Beginning of the year belongs to the dollar and US economy (Afternoon analysis 20.02.2020)

Although Thursday's macroeconomic publications were not among the most important ones, they supported the dollar. The zloty, like other emerging countries' currencies, remains in a weaker condition, and volatility may increase tomorrow when the PMI data from the eurozone are released.

Is it not the end of a strong dollar?

Thursday afternoon brought further positive data from the US economy. The number of initial jobless claims last week amounted to 210k, and although this was a reading that was in line with expectations, this is the bottom level of claims since April last year, when we recorded the lowest threshold for over half a century. The industrial activity rate in the Philadelphia region in February surprised. It rose to 36.7 points, the highest level since May 2017 and far above expectations - by about 11.0 points.

These are not the most important indexes in terms of impact on the dollar, but they fit in with the trend of positive data from the US economy. And the data are also in line with the dollar's appreciation trend. The history of the global strength of the dollar has continued today, and this may only be its beginning. Although the EUR/USD quotations remained practically unchanged and oscillated around 1.0800, this did not prevent the dollar from increasing in relation to other currencies.

The DXY index, measuring its strength against six major currencies, today rose to about 99.8 points, the highest level since April 2017. It is right under the key level of 100 points, which, if exceeded, may increase the demand pressure on the US currency. The dollar is also very strong if we look at the dollar index according to Bloomberg, which also includes emerging countries' currencies. It rose this afternoon to 1218 points, i.e. the highest level since October, but it is also very close to the upper boundary since May 2017 (about 1223 points).

Expectations from the end of last year indicated that the first phase of the US agreement with China would gradually weaken the dollar in favour of, among others, the euro and other emerging currencies, which would be supported by the industrial sector recovering from the mini-recession. Currently, these expectations are reversed, hampered by the uncertainty surrounding the coronavirus, as well as a growing imbalance between the US and eurozone economies, which is greater than expected. Although the recovery may take place later in the year, data from economies showing the negative impact of the coronavirus will only start to flow in, which should strengthen the dollar.

In this context, the zloty will most likely only be a passenger on the departing train if the dollar appreciation continues. Data from the Polish economy may have a very limited impact, given, among other things, that interest rates in Poland will most likely remain unchanged this year (slightly higher than expected inflation is temporary). The Polish currency recorded another day of weakening today, with the EUR/PLN exchange rate rising above 4.28 and the USD/PLN exchange rate above 3.97. Friday may not be a peaceful Friday for the zloty either. Significant data on economic activity indexes in the eurozone will be published, which may exert additional supply pressure on the Polish currency as well.

Tomorrow's preview

On Friday, possibly the most important macroeconomic publications in this week, i.e. February's PMI indexes of the industrial and services sectors for, among others, the eurozone, the UK will be published. Economists expect the data from Europe to fall by about 0.1-0.5 points below the January levels, which would be justified, among others, by the impact of coronavirus. If the sentiment of entrepreneurs in the eurozone and the Islands turned out to be even more pessimistic, it could weaken both the euro and the pound, and at the same time turn out to be another argument in favour of increased demand for the dollar.

Such a scenario would be negative for the zloty, on which supply pressure could increase. On the other hand, the market's reaction to even very bad data does not have to be so negative. Currently, the prevailing belief is that central banks will protect the market from a stronger economic slowdown by providing more liquidity to the market. This sentiment may change when the emerging data suggest a much deeper-than-expected slowdown, which may go beyond the first quarter. This more negative scenario would result in increased risk aversion and a more significant weakening of the zloty.