Daily analysis 19.05.2017

Improvement of the global sentiment does not translate into a stronger dollar. Over 7% slump of the Brazilian real had a limited impact on other EM currencies. The EUR/PLN returns toward 4.20 mark on the improving sentiment. In the afternoon, the GUS will publish data on retail sales and industrial production.

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

• 14.00 Industrial production from Poland in April (survey: 1.9% r/r ).
• 14.00 Construction from Poland in April (survey: 6.8% r/r ).
• 14.00 Retail sales for Poland in April (survey: 9.0% r/r).

Improvement of global sentiment

The US equities finished last session higher. Moreover the morning trading on the S&P 500 futures showed a relatively balanced market. The sentiment is also supported by a neutral trading during the first part of the European session.

In the current scenario rising oil prices are also looking encouraging either. The WTI has exceeded $50 per barrel and Brent reaches the $53 mark. Although the recent upswing is mainly due to expectations of prolonging production cuts by leading crude exporters rather than a better sentiment, this factor also has positive effects on the overall market mood.

It is also worth to noting a rebound on developing currencies. On Thursday the dollar was traded around 19.2 Mexican peso, and today it is around 2 percent lower. The situation on the South African rand and the Turkish lira is also better. They both gained about 1 percent to the USD since yesterday closing. These currencies are a good indicator of the sentiment as they react violently to its change.

The US treasury yields also rebounded (5 years at 1.80%). However, it hasn’t translated into a stronger dollar. The greenback is loosing value to most developed and developing currencies. If the good sentiment prevails then the dollar is likely to strengthen slightly, although the trend reversal still looks to be relatively far away.

Brazilian currency slump

A decline in the global risk aversion completely omitted Brazil currency. The real (BRL) lost more than 7% during yesterday's session, while Ibovespa, the stock index plunged almost 9%. At the beginning of trading day both the stock and foreign exchange markets were suspended due to too sharp declines.

The panic selling of Brazilian assets triggered local press report. Quoted by "The Wall Street Journal" O Globo newspaper reported that president “Temer encouraged a top businessman to buy the silence of a jailed former congressional leader."

Brazil is just beginning to get out of a very serious recession. In last two years the GDP fell by a total of 7%, and the unemployment rate increased almost threefold. At the same time, there was also a surge in public debt. The debt-to-GDP ratio was between 55-60% in 2009-2014 period. Only over the last two years it increased by 15 percentage points and now it is at 75.4% level.

Perhaps the response to Brazilian press reports would not have been so nervous if it had not experienced a strong capital inflow recently. Moreover many economic indicators showed the worst period for the Brazilian economy was over. The authorities announced a series of reforms that would, among other things, make the labor market more flexible and raise the retirement age. Now, these changes are under a serious question mark due to the political crisis. The prospects for the BRL, if press reports prove to be true, are also not favorable in the coming weeks.

The rebound on the zloty

Better global sentiment and improved situation of leading EM currencies also support the zloty. In the morning the EUR/PLN is quoted close to 4.20, which is likely to be considered a base case for the Polish currency with neutral reports from the external economy. Overall the weakness of the dollar also pushed the USD/PLN below 3.80.

In the afternoon, the GUS will publish a series of data from the national economy. A less favorable working day pattern in April may cause seasonally unadjusted data on industrial output to be relatively weak (around 2% y/y). In general, however, we do not see any alarming signals for the economy, which momentum is most likely to be confirmed by strong retail sales (Bloomberg consensus + 9.0% Y/Y). In addition, even if the data were a bit gloomy on estimates, it probably should not have a significant impact on the PLN condition, as the market is practically entirely focused on global data flow.