Daily analysis 04.04.2017

The global sentiment has deteriorated, which is negative for the emerging market currencies. The South African rand lost more than 10% of its value in a few days. The zloty wore-off clearly as well. The EUR/PLN went above 4.25 and the dollar is testing the 4.00 level.

Most significant macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact the analyzed currency pairs.

Negative sentiment

Yesterday’s data regarding the American services ISM was positive. This index has remained above the level of 57 points. The new orders component also remains high (64.5 points). Moreover, the employment subindex for March reached the value of 58.9 points.

However, this relatively positive data was not able to sustain the global sentiment in the market. Investors focused more on the negative data regarding the American car sales for March, as well as on the extending discussion in the American Senate, regarding the election of the Supreme Court judge. The latter may have a negative impact on the pace of implementing economic changes by the Republicans.

As a result, the profitability of the American treasury bonds have went down and the yen has strengthened. The dollar’s position against the euro remains stable, but the American currency clearly strengthened against the emerging market currencies. The South Korean won, the Mexican peso and the Russian ruble are clearly weaker against the dollar than they were yesterday.

It’s worth keeping in mind that the second part of the week will bring new macroeconomic data. However, this data needs to be significantly positive (the labor market data, in particular), because the market seems to be more focused on seasonally disturbed data (like car sales). This also increases the risk for the emerging market currencies.

10% depreciation of rand

The South African rand shows how intense the moves on the emerging market currencies can be. This currency had been one of the strongest EM currencies until March 27th, with its 10% gain against the dollar. However, only a few days were enough to make this entire gain disappear.

The end of March brought speculations regarding a dismissal of the local minister of finance. However, it appeared that nine other ministers have been dismissed as well. Also in March, Fitch agency took note that, “South African president Jacob Zuma's cabinet reshuffle signals a change in policy direction and will raise political tensions within the ANC and its traditional allies, potentially weakening public finances and standards of governance.”

The reaction from S&P was even more intense. The agency downgraded the RSA loan credibility from investment level (BBB-) to speculation level (BB+), with a negative perspective. S&P justified its decision with, “the division in the ANC-led government.” Yesterday, Moody’s included the RSA on the downgrade observation list. The current level of the Republic of South Africa is at the level of Baa2. The South African rand depreciated against the dollar from approximately 12.5 to 14, which is more than 10%.

Zloty is weaker

This goes to show that the zloty’s recent appreciation didn’t have much to do with the local economy, nor with positive economic data from the eurozone. This was mainly a result of the general capital flow to the region’s countries (but also to Russia, Mexico or South Korea, where the correction is more shallow.) However, it’s surprising that these moves are being corrected so rapidly. This is especially that the global conditions are not fatal, but only have deteriorated slightly. Nevertheless, the dollar has reached the 4.00 level. The second part of this week will be an important test for the emerging market currencies. If the American data is negative, the zloty may continue to wear-off.