wait for more economic data, in order to have more information regarding interest rates, as well as the QE. The lack of unanimity regarding interest rates may be interpreted by the market as a possible decrease in interest rates by the end of the year. This may wear off the pound.

Tomorrow, we will also know a lot of significant data from the American economy. At 14.30 (2.00 PM), we will receive readings regarding retail sales, PPI, jobless claims and the Philadelphia Fed Index. The market anticipates an increase in these readings in month on month relation. This is probably already included in the dollar's evaluation. The retail sales data will most likely be crucial for the dollar's quotation. A 0.2% increase of this index is expected (excluding cars), whereas last month brought a decrease at the level of 0.3%. Despite a negative reading in July, expenses of the American consumers are still supported by a relatively strong labor market, as well as high stock market indexes (despite their declines over past few days). Therefore, we don't expect another negative reading. However, apart from increased volatility of the dollar, worse readings may wear-off the American currency below 1.12 on the EUR/USD. Moreover, at 15.15 (3.15 PM), which is before the session in the USA, we will receive the industrial production data. This index is expected to go down by 0.3%, in comparison to a 0.7% increase last month. A negative reading should not impact the dollar strongly, considering that this data is known for its large volatility, as well as that the indexes have a relatively larger significance in comparison to industrial production.


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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