Daily analysis 18.08.2017

The dovish message from the ECB's minutes has been covered by a significant increase in risk aversion and the depreciation of the US currency. The zloty has been incurring major losses. The EUR/PLN pair has been close to the 4.28 level, and the PLN/HUF pair has been almost at monthly lows. Data from Poland won’t likely affect the valuation of the domestic currency.

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

• 2.00 p.m.: July's retail sales in Poland (estimates: 7.9% YOY),
• 2.00 p.m.: Industrial production and July's construction output in Poland (estimates: 8.4% YOY and 13.3% YOY respectively),
• 4.00 p.m.: The University of Michigan's consumer confidence index (estimates: 94 points).

Too many signals

In recent hours, the currency market has been influenced by a relatively large number of factors. After the publication of somewhat dovish minutes from the ECB, the EUR/USD pair has established daily lows around 1.1660. These levels, however, haven’t persisted for some time - most likely due to several reasons.

The risk of overshooting the foreign exchange rate mentioned by the members of the European Monetary Authority can be understood in two ways. On one hand and for the short term, the ECB may indeed counteract the rise of the euro by creating more pessimistic monetary policy. On the other hand, the stronger euro has been a result of the surprisingly good shape of the European economy, and yet, the single area’s currency exchange rate does not belong to the ECB's mandate.

The overall positive reaction from the ECB (economic growth, labour market, an increase of political risks) has made the reaction to the euro a short one. The market has quickly focused on other elements that have recently supported the European currency in relation to the US. There have been some rumours (later denied by the White House) that Gary Cohn, the head of the National Economic Council, would resign. He has been perceived as a key person in the White House in context of the reforms announced during the election campaign. This information has clearly worsened the stock market's sentiment, as the New York Stock Exchange’s main index has lost 1.5 percent.

The sale of share prices has caused strong movements in the bond market. Yields of 5-year treasury bonds have fallen below the 1.75% boundary, while at the same time, reducing market expectations for future US interest rates. Therefore, such moves have influenced the dollar negatively. Not only have the Japanese yen and Swiss franc been strengthened, but the euro (which has recently benefited from higher risk aversion) has also gotten stronger, especially as concerns have spread beyond the euro area's currency.

As a result, the EUR/USD pair has risen above the 1.1750 boundary this morning. Quite sharp movements may also be a result of reduced liquidity in the market. In such an environment, some reports (including gossip or simplification of news agencies) can cause surprisingly strong changes that probably wouldn’t have occurred if it weren’t a holiday season. Abroad's macro calendar of today has been practically empty (except for a report on consumer sentiment in the US). However, a report on the political environment will be important. If the risk of reshuffling in the National Economic Council declines, the dollar may undo some of yesterday's losses.

Favourable data has not been helping the zloty

A strong GDP reading or promising employment data has not been able to stop the zloty from depreciating, while the global sentiment has been worsening. In the morning, the EUR/PLN pair has crossed the 4.28 boundary, which means, that it has approached multi-month peaks again. Again, the zloty has shown that it has been relatively weak against other currencies in the region. The PLN/HUF pair has again fallen below the 71.00 level, which means that the zloty against the forint has been close to 7-month lows.

At 2 PM, important data from the Polish economy in July will be published. The condition of retail sales or industrial output will show how Q3 began. The consensus has assumed that both production and sales has grown at a rate of about 8% YOY. A double-digit growth in construction output is more likely to be seen, since last year especially, it fell by 18.8%. The benchmark for this indicator has been very low. In general, however, even if it exceeds the consensus, it is unlikely that the zloty will be clearly strengthened if the global risk aversion will be maintained.