Daily analysis 22.07.2016

, author:

Marcin Lipka

The British PMI readings are the worst since 2009. Brexit has a minor impact on the German economy. The doors are open for the Bank of England to ease the monetary policy. The zloty benefits from a positive attitude towards the emerging market currencies.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • No macro data that could significantly impact the analyzed currency pairs.

PMI indicates decrease in British economy

Today's PMI readings from the British economy were anticipated by investors for many days. It was obvious that Brexit will have a negative impact on the opinion of logistic managers regarding the level of orders, productions and employment. The scale of this phenomena was difficult to estimate. However, we have clearly emphasized yesterday that the publication may be significantly below the already pessimistic forecasts.

The process of anticipation for the British publication, slightly disturbed positive data from the German economy. The group PMI index for the services and the industrial sectors, increased to its seven-month maximum. The study was made by IHS and Markit. Both agencies took note that an increase in new export orders was strong and that increase in employment was the highest in almost six years.

In his commentary to the data, Oliver Kolodseike, Markit economist, claimed that, “for the time being the enterprises do not seem affected by uncertainty regarding Brexit.” This brought some investors to a conclusion that the British data might be relatively positive, so the pound went to the area of 1.3280.

However, it appeared after 10.30 that the situation is significantly worse than economists who were surveyed by Bloomberg expected. The PMI compound of the services and the industrial sector went down from the level of 52.4 points to 47.7 points, against the 49 points expectations. This is also the lowest level since April 2009 that caused a sudden depreciation of the GBP/USD to the 1.3120 area.

The index description, as well as the Markit and CIPS economists commentaries, don't seem to contain positive elements. The only positive thing is an increase in export orders that most likely was caused by a significant overvalue of the pound. Rest of the PMI components were very weak.

Chris Williamson, chief economist of Markit, wrote that, “July brought a dramatic deterioration in economy, due to the fact that activity of enterprises was decreasing at the fastest pace since the worldwide financial crisis.” Entrepreneurs have also observed canceling of orders, shortage of new orders, postponing or withholding new projects. Moreover, Williamson expects the British economy to shrink in the third quarter by 0.4%.

Actions of Bank of England

Depreciation of the pound caused by a weaker PMI reading, would probably have been milder if it wasn't for the forthcoming Bank of England (BoE) meeting. A significant deterioration of on of the leading accelerating indexes, is a very good argument for the dovish, as well as neutral BoE members, to decrease interest rates more than it is assumed by the market consensus.

The Bank of England may also seriously take under consideration the suggestion of implying the monetary easing, as well as increasing scale of the assets purchase already at the beginning of August. Depending on scale of actions, as well as further macroeconomic publications, this could increase the likelihood of the GBP/USD to return below 1.30, or even a quick descent to the new thirty-year minimum against the dollar.

This situation would be negative for evaluation of the pound against the zloty as well. Especially taking under consideration that the Polish currency is doing relatively well recently. If the Bank of England combines a decrease in interest rates with the return to purchase of treasury bonds, the GBP/PLN may quickly go below the limit of 5.00.

Tidbit from Turkey

Few days ago we wrote about the decision of Standard & Poor's regarding a downgrade of Turkey's rating. As in similar cases, this time the statements from the government were negative as well. However, the statements from the Turkish vice-prime minister in his interview with Bloomberg, were far beyond what is usually heard in similar cases.

Nurettin Canikli said that, “Standard & Poor's is in the same camp as the ones who planned the coup d'etat.” However, even if similar statements appear in the case of anticipated decisions of Moody's, as well as Fitch, we do not expect a dramatic depreciation of the lira for the time being. This would only occur if Ankara abandons the path of allegiance with the West. Despite a very tense situation, this is not the base case scenario for the time being.

Zloty is stronger

The past hours have brought a further appreciation of the zloty. Of course, it is most visible against the pound. In the case of other currencies, it is at the level of approximately 0.01-0.02 PLN. A positive global sentiment combined with a limited perspective of monetary tightening in the USA, continues the main reason for this phenomena. In such conditions, the PLN continues to benefit from a positive decision of Fitch regarding not changing Poland's rating.

However, we may discuss whether a worse situation in Turkey impacts improvement of the PLN condition. The chances that investors who reduce their position on Turkish bonds transfer them to Poland, are rather small. Turkey, Russia, Brazil and the Republic of South Africa are places of a definitely different risk profile than Poland. Thus, it is rather the rouble, rand or real that may benefit from escape from Turkey, instead of the zloty.


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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