Daily analysis 05.11.2015

, author:

Marcin Lipka

Readings from the US and comments from the FOMC members pushing the expectations towards the December rate hike. The EUR/USD is also under pressure from weak German data. The Polish MPC is against the interest rate hike but the CPI projection is markedly lower for 2016. Speculations on domestic rating.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.30: Jobless claims in the US (survey: 262k).
  • 19.30: Statement from Dennis Lockhart during the central bank conference in Switzerland.

Double impact to the EUR/USD

Yesterday, there was a culmination of events that pushed the EUR/USD around 100 pips lower, to around 1.0850. Firstly, macroeconomic readings met or exceeded expectations. According to the ADP report, the US economy created 182k jobs in the private sector. It is more than enough to push the unemployment readings lower according to the Atlanta Fed calculator.

Additionally, the market received solid readings regarding the condition of the service sector. The ISM rose to 59.1 points, which was significantly above the 56.5 points expected by economists. The attention was also brought by solid readings of major subindexes. New orders and production rose to 62 and 63 points respectively. The employment ISM was also solid and soared to 59.2 points. It increases the odds that official data published by the Labour Department on Friday will be at least close to market expectations, around 180k.

Moreover, yesterday's comments from Fed officials and especially the suggestions from Yellen during her hearing before the House Financial Services Committee showed a much clearer view regarding the future US monetary policy.

The Fed chief noted the strong condition of the US economy, employment increase, despite the most recent slowdown in payroll creation, and also emphasised that mainly a drop in commodities prices and lower costs of imported goods pushed the inflation close to zero. Yellen also pointed out that the FOMC sees that hiking in December will be appropriate if the economy expands in line with expectations. The FOMC chair also added that no decision has been taken yet and the Committee would analyse the incoming data.

The Fed's chairwoman also stressed the change to the most recent statement which clearly pointed that during the December meeting the decision to hike the benchmark can be made. Investors are also becoming more convinced that the monetary policy change is on the way. The interest rate’s future market sees the chances for a hike at 60% and the 2-year government papers rose to 0.84%, which is the highest level since April 2011.

The downside pressure on the EUR/USD does not come only for the dollar strength. Today's factory orders from Germany were markedly below market expectations. It fell 1% y/y while expectations were at a 1.9% gain. Additionally, there is a significant deterioration in demand from non-eurozone countries, which fell at the fastest pace since 2011, according to Bloomberg calculations. It may be real proof of a slowdown in the emerging markets.

A combination of the fairly solid data from the US and weak data from Germany increases the odds for a hike in the States and gives more arguments to monetary stimulation from the euro area. As a result, it is a strong argument to keep the EUR/USD low and if the current economic trends continue, it may push the pair towards 1.05.

The foreign market in a few sentences

Investors are expected to closely monitor the incoming data and especially the US Labour Department publication, which is due on Friday. If the economy creates around 180k jobs then the current trend should remain in place. Additionally, even if the reading turns out to be much weaker, but not below 100k, investors should only expect a short term rebound on the EUR/USD. Only a set of markedly weaker data might reverse the stronger dollar trend observed for the past several weeks.

MPC and Moody’s

The Polish MPC governor confirmed again that there are no reasons to change the current monetary policy. The market, however, has been focused not on the decision made by the current MPC but on speculations about new members who are expected to take a lead in January and February. Furthermore, if we look at the new macroeconomic projections from the NBP, we can see that there is more room to modify interest rates. The inflation for 2016 was reduced from 1.5% to around 1.1%. Also, in 2017 the CPI will fail to reach the lower bound of inflation target. The GDP projections for 2016 were also lower albeit slightly.

If we look at the data, there is probably enough room to cut the benchmark even by 50 bps – twice the amount that market currently prices in. It may be an element which can put pressure on the currency even after the news regarding the budget hit the wire. It is also worth noting some comments from Moody’s. The rating agency, cited by Bloomberg, claims that the election result is credit negative. It claims that “many of the party's envisaged reforms mark a significant, and credit negative, shift from the policies of the previous government. Moody's also says that “Policies are also likely to show a more marked inclination towards state intervention and a reduced role for independent bodies (including the National Bank of Poland and the Polish Financial Authority)”.

Moody's comments look more negative than earlier warning signs from Standard&Poor's and a fairly neutral approach from Fitch. It is probably a result of the different approach regarding the odds for fulfilling the election promises. As a result, to evaluate the threats we have to wait at least a few months until the new administration starts to govern.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.1050-1.1150 1.1150-1.1250 1.0950-1.1050
Range EUR/PLN 4.2400-4.2800 4.2400-4.2800 4.2400-4.2800
Range USD/PLN 3.8600-3.9000 3.8200-3.8600 3.9000-3.9400
Range CHF/PLN 3.9000-3.9400 3.9000-3.9400 3.9000-3.9400

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5350-1.5450 1.5250-1.5350 1.5450-1.5550
Range GBP/PLN 5.9200-5.9600 5.8800-5.9200 5.9600-6.0000

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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