Daily analysis 26.04.2017

Dissonance between the emerging market currencies is increasing. Differences in attitude towards the tax changes between the White House and the Republicans may appear too difficult to overcome. The zloty remains globally strong, but the space for its further growth is decreasing.

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

• No macro data that could significantly impact the analyzed currency pairs.

Sentiment remains positive, but not everywhere

Yesterday’s session in the American stock market has yet again ended with growths. In addition, the S&P 500 index is only 0.5% away from its historical maximum. There were also no suggestions of an increase in the risk aversion during the Asian session. However, it’s worth noting that the behavior of the emerging market currencies is becoming less consistent.

During the Asian session, the new Taiwan dollar reached its highest level against the dollar in more than two years and the Indian rupee’s quotations against the USD climbed up to their one-and-a-half year peak. Additionally, the Czech koruna, Hungarian forint and zloty have been the leading emerging market currencies since Friday. Each of them have gained more than 2% against the dollar.

Initially, the appetite risk was positive for the Latin American currencies. However, this trend has reversed completely over the past few hours. The Chilean peso and the Mexican peso have lost 1.5% and 2% against the dollar, respectively.

This behavior seems relatively logical. Both East-Central Europe and South-East Asia should benefit from a stable situation within the European Union. However, the anxiety over a more protectionist attitude from the USA might have increased in Latin America, especially taking yesterday’s announcement regarding paying custom duty on wood from Canada. Moreover, the peso and Russian ruble may be under negative impact of declines in the raw material market. However, it’s worth emphasizing that capital’s impact on the market hasn’t been significant in particular markets since the beginning of the year. The current change in attitude may be the beginning of deterioration in the condition of the emerging market currencies.

White House’s plan

Today’s main information will most likely be the presentation of the tax system changes plan from the White House. According to the press, President Donald Trump intends to announce a decrease in taxes for companies and implement a lower tax for repatriation of incomes from the American companies, which are active abroad.

However, we still don’t know how a decrease in income (approximately 2 trillion dollars during ten years, according to the Tax Foundation think tank) would be equalized. The border tax, as well as the healthcare system reform, most likely will not be taken into consideration in these calculations.

This project may be denied by the Republicans. Another problem is that the tax reform may assume an increased deficit within the next ten years. This would require a support from 60 senators and the Republicans only have 52 representatives in the Senate. This only allows them to make neutral changes for the US budget (they could lower taxes for 2-3 years, but they would have to raise them afterwards, for example.)

It also seems that Trump’s plan may only be an initial negotiation offer for the Congress. Therefore, the dollar’s reaction to this offer doesn’t have to be positive. However, if the White House’s plan is supported by the Republicans, the dollar may gain value. Nevertheless, there are minor chances that this would happen today.

Limited appreciation potential

This morning, the dollar was near 3.86 PLN. However, the zloty’s appreciation potential against the main currencies may fade out. The zloty took advantage of the positive sentiment towards the eurozone, emerging market currencies and an improvement in Poland’s business cycle.

The attitude towards some of the emerging market currencies is beginning to deteriorate. Therefore, even if today’s tax reform plan from Donald Trump does not support the dollar, the zloty’s further appreciation will become hampered.