Daily analysis 21.07.2017

The EUR/USD is close to two-year highs after yesterday’s ECB meeting and reports from Bloomberg in US developments. The zloty is losing value not only the the euro, but the Polish currency is at 4-month lows against the forint. This may suggest that the PLN is under pressure from domestic issues.

Key Macro Data (CET time- Central-European). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• No macroeconomic data which may affect the analysed pairs.

Mixed signals but EUR/USD is significantly higher

As we reported yesterday, Mario Draghi faces a difficult task. He probably didn’t want to push the euro higher, but at the same time wanted to show that the economy is on a fairly strong growth path and the ECB is expected to slowly reduce the monetary stimulus fairly soon.

The written statement from the ECB was fairly dovish. The portion of communication which contained forward guidance regarding a longer and wider QE (if inflation fails to move on the expected path), was included in the message. However, the situation started getting more complex when the press conference began.

Mario Draghi stressed that no major policy shifts had been discussed during the meeting many times. He also explained that his message at the Portuguese Sintra was similar to previous comments made in Tallinn. Moreover, the reflation, which has been catching some attention recently, was just a technical indicator and not a policy shift.

Theoretically, a good strategy from Draghi was to leave a fairly wide time frame to decide when the assessment of the policy can be presented. He claimed that autumn (more data, new macroeconomic projections), could be a good moment to expect hypothetical changes. However, when reporters started to ask whether September 7th (next EBC meeting) could be regarded as an autumnal month, there was some Q&A confusion. This resulted in the impression that the next meeting may actually be the most likely meeting to see policy overhaul.

Besides, the “autumn” issue, the conference was neutral at least. This is confirmed by the behaviour of the German bonds. Their 2-year yields were flat after the meeting, while the 10-year benchmark dropped by 2 basis points (further 3 bps slide today). Moreover, the spread between the periphery and the core eurozone bonds also narrowed.

These message were received differently in the FX market. The EUR/USD surged toward 1.1560-70 during the press conference, which seemed to be unreasonable, especially taking into account that there was no signal from the bond market.

Interestingly, when investors tried to figure out what the reasons were behind the euro’s appreciation, Bloomberg published an article pushing attention toward US politics. According to the news agency which relies on expert information, the investigation by special prosecutor Robert Mueller may be expanded to business transactions.

This information markedly weakened the dollar due to additional uncertainty regarding domestic politics. It may also further delay reforms that were promised during the last election campaign. However, similarly to the Draghi press conference, only moves on the currency market were significant. Changes in the fixed income assets were very limited.

As a result, despite a fairly dovish message from the ECB and the fall of German bond yields, the euro strengthened. Additionally, the EUR/USD was pushed to almost two-year highs due to some further dollar weakness. Such nervous moves should be treated cautiously - especially considering that they are not confirmed by fixed income changes.

The zloty failed to appreciate

The dollar’s slide, combined with falling yields in the eurozone, created an ideal condition for CEE currencies. However, the zloty, in contrast to the CZK and the HUF, failed to take advantage of favourable conditions. Both the Hungarian and Czech currencies strengthened against the euro by around 0.2 pkt this week.

The złoty, however, has lost around 0.5% since Monday. It also weakened against the HUF to its 4-month lows. It suggests that the Polish currency would have been much stronger if there had been no local political issues. It may also be a warning sign that when global sentiment worsens, there would be a much stronger PLN depreciation. On some pairs (GBP/PLN, USD/PLN), it may exceed one-percent.