Daily analysis 11.08.2017

The fall in US Treasury yields, the dollar sell-off against the yen, and Dudley's comments have kept the US currency from rising. Important inflation data from the United States. The zloty on 5-month lows to the euro. The EUR/PLN pair has been close to the 4.29 boundary.

Macro key data (CET time- Central-European). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• 2.00 p.m.: Current account balance for Poland (estimates: minus 827 million euros),
• 2.00 p.m.: Second July's preliminary reading on inflation for Poland (preliminary reading: 1.7% YOY and minus 0.2% MOM),
• 2.30 p.m.: Consumer inflation (CPI) from the USA (estimates: 1.8% YOY and 0.2% MOM: excluding fuel and food prices 1.7% YOY and 0.2% YOY).

Relatively weak dollar

Strong drops on the American markets and further price depreciation in Europe have been triggering growth aversion to risk. The Japanese and the Swiss currency have been gaining on this situation. The dollar, which has sometimes been regarded as a "safe haven", has not been, however, capable of appreciating.

The relatively weak USD has been a derivative of several factors. Firstly, we had clearly lower than expected PPI data yesterday, which, if continued over the coming months, could keep the pressure on consumer prices and determine slower growth than expected. It is also worth noting, that the share of capital to bond flow has caused a fall in the profitability of the latter, which automatically translates into falling expectations on interest rates. This has also been negative for the USD.

The strong dollar's sell-off in relation to the yen has been another negative element for the US currency, especially in the context of a relatively stable euro. Yesterday, the dollar has not received support from FOMC members comments. William Dudley (the chairman of the New York Fed, always with the vote right and close to consensus) said, that he "has been expecting the upward movement of inflation over the medium run, however not to a 2% boundary YOY due to very low inflation readings over the months. So we will not get a 2% data year by year before some of these very low readings will fall from the statistics of 6 to 10 months from now.

As a result, it can be stated, that in the current circumstances a strong appreciation will be difficult to be generated by the dollar. Global growth of risk aversion has been supporting other currencies more (like the franc and the yen), and macroeconomic data from the US has not been good enough to increase the chances of rate hikes. Inflation data from the USA.

Since Monday, the market has expected that the inflation data from the USA will be the most important events of the current week. Of course, the expectations have been covered up by the growth of geopolitical tension, however, the probable preliminary readings at 2.30 p.m. (CET time) will be widely observed.

The economists' consensus surveyed by Bloomberg has assumed that CPI inflation will remain at 1.7% YOY, so on more than 2-year lows. However, it is worth noting, that as many as 19 out of 46 economists surveyed assumed higher readings (17 at 1.8% and 2 at 1.9% YOY). No one has expected a drop in core inflation to new lows of 1.6% YOY.

Such a decomposition of expectations has suggested that even with a core CPI increase to 1.8% YOY, the positive reaction to the dollar may be relatively moderate. Only 1.9% level YOY should trigger stronger appreciation against the dollar as it will be a real surprise. On the other hand, a relatively small downward deviation of this indicator would have been a heavy burden for the dollar due to the consensus being moved rather towards a higher than a lower reading.

Zloty on new lows

The global increase in risk aversion and the foreign exchange market price appreciation have had a negative impact on the zloty's valuation. The EUR/PLN pair has been quoted at 4.29 in the morning, which means, that the European currency in relation to the Polish one has been the most expensive in less than 5 months. The zloty has also been at the end of the world's list of currencies of the developed and emerging countries this week (item 28/31).

On the other hand, however, it should be noted, that the relatively weak condition of the dollar has limited the depreciation of PLN. If the rise in aversion to the risk was combined with a stronger dollar and relatively high yields on US Treasuries then the Polish currency would probably be even weaker. In this context, the afternoon's inflation readings from the United States will be important. If the price increase accelerates noticeably above forecasts, the EUR/PLN may cross the 4.30 boundary and the USD/PLN would rise up by 1%.