Daily analysis 18.05.2017

The sharp rise in risk aversion is also impacting the EM currencies despite the overall weakness of the dollar. Solid data from the UK supports the pound. The zloty has weakened significantly due to global sentiment deterioration.

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

• 14.30: Weekly jobless claims from the US (survey: 240k).

Risk aversion increased markedly

Yesterday's session in the United States showed a very strong increase in risk aversion. US shares lost nearly 2 percent value. A strong move was also observed on the fixed income market. Yields of 5Y US Treasuries fell below 1.75%. It's 20 basis points less than a week ago.

It is also worth noting how the market lost faith in rising interest rates. The FOMC rate increase, in June, is almost certain but after this decision the market is pricing only one more hike by 25 basis points by mid-2018. Lower rates in the foreseeable future may keep the dollar under pressure.

The weakness of the dollar should theoretically be positive for emerging market currencies. However, this rule is valid when the global stock market is rising or at least remains stable. In the scenario of a serious slide on the US equities, the EM currencies are expected to be lower.

Since yesterday’s closing, the Mexican peso, the Turkish lira and the South African rand depreciated by more than 2% to the dollar. The slide on the zloty is milder but still the PLN is one of the weakest currencies in the EM world with a 1 percent move.

As political issues have clearly pushed the sentiment lower, it is difficult to determine whether the recent increase in risk aversion is short-lived, or that reports from Washington will dominate media coverage for weeks to come. In general, however, the “risk off” scenario on equities combined with the falling dollar and sliding yields on government bonds is negative news for developing currencies.

More positive data from UK

In Wednesday's analysis, we pointed out that data from the UK labor market, despite falling real wages, is really positive. Today, the ONS published retail sales readings from the United Kingdom. In monthly terms, it increased twice as fast as expected (2.0% m/m vs. 1.0% m/m). On an annual basis, sales excluding fuels and foods, the market consensus was around 2.6% and the final reading (with revisions) turned out to top 4.5%.

While the ONS cites anecdotal feedback that good weather has contributed to faster growth, the positive consumer sentiment coupled with a very good labor market situation suggests that the British economy may not be feeling the negative effects of Brexit for the time being. In addition, the data can also support Tories in the June 8th elections. As a result, the odds of the pound rise are increasing and the likelihood of a decline in value looks to be lower.

Zloty under pressure

Soon after 8 am, when the zloty was still relatively stable, we pointed out in our morning video comment that a strong sell-off in the currencies of developing countries is likely to cause noticeable pressure on the zloty. With the fall in US equities around two percent, it would be very difficult to keep the zloty stable even in the case of a weak dollar or a diminishing chance of a rate hike in the US.

A significant deterioration of global sentiment pushed the EUR/PLN and USD/PLN towards a 4.22-4.23 and 3.80 level respectively. It also showed that the Polish currency remains much more affected by the global trends than by the local macroeconomic data. The zloty also weakened to the forint, which as a less liquid currency, usually responds more calmly to disturbances in the global stock market. One may be surprised, however, that the Czech crown weakened at a similar rate to the zloty. This could mean that the portfolio capital inflows that were lured to CZK after the central had exited the peg are becoming nervous. It may push the EUR/CZK back towards the 27 level.

In the long run, the zloty should stabilize on the relatively good economic situation in the euro area and the improvement of the political climate in the region. In general, however, if the issues in Washington are not resolved, the zloty and other EM currencies may remain under pressure for longer.