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A lot of signals but limited changes (Daily analysis 29.01.2019)

29 Jan 2019 14:10|Marcin Lipka

Reports on trade negotiations, Venezuela or Brexit, may cause greater changes in currencies, but it is possible that the market is waiting for macroeconomic data scheduled for the next few days. The zloty remains stable, and the euro continues to move slightly below the 4.30 PLN limit.

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.

There are impulses but not sufficient

The main currency pair's exchange rate is relatively high, given the weak macroeconomic situation in the eurozone and the poor prospects for the ECB to raise interest rates. On the other hand, the yields of US Treasury instruments remain at the levels of the end of December 2018, which means that the market does not assume a further tightening of monetary policy also in the USA. What can improve the market situation?

Reports from Venezuela will not help either. Despite the sanctions imposed by the United States on the state-owned concern PDVSA (de facto preventing its export to the United States), there are no negative consequences of this movement. These include, for example, the cancellation of the visit of Chinese representatives to Washington, which is to begin today. China has become financially involved in Venezuela (mainly in infrastructure investments) and regime change could threaten their influence in the region, even though Juan Guaido, the interim president, recognised by most countries of the American continent, has announced that they will be recognised when the authorities change.

Ahead of us, there are also key events concerning Brexit. In the next few hours (probably after 8:00 p.m. CET) there will be a series of votes on amendments to the Brexit plan.

Some of the initiatives are of a cross-party nature, which shows the increasing involvement of the House of Commons in the Brexit process. These include, for example, the Cooper-Boles amendment, which extends the negotiation period to the end of the year if the government's plan is not adopted by the end of February. They increase not only the chances of leaving the EU in an orderly manner but also of a gentle Brexit.

On the other hand, noting the popularity of parliamentarians' initiatives, Prime Minister May is also preparing a modified plan to leave the EU, which will satisfy both Eurosceptic Tory members (modification of the backstops) and those who want more time to develop a close trade agreement (the transitional period may be extended by one year until the end of 2021). During this time, the UK is also expected to pay contributions to the EU budget to encourage Brussels to have a more gentle attitude towards it.

In general, however, the first initiative (Cooper-Boles) seems to be much better for the pound. Firstly, it extends the duration of the UK's stay in the Union (probably until the end of 2019) and not the extension of the transitional period after the exit from the EU. Secondly, this option may be further developed into a customs union (the backstop issue disappears), or even the Norwegian plus option (customs union combined with the common market) or a new referendum and remain within the EU structures. If this option received a majority of votes in the House of Commons today, then a strong strengthening of the pound, which in relation to the zloty could exceed the limit of 5.00 PLN, could be expected.

Zloty with no changes

The situation of the Polish currency remains stable. The zloty in relation to the euro still fluctuates slightly below 4.30, and we will not see a more pronounced increase in volatility in this pair in the following hours. More may happen at the GBP/PLN pair, especially in the evening trade, when the House of Commons votes will show which solution to the Brexit issue British parliamentarians tend to prefer.

Greater volatility in the zloty may occur at the end of the week when a number of data from the USA (labour market, ISM) or the eurozone (GDP readings) will be published. Until then, apart from the pound, the zloty pairs are likely to remain relatively stable.

29 Jan 2019 14:10|Marcin Lipka

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 acknowledgement of the source is prohibited.

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