Daily analysis 14.11.2016

The dollar’s index is near its thirteen-year maximum. The growth of inflation expectations in the USA may be positive for the USD, at least within the forthcoming weeks. The zloty is losing value along with the other emerging market currencies. Profitability of the ten-year treasury bonds are above the level of 3.5%.

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

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

Dollar is dominating the markets

The trends from before last weekend have continued to intensify this morning. Profitability of the American ten-year treasury bonds are above the level of 2.25%. This means that they increased by 55 base case points in comparison to their minimum, which was quoted shortly after the elections. Profitability of the American two-year treasury bonds increased by approximately 30 base case points. Currently, they are testing the level of 1.00%.

The growth of inflation expectations, which is the result of the announcement of higher fiscal expenses in the case of the economic growth being near its potential, may cause the Federal Reserve to raise interest rates faster than expected. This is a positive information for the dollar, at least in the mid-term.

The long-term effect of higher infrastructural investments is mainly determined by their correct use. If these investments improve production abilities of the economy, the positive effects will be long-term. However, if these investments are addressed incorrectly, this would most likely decrease the GDP, interest rates would become lower and the dollar would eventually lose value.

The market has always been focusing on the short-term effect in the case of the United States. This short-term effect is currently favorable for the dollar, which is showed by the USD index. This went over the 100 level today, which means that the American currency is just 0.5% away from its highest level in more than thirteen years.

It’s also worth keeping in mind that not only expectations regarding high interest rates in the USA are causing the USD to grow. Despite the recent comments regarding soothing Trump’s protectionist rhetoric, some investors fear that favorable trade balance with Asia or Latin America may deteriorate. Weaker economic perspective of these regions is evaluated most rapidly by the currency market.

High level of the dollar’s attractiveness against the developed market currencies, as well as against the emerging market currencies and the likelihood of a steep path of the future interest rates are fundamental reasons for the dollar to remains strong, at least in forthcoming weeks. However, it is likely that the dollar will remain strong in the forthcoming quarters.

Zloty and the other emerging market currencies

Since the beginning of last week the situation of the emerging market currencies has deteriorated. However, the scale of these changes is diversified. The Mexican peso lost 12% of its value and the Brazilian real, as well as the South African rand lost approximately 8%.

The situation of the zloty seems definitely more favorable. However, its overvalue at the level of 4% is near to the one, which is observed on the Russian ruble, the Turkish lira and the Hungarian forint. Low level of the zloty, as well as of the forint, is the result of their strong relation to the euro. The European currency wore-off by more than 2.5% against the USD. On the other hand, a relatively limited reaction of the Turkish lira is the effect of its previous depreciation, which was causing the USD/TRY to beat its historical records.

It’s also worth noticing that the situation in the market is far from calm. Today, the profitability of the Polish ten-year treasury bonds went above the level of 3.5%. This is their highest level in more than two years. This is partially a result of the global moves. However, the spread between Polish and German ten-year treasury bonds, which is clearly above 300 base case points may seem disturbing for the market participants. This also translates to the zloty’s condition.

The EUR/PLN should stabilize relatively quickly, especially taking into consideration that the euro is relatively weak. On the other hand, it seems unlikely that the USD/PLN will return below the level of 4.00. A clear overvalue of the dollar would require another strong change in the global markets and this is not the base case scenario for the time being.