Global depreciation skipped zloty (Daily analysis 05.02.2018)

05.02.2018 13:06|Marcin Lipka

Weak sentiment on the share market and growing yields on US Treasury bonds still have a very limited impact on the valuation of emerging countries’ currencies. Weak data from the UK. The zloty remained relatively stable. The EUR/PLN pair stays between 4.15 and 4.16.

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

  • 4:00 p.m.: ISM index from the US service sector (estimate: 56.7 pts.).

Really weaker sentiment but currencies without significant changes

When only focusing on certain parts of the currency market, it can be concluded that in recent days a stable sentiment on the global stock market (or relatively limited changes in the debt instruments) has been observed. This calm situation on the EUR/USD pair or on the currencies of the emerging countries can be misleading.

Last week has been the worst week for the Dow Jones index in the US for two years. On Friday, the main US indexes fell by more than 2%, and today's Asian session ended clearly in the red. In the morning, during today's European session, US Treasury bond yields maturing in 10 years reached new highs of 2.88%. There is a shortage of about 20 basis points for yields to reach the highest levels in about 7 years.

The current conditions are not optimal for emerging market currencies, however they did not depreciate. It can even be stated that if they remain at a high level, taking into account the current sentiment, it is difficult to find conditions under which they would be depreciated.

Generally, if the current market trend continues (drops in stock markets and increases in yields on the US Treasury bonds and other developed countries) that a capital outflow from EM currencies is expected. Currently, investors probably consider the declines to be a short-term stop before further growths. EM currencies are also supported by the fact that the net number of positions increased again (to new records) for further EUR/USD increases (data at the end of Tuesday's session). However, if these positions are reduced over time, then the pressure on EUR/USD may suddenly increase, and this could be an argument for the weakening of emerging market currencies.

Weak PMI data from the UK

Similar to the PMI readings from the industry sector in the UK, the service sector data is not positive either. According to IHS Markit and CIPS data, the index fell to its lowest level since September 2016 and amounted to 53 pts. in January. The survey showed a weak increase in new orders (below the 2017 average) and decreasing price pressure.

Chris Williamson, head of economists at IHS Markit, stated that PMI data for Q4 showed GDP growth of 0.4-0.5% quarterly, but January's reading suggests a reading slightly below 0.3% QOQ.

Apart from the British service sector's weakness, it is worth noting the growing tensions in the British Government (future relations with the EU) and the Bank of England meeting on Thursday. It is difficult to expect many hawkish statements when taking the political situation and unsatisfactory economic prospects into account. Therefore, today's data increased the pressure on the sterling.

Calm situation on the zloty

Due to the scale of drops on the US market on Friday and the increasing yields on the US Treasury bonds to multi-years highs, testing the 4.17 border by the EUR/PLN could be considered as a very mild move. However, around midday, the euro was again in the range of 4.15-4.16 PLN, which essentially erased the increases from week’s end.

The calm response on the zloty resembles the behaviour of other emerging markets' currencies (the dollar costs less than 6.30 yuan, close to the last more than two-year-old lows). However, if the situation on the core markets continues to deteriorate, it would be more difficult for the zloty to maintain current levels. Adaptation to the new situation would also be quite rapid and short-term and increases on EUR/PLN could not be excluded.


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