Daily analysis 28.06.2017

The euro continues strong gains on the global market. The EUR/USD has tested one-year high. Significant changes on the fixed income instruments. Impact from global shifts on domestic currency is mixed with a depreciation bias especially in the scenario of stronger risk aversion increase. The EUR/PLN close to the 4.23 mark.

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

• Afternoon: Another day with speeches from key central bank officials in Sintra Portugal. Comments from Vitor Constancio (vice-president of the European Central Bank), Mark Carney (BoE governor), Mario Draghi (ECB president).

Combination of a few elements

Yesterday, before 10.00 am CET the euro was worth around 1.1190 dollars. After 24 hours the main currency pair is higher by 200 pips. It pushed also the EUR/USD to toward one-year highs. Although the scale of changes initiated by a widely commented Mario Draghi comments seem to be somewhat overstated it is possible that we are approaching a more serious monetary policy shift in the euro area.

A better growth and jobs prospects combined with claims that lower inflation is transitory as well as some calmness of political issue and both solid consumer/corporate sentiment may give the ECB valid arguments to start suggesting withdrawal from ultra dovish monetary policy.

Although for a long time we have noted that Draghi’s dovish stance could prevent market to increase inflation expectations it is possible that the ECB president profile might have changed. Such events sometimes occur. This month Bank of England chief economists have clearly shifted toward hawkish.

It is also worth noting that yesterday’s reaction was not limited to currencies. Yield on 10 year German bonds rose from 0.24% to 0.40%. The 15 bps move is fairly large taking into account low rate environment. Additionally it was generated primarily by changing expectations of future inflation and not the creditworthiness of the issuer.

Besides impulses generated by Draghi the EUR/USD was supported by IMF reduction of the US growth. The Fund now estimates that the GDP will expand only by 2.1% in 2018 while in April expectations was 0.4 percentage point higher. The decline in growth is primarily due to lower probability that the fiscal changes will be implemented by the current administration.

A limited amount of information was revealed during evening speech by Janet Yellen in London. Investors mainly focused on a statement that some assets have somewhat stretched valuations. Overall similar comments were presented earlier and her comments just hit markets when it had already been under pressure.

Summarizing, yesterday’s euro appreciation may be too large in the Draghi’s speech. However, considering that the ECB is close to the announcement of a gradual withdrawal of extremely accommodative monetary policy and investors has been pausing their expectations on Fed’s rate increases, the EUR/USD is likely to remain at relatively elevated levels.

Pressure on the zloty should be limited

In the recent hours we have observed major shifts on both on the currencies and bonds market which are rather negative for the zloty. The appreciation of the EUR/USD due to increasing probability of higher interest rates in the euro zone is a risk that some of portfolio capital will withdraw from the domestic market. It is a different situation comparing to that observed since the beginning of the year. At that time the EUR/USD was also rising but not due to euro appreciation but on the dollar weakness and lower expectations regarding Fed’s rate hike path.

Another element which may have a negative impact on the PLN is European equities decline. Higher estimated growth should be beneficial for stocks, but this fact has already been priced in. On the other hand steeper yield curve was not expected by investors so higher financing cost by drag on companies profit profiles and the GDP growth.

Concluding, less dovish monetary policy from the ECB may contribute to further zloty depreciation although this negative move may be limited by a relatively good economics prospects both in the euro area and in Poland. If global investors decide that the ECB monetary policy turns to be to hawkish they will probably increase pressure on stocks and higher risk aversion environment may markedly weaken the PLN.