Daily analysis 04.07.2017

Solid manufacturing ISM reading from the US is pushing the treasuries yields higher. A more hawkish stance in developed countries may threaten the EM currencies. The zloty is weaker with EUR/PLN trading in 4.24-4.25 range. The second part of the week is important for market participants.

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

• No macroeconomic data which may significantly affect the analysed currency pairs.

Will the dollar pare some losses?

The US dollar performance in the recent days has been fairly weak. Higher valuations of the euro, Canadian dollar or the pound after the conference in Sintra, Portugal, pushed the greenback lower. It is worth noting, however, that yesterday’s data from the American economy may somewhat change order on the FX market, especially if they turn out to be supported by Friday’s Labour Department readings.

On Monday afternoon, the manufacturing ISM publication hit the wire. The index rose to a 57.8 points level. It was almost 3 points above last month’s reading (54.9) and 2.5 points higher than market expectations (55.3). Additionally, it was the highest reading for almost three years.

Moreover, the performance of key components was also encouraging. New orders increased to 62.4 points and new orders topped 63.5 points. In both cases the values are at an upper limit of the range in the last decade. Additionally, the employment component increased from May by almost 4 points to reach a 57.2 mark.

Although, we have recently noted that survey indicators do not necessarily translate to the real performance of particular economy the ISM index is relatively closely related to “hard data”. It was “predicting” fairly well the slowdown in 2014/2015 in US production, while, currently, it is also closely related to the recent rebound. Industrial production rose 2.2% YOY in May which was the highest reading for almost 2.5 years.

It should also be noted that a positive view of the data was confirmed by behaviour of the bond market. The 2-year treasury yields rose to 1.42%l, the highest level since late 2008. Increasing pressure on higher rates was also seen on the 5-year bonds. Their yields rose to 1.93%, reaching the highest levels since May.

It can be surprising that we had a fairly limited response from the dollar yesterday. However, it is may still be the result of a fairly hawkish stance from the other major central bankers. As a result, the CAD, the EUR and the GBP kept their gains, and muted the dollar’s response.

However, if yesterday’s ISM solid performance is confirmed by a relatively hawkish stance from the “minutes’ and the Labour Department publication on Friday, the market may begin to not only price in the December hike but increase the odds for more moves in 2018. If that is the case, it would probably give the dollar the opportunity to regain some of the recent losses.

The combination of rising expectations for higher interest rates in the US with a consensus of a more hawkish stance from other central bankers in developed countries would be negative for many EM currencies. Especially vulnerable would be currencies which significantly gained value recently but the benefits of higher global growth for their countries would probably be limited (Mexican peso).

Zloty in unfavorable environment

The zloty fairly quickly reacted for better-than-expected ISM readings from the US. Rising treasury yields pushed the EUR/PLN higher, towards the 4.25 level. At the beginning of the European session, a slight correction was observed but during midday trading the pair returned to the opening valuation.

The depreciation of the zloty and the possibility of some capital outflow is clearly visible in comparison to the forint. The PLN/HUF is at 3 month lows around the 72.50 level. The forint, as a less liquid currency has benefited less than the PLN in the recent capital inflow trend. However, when the sentiment may deteriorate the HUF losses are usually more contained than the PLN. Similarly to the US dollar, the zloty may be significantly affected by readings from the Labour Department. If the data turns out to markedly exceed expectations trading on the EUR/PLN and USD/PLN may move towards the 4.25-4.30 and 3.75-3.80 level respectively.