A weaker dollar supports the zloty (Daily analysis 8.06.2020)

Relatively low quotations of the dollar are a good signal for the Polish currency, which remains weak. The strongest decline in the history of the German industry - production in the automotive industry shrank by three quarters in April.

The new week on the market started with limited changes. It was partly a matter of lack of significant events, and partly of discounting data from the end of last week. The May report on the US labour market presented then surprised positively, indicating, among others, an increase in employment or a decrease in the unemployment rate compared to the previous month.

The dollar index is the lowest since March

Positive sentiment from last week was also present. The dollar index according to Bloomberg (which includes currencies of emerging countries) fell to around 1203.9 points this afternoon. This is the lowest level since March 11th. This underlines the current weakness of the US currency.

The main currency pair, i.e. the EUR/USD, continues to oscillate around the 1.13 limit, although it was even below 1.09 two weeks ago. The continuing weakness of the dollar and the domination of positive sentiment in the broader market continue to help the zloty.

At first sight, the zloty is stable

The zloty's quotations against the main currencies were quite stable today. The EUR/PLN exchange rate oscillated around 4.43 and USD/PLN between 4.92 and 4.93. However, if we take into account the aforementioned condition of the dollar and market sentiment, the zloty should, in theory, benefit a little more from such favourable circumstances.

But that's not what is happening. Today, the zloty was at the bottom of the list of the weakest emerging countries' currencies in relation to the euro. This is most likely a consequence of an unexpected interest rate cut by the NBP. Therefore, the relatively weak condition of the Polish currency is further masked by the domination of positive sentiment resulting in an increased appetite of investors for more risky assets.

The zloty's condition in the coming months will largely depend on the rate at which the economies return to their pre-pandemic state. Although the market is now focused on the future and supported by the monetary stimulation of central banks, the incoming data highlight the low level of the economy that is starting to recover.

Shocking declines in production

The aforementioned data include today's publication of the Destatis, the Federal Statistical Office. Industrial production in April fell in Europe's largest economy by 25.3% year-on-year, 17.9% month-on-month. However, the pandemic and related restrictions had an uneven impact on individual industries.

The production of consumer goods decreased by 8.9% year-on-year, and indirect by 13.8%. Much more severe declines occurred in the production of capital goods - by 35.3%. The virus affected the automotive sector, where a drastic decline of 74.6% was recorded.

Such huge differences in individual industries can make it difficult for economies to get back to their starting point quickly. The current positive sentiment towards the lifting of restrictions may deteriorate over time, increasing somewhat the supply pressure on, among others, emerging countries' currencies. This may particularly affect the zloty if it continues to be accompanied by the internal weakness observed over the past few days.