Afternoon analysis 09.08.2017

09.08.2017 15:01|Bartosz Grejner

Increased risk aversion today has significantly raised the valuation of assets that have been considered safe havens, at the expense of riskier ones. The sale of this type of assets has harmed the zloty that has lost value.

Increased level of uncertainty

Today, the market has been dominated by increased risk aversion, probably caused by geopolitical tensions on the US-North Korea line. Yesterday's appreciation of the dollar after the publication of the data from the US labour market has also contributed to the situation we have observed today.

Consequently, assets considered as risky, i.e. stocks and currencies of emerging countries, have been losing value. Major European indexes have fallen by around 1.5% - 2%. Under such circumstances, the assets regarded as "safe havens" such as gold, the yen or the Swiss franc have clearly gained.

The appreciation of the latter has been particularly significant given the recent decline in its value. However, in relation to the euro, the Swiss currency has gained as much as 1.5% today. Only yesterday we observed the EUR/CHF pair to be above 1.15, but today it has fallen to 1.127.

However, taking into account the reasons behind it, the reaction seems to be somewhat exaggerated. As a result, it will probably return to normal within the next few days. Although, Friday's US inflation data may distort this scenario. If they deviate from the consensus, significant changes in the value of the dollar and yields on government bonds may occur, resulting in relatively large changes in the prices of, among others, emerging countries’ assets.

Current situation is not in favour of the zloty

The sale-off of risky asset classes, including the main European indexes, has noticeably deteriorated the condition of the Polish currency. The EUR/PLN quotes have approached 4.27, which has been the upper limit of quotations of the last three months. In turn, today, for one dollar we had to pay approx. 3.64 zł, although on Friday it was 8 gr cheaper. It is most likely that the zloty has suffered the most severe losses with relation to the globally stronger franc, today.

The value of the Swiss currency in relation to the Polish one has risen to the highest level since July 28. However, the pace of its growth has been very fast - the CHF/PLN pair exchange rate has even exceeded 3.78 today, while it was still at 3.68 on Monday.

Even if the geopolitical situation improves in the coming days, the zloty may continue to remain relatively weak if we observe the dollar's strengthening. In this context, the aforementioned US consumer inflation data (CPI) will be relevant for the valuation of the Polish currency.

Tomorrow's preview

The Office for National Statistics (ONS) at 10.30 will publish June's report on industrial production. The last few months have disappointed market expectations, which contributed, among others, to the significant weakening of the pound in relation to the euro or the zloty.

The median market expectations suggest the decrease in June's industrial production by 0.1% YOY, and the increase of its main component, i.e. manufacturing production, by 0.6%. If the data was consistent with the consensus, this would be the third month of decline in industrial output compared to the same period last year.

Probably, only a reading indicating an increase in the year-to-year production would be able to clearly strengthen the pound. The British currency has been currently weakened by slightly lower expectations of interest rate hikes following the recent Bank of England meeting and the Brexit process.

At 2.30 pm, the US Department of Labor will publish a weekly report on initial jobless claims. Since the beginning of June, the number has not exceeded 250k and it has still been near 44-year-old lows from the end of February (223k). On the other hand, the insured unemployment has been at a relatively low level - last week was the 16th time in a row below 2 million and only 70k above the nearly 29-year lows from May this year.

Theoretically, this report was rather second-tier in terms of its impact on the dollar. However, in the context of recent better than expected inflation and labour market data and the still weaker dollar, better than expected jobless claims' data could be a "confirmation" of the relatively good condition of the US economy.

As a result, the dollar could gain in value, although the appreciation potential would be rather limited. The current market estimates point toward initial jobless claims to amount to 240k and insured unemployment to 1,968 million.

Perhaps the most important scheduled release of this week is Friday's data on July's consumer inflation (CPI), after which we can expect a significant increase in volatility - especially should the readings deviate from the market consensus.

 


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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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