Dollar reaches new highs (Daily analysis 21.05.2018)

21.05.2018 12:40|Marcin Lipka

Pressure on emerging markets is still visible. The EUR/USD pair reaches this year's new lows in the morning. Data from the Polish economy seems to be positive but has a limited impact on the zloty due to strong negative external signals. The EUR/PLN pair close to the 4.30 boundary.

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

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Again negative sentiment present in the market

The EUR/USD recorded a new half-yearly lows close to 1.1700 boundary just after the European session started. The pressure on the main currency pair is caused by both the strength of the dollar supported by the outflow of capital from emerging markets, higher than expected interest rates in the United States, and the weaker euro, which is influenced by the problems in Italy.

The yields of Italian Treasury bonds maturing in 10 years reached the level of 2.3%, which is about 50 basis points more than at the beginning of the month. However, the nominal values are not the most important ones. The most interesting is the way Italy's debt behaves in relation to Portuguese instruments. The yields on 10-year Italian bonds are 35 basis points above those of Lisbon. This is the biggest difference in almost 10 years. Moreover, it is also worth noting that Portugal has a speculative rating and Italy has an investment rating. The market, however, appreciates it completely differently.

There is also no positive news from the oil market. Nicolas Maduro, who has been in power so far, won the elections in Venezuela on Sunday. This means that the underinvested extractive industry will deepen its collapse, which in turn, will signal further increases in the price of crude oil or at least the maintenance of its very high prices.

The strong dollar and rising energy prices are a bad combination for the currencies of emerging countries. This applies mainly to those countries with high current account deficits, which are additionally financed in USD. Today, the Turkish lira has reached new historical lows. The USD/TRY pair cost 4.56 today, i.e. the dollar was the most expensive in history in relation to the lira.

Over a month, the losses of some EM currencies are extraordinary. The Argentine peso lost 17% and the Turkish lira 10% against the dollar. The Brazilian real, the zloty, the Mexican peso and the Hungarian forint dropped by 7-8%. Apart from global issues, each country has its own local problems. Argentina has fallen into serious financial difficulties due to an insufficient number of reforms and absorption of earlier capital inflows, and Turkey is giving too much stimulus to the local economy. The currencies of our region, i.e. the forint or the zloty, in turn, are influenced by the weakness of the euro and the hypothetical problems related to Italy. This may worsen the financial situation and economic condition of the entire European Union in the coming quarters.

There are no signs so far that the current situation will change significantly. The risks associated with Italy, the situation on the energy raw materials market and the pressure on emerging markets are likely to maintain the current trends in the coming days.

Zloty remains under pressure

At 10.00 a.m., the Polish Central Statistical Office (GUS) published data on industrial production from Poland. The readings for April were very good. The results of 9.3% year-on-year exceeded the market estimates (8.5%). However, the number of working days was higher by one this year than last year. In addition, the issue of a different calendar of holidays has to be taken into consideration, which also disturbs to some extent the readings. According to the Polish Central Statistical Office (GUS), after seasonal adjustment of data, April's data reached the 5.9% year-on-year level, which can be considered as a decent result and is in line with the recent trends.

In the case of strong external factors (details in the previous paragraphs), national data rarely cause significant changes in the zloty. Therefore, it is possible that the Polish currency will be under pressure from events in Italy, high oil prices and a strong dollar. This will hamper the creation of the zloty's upward movement, while if current trends deepen, it may result in new highs reached by the euro, the dollar or the franc.


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