Chinese growth woes lift the US dollar; the zloty trades lower in thin liquidity conditions (Daily analysis 16.08.2022)

As the week begins, the dollar, the franc and the yen are attracting capital. Concerns about the outlook for the global economy are taking the upper hand again, this time driven by news from China. Among the main currencies, the Norwegian krone performs worst, which is dragged lower by a sharp decline in oil prices. In the emerging markets, the zloty underperformed due to national holidays resulting in thin liquidity conditions.

Investors are balancing between fears of a severe global recession, worries about stagflation and hopes for a so-called soft landing. In the first part of the month, doubts over the state of the US economy were extinguished by an excellent labour market report. Data on the sharp turnaround in inflation was also greeted with enthusiasm, suggesting that its peak in the US has passed. This combination is ideal for risky assets and emerging markets, as it makes one think that the Federal Reserve will be able to abandon its strategy of aggressive tightening and strong interest rate hikes. However, the turnaround in the Fed's intentions is still in the realm of speculation and expectation, and it has not been officially confirmed. A kind of tug-of-war is therefore underway. Market participants seem most eager to bet on the most optimistic scenario of a soft landing. The problem is that it is based on wishful thinking rather than solid fundamentals.

In such a situation, it is particularly easy to cast doubt. At the start of the new week, it is raised by data from China, which confirmed the assessment that the economy's weakness has origins well beyond the property market and that demand is being dampened, not only by an uncompromising approach to the fight against pandemics. The interest rate cut is being seen as a white flag raised by the authorities and a signal that the situation is serious. The worldwide cooling of investment sentiment has hit the zloty particularly painfully due to the festive trading conditions and reduced liquidity. Just as they did in June (on Corpus Christi, just after the Fed's sharp rate hike), currency exchange rates rebounded markedly in the absence of domestic institutions, with the euro heading back towards 4.70 PLN.

The EUR/USD was pushed above 1.03 last week. However, 1.04 was not crossed, and only this will be seen as a sign of easing pressure on the euro and an end to the dollar's dominance. For now, the main currency pair has turned back to 1.02, the middle of the fluctuation range of the past few weeks. The zloty's troubles could quickly subside as long as risk aversion in global markets does not continue to spiral. There are numerous chances of avoiding such a pessimistic scenario for the Polish currency due to the summer atmosphere of anticipation and lack of conviction regarding the most likely development of market trends. This seems to be confirmed by the fact that investors' anxiety had dimmed considerably by the start of Monday's session on Wall Street. The more volatility decreases, the less justified and more difficult it will be to maintain bets on a weakening PLN. The perception of the position of individual economies is not straightforward; it can change from week to week with the arrival of new macroeconomic publications. This week, these will include Tuesday's industrial production reading and Wednesday's retail sales from the US. On the same day, we will get several GDP readings, including from Poland and the eurozone.