Daily analysis 24.07.2015

, author:

Marcin Lipka

The PMI readings from China and France were clearly weaker than expected. Publications from Germany and the eurozone were also disappointing, but the increase tempo of the common currency area in the third quarter should not be endangered. The rand will possibly still wear off despite the increase in interest rates of the Republic of South Africa. Stabilisation of the national currency is still the base case scenario.

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

  • 15.45: The initial PMI reading from the American industry (estimations: 53.6 points).
  • 16.00: Sales of new houses in the USA (estimations: 548k).
  • Monday at 10.00: The German Ifo index (estimations: 107.5).

The PMI is weak but not tragically

The industrial PMI readings from China were published last night. They were significantly worse than economists expected (48.2 points vs 49.7) and quoted 15-month minimums. Looking at the most significant sub-indexes it is impossible to find any positive aspects. Production, employment and orders are shrinking. This can be a serious threat for the strategy of maintaining the growth of GDP on a level of 6.5-7% until the end of the year.

Publications from the eurozone were also worse than the market's consensus, although in this case there is a clear distinction between France, Germany and other countries sharing the common currency. Worse information was regarding the renewed shrinking of the French industry (49.6 points), as the market expected a reading of above 50 points, which would mean a slow development.

Jack Kennedy, a senior economist of Markit (the company conducting the survey), claimed in his comment regarding the French data that “a weaker tempo of new orders has been quoted and the employment shrunk for the first time in 5 months”. Kennedy also thinks that it will be difficult to keep the growth of the GDP on the level of +0.6% q/q.

Publications from Germany were also quite disappointing, although in this case the difference between the economists' expectations and the real reading, was significantly smaller. The group publication including industry and services was by half of point weaker than the consensus. However, data on the level of 53.4 are close to this year's average.

In his comment regarding the German data, Oliver Kolodseike, Markit's economist, claims that “despite a slight decrease in production in relation to June, the companies are quoting an increased tempo in the new orders, and an increase in employment to a healthy level”.

Weaker data from the two strongest economies has increased fear that the general readings from the eurozone will also be weak. However, the situation was not as bad as the expectations. The PMI index from 8 of the eurozone countries achieved 53.7 points. It was the sixth best reading since mid 2011.

According to Markit information, this time the peripheral countries behaved better than the core of the eurozone. Despite there are not being any detailed data from particular countries in the initial readings, it is most likely that Ireland and Spain were the leaders when it comes to increases.

In his comment regarding data, Chris Williamson, chief of Markit economists, referred to the Greek situation. He claimed that in general the entrepreneurs did not experience a negative impact of the crisis in Greece. Williamson also claims that recent readings show an increase in the eurozone's economy, to a tempo of at least 1.5% in 2015.

Rand will possibly remain under pressure

Yesterday's hikes in South African interest rates, do not change the attitude towards the rand. A lot of problems are still ahead of the most developed African economy and they should have a negative impact on its currency.

The Republic of South Africa has some serious social problems regarding unemployment which is over 25%. However, danger of strikes forces a relatively quick increase in salaries. Additionally, the authorities are saving themselves by raising taxes and fees for electricity among others. This causes inflation pressure despite this problem generally not concerning the rest of the world. Due to a decrease in raw materials a lot of countries are quoting deflation.

The GDP being in the limits of 5%, a deficit on the current account, and a 4% budget deficit are still a danger. This causes the country to be very sensitive to any market disturbances regarding an increase in aversion towards risk, or the perspective of the monetary tightening in the USA.

The base case scenario for the rand is a decrease in its value, which will at least be equal to the difference between the RSA and its trading partners. It is 4-5% in a year on year relation. On the other hand, in case of bigger turmoil on the market and further decreases in raw material prices (gold, platinum, copper and coal) the price of the American dollar can quickly cross the level of 13 rands.

Few words about the foreign market

A decrease in the EUR/USD caused by the weaker PMI readings is most likely to become larger next week. Anticipation for Wednesday's meeting of the Federal Reserve itself should enforce the American currency and it is possible that in the middle of next week the EUR/USD will be in the limits of 1.0850.

Euro is stable and franc is cheaper

The base case scenario for the EUR/PLN is still a stabilisation in the area of 4.12. When it comes to the American dollar, according to our concept of the buck's behaviour on the international market, an increase in the area of 3.80 PLN should occur in the middle of next week.

Slightly bigger movements are observed on the franc. The Swiss currency got clearly weaker to the euro, for no apparent reason. This caused the CHF/PLN to go to the area of 3.90 for a moment. However, crossing this area is currently not the base case scenario, because the franc's wear off on the international market is unlikely. Only in the case of an end to the problems regarding Greece and more political stabilisation in Athens, a sufficient outflow of capital from Switzerland can be noticed, and the EUR/CHF would go above 1.05. It would translate to a decrease in CHF/PLN to below 3.90.

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

Range EUR/USD 1.0850-1.0950 1.0750-1.0850 1.0950-1.1050
Range EUR/PLN 4.1000-4.1400 4.1000-4.1400 4.1000-4.1400
Range USD/PLN 3.7400-3.7800 3.7800-3.8200 3.7200-3.7600
Range CHF/PLN 3.9200-3.9600 3.9200-3.9600 3.9200-3.9600

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

Range GBP/USD 1.5450-1.5550 1.5350-1.5450 1.5550-1.5650
Range GBP/PLN 5.8000-5.8400 5.7600-5.8000 5.8400-5.8800

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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