Daily analysis 02.01.2018

The good condition of Asian currencies in relation to the dollar, strong PMI readings from the eurozone and bond market behaviour supported the EUR/USD quotation. Worse than expected readings from the UK. The dollar was getting closer to 3.45 PLN. A solid publication from the national industry.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 3:45 p.m.: December's reading from the US industry. Final PMI data according to IHS (estimate: 55 points).

Dollar deepened the depreciation. EUR/USD tested 3-years highs

The significant weakness of the US currency was seen during the Asian session. The dollar lost almost 1% to the Korean won compared to last year’s closure. In addition, the USD/KRW pair reached its lowest level since the end of October 2014. Two currencies gained noticeable, the Malaysian ringgit (0.7%) and Taiwanese dollar (0.6%). The latter currency is the strongest in relation to the US dollar since December 2013.

Good sentiment towards emerging markets was the result of good PMI index readings (China, India), as well as increasing chances of easing tensions on the Korean Peninsula. This caused the dollar to be under pressure at the opening of the European session (this was stressed in our morning video analysis).

Further weakening of the dollar as well as EUR/USD increases were supported by solid PMI indexes from the single currency area in December. For the eurozone as a whole, the publication of the industrial condition index was in line with expectations (60.6 points, the highest number in history). But it wasn’t only the French and German indexes that were high as the IHS Markit publishes data earlier for only these two countries. Historically, the highest readings were received from Austria (64.3 points) and Ireland (62.2 points). It may be interesting that in Greece, the industrial PMI increased to 53.1 points, which hasn't been seen for 114 months.

It is worth noting that record data has not presented itself only over the past few months. Chris Williamson of IHS Markit, who commented about the data, wrote that the year 2017 was historical in the case of the highest industrial reading of PMI (the survey has been conducted for less than two decades) for the eurozone as a whole. Investment expenditures in companies (machines, new production facilities) also significantly increased, which improves the chance of prolonging the current recovery.

This time, the higher EUR/USD quotations were also supported by Treasury bond quotations. On Friday afternoon, the spread between 10-year Treasury yields in the USA and Germany fell below 200 basis points and currently fluctuate between 197-198 basis points (10 basis points less than Wednesday morning). The combined effect of the overall strength of the European currency on US currency weakness means that the EUR/USD has been testing the highest levels for 3 years during the morning trade.

Data from Great Britain failed to meet expectations

PMI readings from the UK were far less spectacular than those of the eurozone. The industry index decreased in December by 1.9 points to 56.3 points. The reading was additionally 1.6 points below economist estimates.

The data description produced by CIPS IHS Markit did not appear to be bad. Employment, new orders and production are growing at a strong pace. Meanwhile, production costs and production inflation slowed down. The perception of the future from British companies is also relatively positive. Of the surveyed managers, 54% believe that production will increase in the coming year.

Generally, the data should be considered relatively positive (especially in the context of Brexit). However, much more solid readings from the eurozone meant that the euro benefited more than the pound from dollar weakness. Moreover, in relation to the strong zloty, the sterling weakened, which caused the GBP/PLN to fall clearly below the 4.70 PLN limit.

Positive PMI readings for Poland

The first trading hours in 2018 are beneficial for the Polish currency. The EUR/PLN (before Polish PMI data) fell to around 4.17 in the morning on a wave of good sentiment during Asian trading. On the other hand, subsequent EUR/USD increases brought USD quotations around 3.45 PLN, the lowest level since December 2014.

Good sentiment on the zloty is not only supported by foreign events, but by a solid reading of Polish PMI from industry as well. December's index rose to its highest level in 34 months (55 points). Although the index is far from being historically high (more than 60 points) or close to the eurozone's results, the average level for 2017 was the highest since 2006 and historically, the second best result in twenty years.

In summary of the data, IHS Markit Director Trevor Balchin, wrote that the latest readings pushed his organisation to elevate the estimates for Poland's GDP for the whole of 2017 to 4.4% level. Today's data, together with positive sentiment towards emerging markets, should continue to support the condition of the domestic currency.