Daily analysis 11.01.2018

The market cooled after yesterday's volatility that was caused by reports on Chinese currency reserves. Other strong readings from the eurozone's economy were published. The MPC message was rather dovish, but the zloty remained insensitive to national signals. The EUR/PLN quotations are relatively stable.

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

• 1:30 p.m.: Records of discussions after December's ECB meeting,
• 2:30 p.m.: Weekly initial jobless claims in the US (estimate: 245k),
• 2:30 p.m.: December's producer inflation (PPI) in the USA (estimates: 3.0% YOY, excluding fuel and food prices 2.5% YOY).

Sentiment cooled down

Yesterday's quotations were dominated by news of possible strategy changes in currency Chinese reserves. Hypothetically, the lower demand for US Treasury bonds in China are causing a significant dollar weakening, the EUR/USD pair increases close to the 1.2020 boundary, and the US Treasury instruments maturing in 10 years moving close to 2.6%.

The observed movements were quickly revised. At the end of the New York session, the EUR/USD returned to levels prior to the publication of the unofficial information from China. The US Treasury bond yields also returned to morning value.

This result is mainly due to the fact that surprising news from Bloomberg news agency doesn’t have to be realised. If it did become true, the whole process would be spread over time. Moreover, if China really wanted to diversify its wallet in a more aggressive way, this would be kept secret because the disclosure of this information could generate significant losses for the owner of the Treasury bonds. Yield growth translates into a decline in the value of debt instruments and China possesses US treasury bonds in the amount of over 1 trillion USD (out of the 15 trillion issued).

The official announcement from the State Administration of Foreign Exchange (SAFE) agency was released, but only during the Asian session. Quoting SAFE, Reuters wrote that allegations on cuts or suspension of the US bond-buying could have been based on incorrect information.

It seems that the subject of Chinese reserves should not cause stronger emotions in the coming days. If the official data was to show that Chinese currency reserves in US Treasury bonds are declining is the only subject that could return.

Positive data remains within the eurozone

At 10:00 a.m., Destatis published German GDP data for 2017. When adjusted by the term of working days, a 2.5% increase for the entirety of last year was noted. Looking at the different GDP components, a moderate improvement in all key categories was stated. Therefore, the balanced economy increases chances of good economic conditions in subsequent quarters being kept.

During relatively fast economic growth, Germany recorded a 1.2% GDP surplus in the public finance sector last year. This has been the best result since 1993.

Eurostat published November's data on industrial production (PPI). The eurozone's result amounted to +3.2% year-on-year, which is slightly above the market consensus (3.1%). It is worth noting that capital goods production accelerated strongly (from 3.5% YOY to 6.2% YOY), which may suggest that companies are investing in the capacity of their production capacity as they expect the good economy to last.

The readings did not have a strong impact on the euro. It seems that the market is rather seeking stability after yesterday's unexpected volatility. The ECB will publish a record of discussions (so-called minutes) that took place at last ECB meeting in the early afternoon. If there are no direct references to currency valuation, minutes should be taken as neutral. Investors will likely wait for November's inflation data from the US on Friday, which may be particularly important for both the dollar and treasury bond quotations.

Stable zloty

After increased volatility on the zloty over the past few days, the previous hours brought stability. The EUR/PLN moved within the range of 4.17-4.18 while the USD/PLN pair incurred some losses and was close to 3.50. The Polish currency did not react to the MPC's dovish message either.

Firstly, President Glapiński suggested that he would like to see interest rates at their current level at the beginning of next year. Early 2018 was the only timeframe that was mentioned. In addition, Professor Gatnar and Dr. Kropiwnicki withdrew from earlier possibilities on the monetary tightening, stressing the need to receive new macroeconomic projections of the NBP (March). It seems that the chance of any monetary tightening this year may be limited, which is rather more negative than the amount of positive information for the zloty in the perspective of subsequent quarters.