A volatile situation on the currency market after reports from Germany and a government shutdown in the US. CFTC data continues to show a strong engagement of speculative capital expecting some further increases in the EUR/USD pair. Small changes on the Polish currency excluding the USD/PLN pair, which tested the area of 3.40.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
- No macro data that clearly influences the analysed currency pairs.
On Friday, the market was curious about two issues - the shutdown in the US and the SPD meeting, where German Social Democrat delegates were to decide on coalition talks with Angela Merkel.
During the weekend, it turned out that the US Congress decided not to extend funding for certain federal institutions, which resulted in a government shutdown. Theoretically, this should result in the weakening of the dollar, as these types of events don’t improve sentiment on the markets or the consumer and investor climate.
In the case of the US, a government shutdown has a milder character in the first few days. Moreover, during the weekend, it was suggested that a vote will be held on Monday on the reopening of funding for federal institutions. This may be the reason why the market's reaction was so limited. In the morning, the dollar index was 0.25 percentage points lower than it was during Friday's closing.
In turn, events in Germany should support the euro. During the Bonn meeting, SPD delegates agreed to continue CDU/CSU coalition talks. This decreased the risk of early elections in Germany, which in turn, increases the chance of the stabilisation of the political situation in the eurozone. However, the overall reaction of the currency market to reports from Germany is relatively small. The EUR/USD was about 0.3 percentage points above Friday's closing. Taking into account that this is a result of both positive information for the euro and negative information for the dollar, the movement is very limited. Why?
It cannot be ruled out that investors are nervous about the ECB meeting on Thursday. Last week, some representatives of the European monetary authority suggested that euro increases could not be justified by foundations, and a strong currency due to the prices of imported goods and services, is negative information for price processes.
January's ECB statement may be maintained in a similar tone, specifically Mario Draghi’s press conference. The ECB President will likely try to cool down investors' rate hike expectations, which the market measures over the course of the year (approx. 5 basis points until December). This can be a negative signal for the EUR/USD pair.
Partially negative information for the main currency pair may also be the fact that, according to Friday’s CFTC data, the net speculative positions that assume further growth are close to the historical record. This amounts to almost 140k contracts (worth 125k EUR each). Therefore, investors "bet" the value of about 17.5 billion EUR (the nominal amount of contracts) which count on further increases in the European currency value to the dollar. The balance of contracts is not a good index to outrun the trend, but such significant involvement of investors suggests that when a growth stop happens as well as the correction of recent movements, a portion of these positions can be strongly reduced. Therefore, this could mean that the recovery of past increases may be relatively strong if an appropriate catalyst occurs, which would trigger such movement. The abovementioned ECB meeting may be a catalyst for a move such as this.
Calm situation on the zloty
Changes in the Polish currency are limited. The zloty calmly accepted both reports from Germany (the SPD’s decision to continue coalition talks) and news concerning the partial shutdown. The slight appreciation of the EUR/USD with the constant EUR/PLN valuation resulted in a depreciation of the USD/PLN pair to about 3.40.
The calendar of national macroeconomic data publication scheduled for this week is practically empty, which means that the market will focus on global events. This concerns political developments in the US (what will happen next regarding the government shutdown?) and Thursday's ECB meeting. A mild statement from the ECB should not be negative for the zloty. However, if there were significant capital movements from the euro to the dollar, then a decrease in the EUR/USD could weaken the zloty, not only in relation to the dollar but also in relation to other currencies.