Calm beginning of the week, but the Bundesbank provides warning signs (Daily analysis 17.02.2020)

The market remains optimistic about economic recovery in the second part of the year. The Bundesbank's report cools down hopes for an increase in Germany's GDP growth pace in Q1. The zloty is depreciating against the main currencies: the EUR/PLN is above 4.26 and the USD/PLN is increasing above 3.93, i.e. to the upper limit of quotations since October.

Dollar still strong

The week begins calmly on the broader market. The increase in identified cases of coronavirus infections above 70,000 does not cause any concern among investors. The market now reflects high expectations for the second part of the year and its participants are already looking beyond the horizon of coronavirus. Financial stimulation by the Chinese government and central bank to reduce the negative impact of the virus raises hopes for a strong rebound later in the year when economies return to normal functioning.

These hopes are now among the main factors contributing to maintaining the most important market indexes in Europe (or the US) right next to the historical records. The dollar and the euro behave slightly differently. Until the midday, the EUR/USD quotations were just at the lower end of April 2017, moving in the range of about 1.0830-1.0850. This relatively low level (at the end of the year the exchange rate was over 1.12) is, apart from increased risk aversion resulting in the appreciation of the dollar against most currencies, also a result of a slightly higher than expected disproportion between the US and eurozone economies, in favour of the former.

If the market's hopes come true, later in the year, we can observe a somewhat weaker global dollar and a return of the EUR/USD exchange rate to levels above 1.10. However, at the moment, further information from the largest eurozone economy indicates that this may be difficult to achieve in the first months of this year. In its monthly report, the Bundesbank warns that there are currently no signs that economic growth will accelerate in the first quarter. The Bundesbank also sees a great risk of a reduction in exports due to the coronavirus. Given that the German economy is heavily dependent on exports, the first quarter may not be the best for the German industrial sector and the economy as a whole. Therefore the supply pressure on the euro may continue until we see a return to economic normality in China.

Markets may depreciate the zloty

The basket of the Polish currency was slightly weaker in the morning. The zloty lost about 0.2 percent in relation to the main currencies around the midday. The zloty is threatened by a deterioration in the sentiment in the equity market, whose main indexes are still at record levels. A rebound could significantly increase risk aversion, and with a globally strong dollar, the zloty could weaken along with other emerging currencies. Turnover and volatility during Monday's trade may be limited by the holiday in the US (and no session).

The EUR/PLN quotations increased to about 4.26 around the midday and the USD/PLN quotations above 3.93. An empty calendar of macro-economic events today may result in limited volatility. However, the zloty may be under pressure if the European markets start to rebound from the profits generated in recent days and weeks.