Afternoon analysis 04.03.2016:
High volatility after the US labor market data. Drop in wages was the largest disappointment. The zloty gained against its major pairs.
The dollar dropped after the US labor market data. The release was however unclear. On the one hand, employment in non-farming sector increased 242k in February. The reading was better than the 195k forecast. Last month companies added 172k (revised from 151k). The unemployment rate stood at 4.9 percent - the lowest level in eight years.
On the other hand there was disappointing result of wage growth. On a monthly basis wages dropped 0.1 percent against the 0.2 percent forecast. In the prior month wages increased 0.4 percent. Last time wages dropped was in December 2014. On a yearly basis wages increased 2.2 percent against the 2.5 percent forecast.
The overall assessment of the US labor market stays positive. Rising employment and low unemployment rate show an ongoing expansion. However, the wages growth is not satisfying. Without significant payment increase consumption will not be enough to support inflation. Combined with the commodity market situation and anxiety concerning the global economy the probability that the Federal Reserve meets its inflation goal has declined. Moreover, the Fed is currently more susceptible to the inflation data than the labor reports.
The market reaction was unclear. The dollar gained just after the report was released. But later the US currency posted losses against the euro.
Stronger risk appetite
Easing of anxiety concerning the global economy has recently supported the commodity markets. The copper price increased to the highest level since November 2015. The oil price also gained. It was supported by speculations that the oil producing countries may reach an agreement to freeze the output.
The latest news concerning China were also positive. Recently the People's Bank of China said it may change its stance to more dovish. The Bloomberg agency said that Prime Minister Li Keqiang will announce the shift during his speech on weekend. More support to the economy from the Chinese government may support the general market sentiment. It will support the commodity markets, and as a result the currencies of commodity exporting countries.
Additional factor that may support the positive sentiment is the expectations the European Central Bank will add to stimulus. On its next week meeting the Frankfurt-based institution may lower deposit rate or increase the level of asset purchase. Today the MNI agency cited unofficial sources in the ECB that said there is no consensus in the Governing Council on whether to use other tools than lowering deposit rate. Moreover, the monetary authorities are afraid they will miss market expectations. It would lead to repetition of the December scenario, when the ECB's meeting resulted in a strong increase of the euro due to investors disappointment.
The latest comments from the MPC limit the probability of interest rate cuts. Yesterday Kamil Zubelewicz from the MPC presented clearly a hawkish stance. His comments supported the consensus in the MPC that currently there is no need to cut interest rates. It should support the Polish currency in the longer term.
On Friday the zloty gained against its all major pairs. The Polish currency exploited positive sentiment in the broad market. If the ECB meets the market expectations and the Fed lowers the pace of interest rate hikes, the zloty may gain further.
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