Daily analysis 10.01.2018

Significant movements on the debt instruments market led to a change in currency behaviour. Reports from China disrupted dollar valuation. In the shadow of Brexit discussions, mixed data from the British economy was presented. The zloty pared part of its recent losses. Today's MPC meeting is unlikely to have a strong impact on the Polish currency.

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

• 4:00 p.m.: Press conference after January's MPC meeting.

Strong movements on the EUR/USD pair

Until the beginning of European session, a growth in US Treasury bond yields was observed. Reaching the 2.57% boundary, it flew to the highest levels since March. The spread between the yields of the US and German treasury instruments increased to 210 basis points, reaching April’s highs.

However, at the beginning of the European trade, very strong appreciation of the German government bonds yields was noticed. It is difficult to assess exactly what has caused this, but the market has been heavily distorted by ECB purchases. The decreased demand from the central bank could have caused the upward movement of 9 basis points to around 0.55%. As a result, the spread between the US and German bonds was clearly narrowed, which could have caused the EUR/USD falls to halt.

In general, the position of the main currency pair and the dollar were further complicated by this morning’s news from Bloomberg that Chinese officials are evaluating the US government bonds as less attractive. On the one hand, this increases the yield on Treasury bonds, but the increase is not caused by rising inflationary expectations, but rather by a slightly lower demand for them in the future.

Bloomberg also indicates that China may want to diversify its currency reserves to a greater extent (lower exposure on the dollar). This could mean a weaker US currency. Therefore, this could be the reason for the US currency to incur losses in the morning and the EUR/USD pair to come close to 1.2000.

Mixed data from the UK

In the morning, ONS published data from the British economy. Industrial production surprised positively by both better than expected November's reading (2.5% YOY vs. 1.8% YOY) and an upward revision of October's data (4.3% YOY vs. 3.6% YOY).

Moreover, the data also looked optimistic when the monthly fluctuations have been smoothed out. Manufacturing production in the last three months (until November) grew by 3.9% year-on-year, and machine and equipment production increased by as much as 9.7% year-on-year compared to the same period in 2016.

On the other hand, UK trade data appeared to be much worse than expected, especially in the context of the pound. For goods, the monthly deficit was moving between 10-12 billion GBP (November 12.2 billion GBP; consensus close to 11 billion GBP). Given the positive service balance, the monthly trade deficit is significantly lower (2.8 billion GBP). However, it almost crossed economist’s consensus twice. In addition, the trade deficit for October was clearly revised upward from 1.4 billion to 2.3 billion GBP.

As a result, data from Great Britain should be perceived as mixed compared to the pound's condition. For the sterling, the ongoing discussion regarding Brexit is still crucial. According to media reports, Brussels is preparing for a "hard-Brexit," even though "sufficient progress" has been made in the negotiations on an exit agreement. Still, this information may put pressure on the sterling.

Zloty pared some recent losses

The zloty, similar to the valuation of the EUR/USD, interacts with the debt instruments market in both the eurozone and the US. The widening spread between the US and German Treasury bonds led to the depreciation of the zloty. This morning's narrowing of the balance helped the zloty.

However, additional impulses on the zloty were generated before Bloomberg's morning reports on Chinese purchases of US government bonds (details in previous paragraphs). First of all, after this information, the USD/PLN has depreciated, which moved the USD/PLN close to the 3.48-3.49 range (it was 3.51-3.52 in the morning).

A large number of global reports and signals may reduce the influence of today's MPC meeting on the zloty. Even if the message will be more dovish than hawkish (the recent drop in inflation may be a good argument for this), the foreign events will probably dominate the valuation of the zloty in the next few hours.