Currencies calm after holidays (Afternoon analysis 03.04.2018)

A calm day in the currency market, despite the continued weakness of the global sentiment. The zloty, like the main currencies such as the dollar and the euro, remains stable. However, significant currency fluctuation may be observed on Friday.

Almost no changes for the dollar and zloty

The second trading day of the new quarter on the currency market was calm. While sentiment in the broader market remains negative, it has a limited impact on currencies. The matter of potential tariff barriers is still alive, although difficulties in evaluating their final impact on individual countries may result in relatively low currency volatility compared to e.g. the equity market.

Monday's session brought big sales on the US share and bond market. This downward trend continued also on Tuesday, when the main European indexes were also at lower levels than on Thursday, although the depreciation was not as significant as in the USA. However, the euro or the dollar remained relatively calm - the main pair's quotations (the EUR/USD pair), were just at yesterday's level and oscillated around the 1.23. Moreover, the pair's exchange rate was lower than yesterday.

The Polish currency was no exception in this case. The price of the zloty in relation to the main currencies were at yesterday's closing levels, the euro cost around 4.21 PLN and the dollar approx. 3.42 PLN. Relatively calm movements on the zloty can be observed until Friday. During the last day of the week, the labour market report in the USA in March will be published. The most important part of it will include data on changes in employment and the average wage level per hour.

However, the market's attention will be focused on the latter, as it may modify expectations regarding the number of rate hikes this year in the US. The consensus of both the market and the Federal Reserve assumes three increases this year (one we have already had). If the average wage increase exceeds 2.7% per year (and 0.3% per month), the possibility of four increases may become slightly more realistic. This may be a negative scenario for the zloty, which may depreciate if the yields of the US treasury bonds (and the dollar) appreciate strongly.

Tomorrow's preview

At 10.00 a.m., the Polish Central Statistical Office (GUS) will present preliminary estimates of inflation in March in Poland. The zloty continues to be under pressure from the Polish monetary authorities (lower probability of interest rate rises this year and the following year) and a somewhat suppressed increase in inflation. In February, the average consumer price pace slowed down to 1.4% (annually). This is the slowest growth pace since December 2016 and by 1.1 percentage points lower than in November last year.

The median of market expectations indicates a growth pace of 1.7%, although this may be caused by a slightly lower base last year in March (compared to February). Another negative surprise of lower than expected inflation could decrease the chances for higher interest rates this year and limit them to the next year. This would give the Monetary Policy Council, which is already very accommodative, another argument in favour of keeping interest rates unchanged.

An hour later, Eurostat will publish the same data for the eurozone as a whole. Although this is also a preliminary estimate for March, the report will provide a relatively more significant measure of core inflation (excluding energy, food, alcohol and tobacco prices). The market consensus indicates 1.1% (year-on-year) vs. 1.0% a month earlier, although, as in the case of Poland, this "increase" may be the result of a lower base in March last year. Reading by 0.1 pts higher could strengthen the euro, although its stronger appreciation can be observed, if the core index exceeds 1.2% (which would be the highest level in 5 years).

At 4.00 p.m., ISM will publish the PMI index of the US services sector for March. The industrial sector's activity index failed to meet market expectations. Moreover, a reading lower than 59.2 points (which would have been a drop since February, when it was 59.5 points) may put some pressure on the dollar. On the other hand, however, the market is currently dominated by negative sentiment due to the uncertainty over customs in the US and China, as well as the sale of technology companies in the US. The sale of more risky asset classes has recently been a good sign for the US currency, which is clearly gaining when the market is dominated by negative sentiment.