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Calm situation present in the market (Daily analysis 04.06.2018)

4 Jun 2018 12:40|Marcin Lipka

A mixture of events from the USA and the world does not support the dollar at the moment. The increase in producer prices in Turkey exceeded 20% year-on-year. The zloty benefits from a better sentiment and a rebound from the recent increases on the dollar. The EUR/PLN pair falls below the 4.30 limit, and the USD/PLN pair is close to the 3.65 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.

A set of elements

Currently, at the currency market, there are four basic elements that can guide the movements of the EUR/USD pair, and thus also the changes in the zloty. One of them has a positive impact on the dollar, and three have a rather negative impact.

Good and consistent (both from household and corporate surveys) Friday's labour market report for May supports the US currency. The fall in unemployment to long-term lows and the increase in employment exceeding 200k of new payrolls, as well as a faster than consensus increase in wages (2.7% YOY vs. 2.6% YOY) are the elements that prove that the US economy is in good shape, and also bring the Fed closer to the four (in total) interest rate increases this year.

However, other elements outside the labour market are no longer pro-dollar. First of all, the fear of Italy has decreased. It is likely to return (the Five Star Movement already announced at the weekend that a guaranteed income of 780 EUR for the least wealthy part of society was a priority), but the whole legislative process would take some time before other changes (tax cuts and the withdrawal of pension reform) could be implemented and the market seldom stays under strong pressure for months.

A slowdown in the oil market and its recent decline due to the expected growth in production by OPEC and Russia are also a relief for the emerging countries' currencies. As a result, the profile of these countries is improving, which may encourage more courageous investors to increase their investments. It is also a negative sign for the dollar and a positive sign for EM.

The dollar may be under pressure caused by the trade conflict between the US and the EU, between the US and China and between the US and NAFTA. Investors probably estimate that if the United States conducts tough negotiations on all fronts, it will result in a negative impact on the US economic potential and may, for example, convince the Fed's members to delay interest rate increases. As a result, in the short term (from a few days to several weeks), the dollar may be under slight pressure. In the long term, however, the situation should not change significantly. However, the weakness of the eurozone (Italy), the still high prices of raw materials and further interest rate increases by FOMC should support USD vs. EUR or vs. the EM currency basket.

Turkish inflation out of control

In May, the overall inflation reading, as well as its part on core inflation (excluding fuels and food), exceeded 12% year-on-year. In the case of the core component, it was 12.64% and at the same time the highest reading in at least 14 years. On the other hand, producer inflation exceeded 20%.

The data and the need for a sudden increase in interest rates clearly do not support the team of President Erdogan (in three weeks' time the parliamentary and presidential elections take place in Turkey). Due to the complicated economic situation, their outcome is not as foregone as it seemed a few weeks ago. Although this is not the core scenario, if the opposition takes power in Turkey then the lira may appreciate.

Zloty pares some losses

In the morning, the market behaviour suggested that this could be a relatively good session for the zloty. Fewer fears of Italy in the short term, declines in the oil market and a weaker dollar are helping the currencies of emerging countries, including the zloty.

Given that the external environment will not change, it is to be expected that the quotations close to 4.28 PLN per one euro may continue until the end of the day. The next part of the week should not be negative for the Polish currency either. It seems, that there are a few days of more peaceful trade and, as a result, the EUR/PLN will probably stabilise below the 4.30 limit.

4 Jun 2018 12:40|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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