Daily analysis 29.12.2017

29.12.2017 12:54|Marcin Lipka

Further pressure on the dollar with the EUR/USD trading around 1.20. Asian currencies on multi-year highs comparing to their US counterpart. The zloty strengthened again with the EUR/PLN close to more than two-year lows and the USD/PLN below 3.50.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:00 p.m.: Preliminary data on German inflation from December (estimates: 1.5% y/y and 0.5% m/m).

More pressure on the dollar

The US currency is weaker again despite somewhat higher yields on Treasuries and new highs on the NYSE. The EUR/USD is approaching 1.20. Higher valuations on the main currency pair don't equate to the strength of the euro. The EUR/CHF is lower in comparison to the previous day while the EUR/GBP is flat.

As we noted before the holidays, it is difficult to find a logical argument which supports the most recent dollar selloff other than certain portfolio fluctuations by large non-FX funds. In combination with the low volume at the end of the year, it causes future interest rates to not be the main reason behind investors' transactions but rather the changes generated by market participants who are more prone to time pressure than price issues. A deviation such as this should be reduced when the market's depth returns in January.

The weak sentiment to the dollar is magnified by the fact that it hasn't reacted to positive messages from the US economy. What is worth noting, is that it not only pushes the EUR/USD higher, but valuations of some Asian currencies are markedly supported. During the current year, the Thai baht gained about 10% to the dollar. Moreover, the USD/THB is close to its lowest levels since April of 2015. It is only 3 percent short of a value not seen since November of 2013.

Tensions on the Korean Peninsula failed to keep the Korean won under pressure. The USD/KRW is almost at its lowest levels since November of 2014. The Taiwanese dollar is also strong. It rose only 7 percent to the greenback this year, but it is at the highest level to its US counterpart than it has been in more than four years. It shows that only CEE currencies (including the zloty) are taking advantage of the weaker dollar.

Inflation from Germany

Today the only significant event on the FX market is the German inflation data. The market consensus shows that the price presser lessened in December in comparison to the previous month (to 1.5% y/y from 1.8% y/y).

In the morning, however, data from certain parts of Germany have already been published. They point to a slightly lower reduction in inflations than was earlier anticipated. Although, in Saxony and Northern Rhine-Westphalia, inflation in comparison with November data fell by 0.3 percentage points on an annual basis. However in Bavaria, it was only lower by 0.1 percentage point, and in Baden-Württemberg, it remained at the same level every month before. This may mean that inflation could be slightly above the consensus at 1.5 y/y.

It seems that this data should not have a particularly large impact on EUR/USD valuation. Firstly, most of the recent moves have been caused by the dollar and not the fluctuations of the euro. A more fundamental view of the market by investors will probably be seen at the beginning of January when volume returns to its normal levels.

Strong zloty

The weak global valuation of the dollar is pushing the USD/PLN to new lows. The pair is trading at 3.48, a value not seen in three years. The zloty also gained to the euro. The EUR/PLN is only a half percent short of levels recorded in August of 2015. The Polish currency, in line with earlier reports mentioned by the KRW, the TWD, and the THG, is taking advantage of solid global sentiment and broad dollar weakness.

The zloty is also supported by the stable condition of the eurozone and solid performance of the domestic economy. The high GDP growth, however, does not translate to a more hawkish MPC view that decreases the impact of local events for the currency and would strengthen its foreign impact. The following hours should not markedly change the sentiment on the zloty, which may mean that the PLN will finish December at a high level compared to its valuation over the past two years.

 


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