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Afternoon analysis 19.09.2016

, author:

Bartosz Grejner

Better than expected data from the Polish economy. Speculations regarding the behavior of the Bank of Japan strengthen the yen.

Positive data from Poland

Today, we have received three important readings that appeared to be better than the market consensus. This has additionally strengthened an already relatively strong Polish currency. Retail sales increased 5.6% y/y and it was its largest growth since April 2014. This is a positive information for the Polish currency, because consumers expenses are responsible for the majority of the GDP value, as well as are significant for forecasts of the GDP growth this year.

After surprisingly weak industrial production data from July (a 3.4% decline), there was a 7.5% y/y increase in August (against the 5.8% consensus). This was this index's best result since November 2015. Even though historical data is very volatile, this is definitively a positive signal for investors (as well as rating agencies) about the condition of the Polish economy in the third quarter of 2016. Moreover, the PPI inflation reading from August was at a negative year on year level (negative 0.1%). However, inflation has been slowly rising since September 2015. Therefore, we can expect to see it at a positive level soon.

Even though the data from the Polish economy is positive for the zloty, as well as for the stock market, the zloty's appreciation potential is most likely exhausting. The forthcoming days will bring important decisions from central banks that most likely will put aside the emerging market currencies. According to our forecasts, the EUR/PLN is moving near the 4.30 level and this should be the boundary for this pair for the time being.

Unwanted appreciation of yen

In less than one day before the Federal Reserve decision, we will know the methods that the Bank of Japan will use to revive the economy. Unfortunately, a strong and gradually strengthening yen is causing export to stop increasing, as well as is not supporting import, which would cause the economy to return to the correct path of growth.

Despite implementing negative interest rates, aggressive balance operations, increasing profitability of the Japanese bonds is another reason to worry about next to the strengthening yen. The bonds don't give bases to think that the yen's appreciation will suddenly stop. Therefore, expectations towards the BoJ are much larger than towards the Fed meeting, which is scheduled for few hours later.

Over the past week we have heard from the BoJ, as well as Prime Minister Abe's government that the BoJ may decrease interest rates even more below zero, as well as increase the assets purchase program. Theoretically, this should wear-off the yen and contribute to an increase in export. However, past months show that the Bank's action regarding this matter are ineffective. Moreover, this plan could be spoiled by the lack of changes in the American interest rates, as well as a relatively dovish message from the Fed.

Tomorrow's events

Tomorrow at 8.00 AM, we will know the PPI inflation data from Germany for August. The market consensus estimates a 0.1% increase (0.2% growth in July). The German economy has not been developing rapidly recently. Therefore, it's difficult to justify expectations of a significantly better inflation in August.

On the other hand, there was no negative reading since February. Therefore, only a much worse than expected PPI inflation (negative) could cause a slight wear-off of the euro. In any other case, we don't expect larger changes on the European currency.

At 14.30 (2.30 PM) we will know important data from the American real estate market, which will give a clear picture of the buildung sector's condition. It's worth adding that it will be one day before the decisions from central banks of Japan, as well as the USA. In July, sale of new houses was growing the fastest in almost nine years. Therefore, the highest growth of the amount of initiated house constructions in five months has been quoted.

Even though a month on month decrease is expected for August, the market consensus is assuming that the readings will be better than those from June. Next to the amount of initiated house construction, we will know the data regarding building permits. This index has gradually been increasing since March. In general, investors have been receiving positive information from the American real estate market lately. Positive data is expected tomorrow as well.

This data should strengthen the dollar one day before the Fed's decision. The speculations are that the Federal Reserve announcement will be more hawkish, despite no changes in interest rates. However, we expect that a decision such as this would wear-off the dollar in the mid-term.


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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