Daily analysis 21.06.2017

A sell off in the oil market dampened the sentiment and lowered inflation expectations. The pound dropped in relation to the dollar to its two-month lows. A relatively strong dollar and rapidly decreasing oil prices weakened the zloty.

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

• 4.30: EIA Weekly Petroleum Report: crude inventories (estimates: -1.2 m barrels; previous: -1.661 m barrels).

Oil spoiled the mood

Swiftly decreasing oil prices during yesterday’s session deteriorated the sentiment on the market. Stock indexes fell from recent highs and emerging market currencies depreciated. The WTI crude oil price decreased by 16% since the 24th of May to 43 USD a barrel. This was its lowest price level since mid-November. This means the entire gain in price since the first OPEC/non-OPEC production cut agreement from the end of November was reversed even though a 9-month extension to March 2018 was agreed upon a month ago.

Such a swift price movement was mainly due to increasing US shale production and a remaining high level of inventories, which were meant to be decreasing as a result of the aforementioned production cut agreement. Low and still decreasing oil prices contribute to lower inflation expectations. As a result, future interest rate levels could be lower than expected (flattening of the yield curve).

However, the sell off and outflow of capital from the oil market helped the dollar. Wednesday morning, the euro, in relation to the dollar, traded between 1.112 – 1.115. This is close to the lower boundary of last month’s EUR/USD exchange rate. On the other hand, the pound remained under pressure before midday. The GBP/USD dropped below 1.26 to the lowest level since the 18th of April – the day Theresa May announced the decision to hold snap elections on the 8th of June.

The pound’s recent depreciation has mostly been driven by political factors. May hasn’t come to an agreement with the Democratic Unionist Party regarding their support of her party. Afterwards, May will have to face the prospect of passing the Brexit bills amidst a Parliament that doesn’t support her ideas to a great extent.

Zloty was visibly weaker

The swiftly decreasing oil prices, coupled with a relatively stronger dollar, once again turned out to be negative for the Polish currency. The outflow of capital from emerging markets weakened the zloty against most major currencies. The EUR/PLN pair rose to 4.25 – the highest level in two months, while USD/PLN increased to 3.82. This was the highest level seen in over a month. The zloty was also weaker against the Swiss currency – the franc cost 3.916 PLN in the interbank market, which is the most since April 25th.

Taking into account the reasons behind the zloty’s slump, today’s Weekly Petroleum Report by the EIA could prove important. The focus of investors will mostly be on inventory levels (of crude oil and other products such as gasoline). Should there be no visible draw in inventories, the market sentiment could deteriorate even further and, as a result, cause the zloty to lose value.