Afternoon analysis 18.07.2017

Another portion of bad news from the United States weakened the American currency. The zloty benefits from the dollar's depreciation and strengthened its position. An additional argument for the appreciation of the Polish currency was given by data on wages - their growth pace in June was the highest since January 2012.

Dollar clearly lost value

Today, the ZEW Institute published the monthly Financial Market Report, which publishes the values ​​of the economic sentiment indexes for the eurozone, Germany and the USA, among others. The market expectations indicated that the ZEW index for both the eurozone and Germany may slightly decrease, but they fell below expectations, which have probably also contributed to a decline in the European stock markets.

The Germany's expectations index has decreased by 1.1 points (to 17.5 points), while for the eurozone by 2.1 points (to 35.6 points). However, in the case of the eurozone, the assessment of the current situation has increased significantly - by 8.2 pts (to 28.7 pts). The inflation expectations in the eurozone (+7.3 points) were also significantly higher - although growth in Germany (+5.3 points) was also noticeable.

The data, however, had a limited impact on the euro. The news of the day was connected with the introduction of changes in the US healthcare system (and a replacement for Obamacare), which caused problems. It has led to a significant drop in the value of the dollar and, as a result, the euro has gained significantly. The EUR/USD pair rose as high as 1.1560 before 3 p.m. CET - the highest since May last year.

Against the US currency, the Australian dollar - AUD/USD rose to 0.794, which was the highest level since May 2015. This is the result of the publication of minutes from the last monetary policy meeting of the Reserve Bank of Australia, which was viewed as hawkish and increased the chances of interest rate hikes in the near future.

Thursday's decision and the conference of the European Central Bank on the monetary policy are the most important events for the euro planned for this week. Taking into account the ongoing strengthening of the euro, the ECB may not want to send a hawkish signal for it not to continue its appreciation (which could hinder bringing inflation to the ECB’s target). Hence, it seems that there is a better chance for the euro to eventually lose some of its value as a result

Zloty still in good condition

The beginning of the week has been positive for the Polish currency. The sharp drop in the dollar (after Friday's weak US labour market report) signalled appreciation for the Polish currency. Further problems with US health reform and further dollar devaluation contributed to today's strengthening of the Polish currency. Positive information for the zloty was also reported by the Polish Central Statistical Office (GUS) - corporate earnings rose by 6% YOY in June (while an increase of 5% expected), which was the biggest year-over-year increase since the beginning of 2012.

The zloty in relation to the dollar has reached its highest value since May 2015, and the USD/PLN exchange rate fell even to 3.63. The franc and the pound have also recorded a significant depreciation in value to the Polish currency. The euro exchange rate in relation to the zloty was relatively stable and oscillated around 4.20. The strong zloty position in the next few days could be somewhat diminished by worse-expected data on industrial production and retail sales (more about this below).

Tomorrow’s preview

Tomorrow's calendar of events is relatively limited. However, important data will appear, which may significantly affect the zloty's quotations. Moreover, the Polish Central Statistical Office (GUS) will publish data on industrial production, retail sales and producers’ inflation (PPI). The first two readings will be of the most importance, as they may provide clues on the pace of economic growth in the second quarter.

The risk of very unfavourable readings is rather limited by two factors: on the one hand, the high growth rate of retail sales has been maintained, mainly due to the Family 500+ child benefit program and rising wages, while the second, the increase in investment will likely be made at a relatively fast pace thanks to a very low base last year.

The median of market expectations assumes the retail sales' increase by 6.9% and industrial output by 3.8% (on a yearly basis). Taking into account the zloty’s recent appreciation, readings below the expectations could result in a weakening of the zloty. However, it’s worth noting that external conditions have favoured a stronger zloty - a stable situation in Europe and a depreciation of the dollar. In such an environment, the chances of a significant loss of in zloty value seem to be relatively low.