Daily analysis 29.12.2016

The dollar has lost some ground. The US currency decline was launched by surprising results of the US 5-year treasury bonds auction. The zloty still remains weak and it is more difficult to find a positive scenario for the PLN.

The most important macro data (Central European CET time). Estimates of macroeconomic data are based on information from Bloomberg unless stated otherwise.

• 14.30: Weekly data on jobless claims in the United States (estimates: 265k).
• 14.30: The US foreign trade balance (estimates: neg. 61.6 billion USD)

The debt auction clearly influenced the dollar

Over recent days, we got used to to the fact that low liquidity causes quite unexpected movements in the currency market. Yesterday’s afternoon dollar strengthening may be included to these movements. However, the evening weakening was caused by significant debt market reshuffles and it may have some serious consequences in the near future.

At 7.00 PM, results of the US treasury bonds auction were released It turned out that the demand for instruments with a value of 34 billion, maturing in 5 years, exceeded the supply for more than 2.7 times. In addition, foreign investors bought 71.4% of the total issue, which was the highest result ever.

Theoretically, these news should be positive for a currency of a particular country (the portfolio capital inflow ). However, it is worth noting that such strong demand for the US debt resulted in a significant decline in yields. Before the auction, 5-year debt market instruments were paying more than 2.06%, and now they are about 10 basis points lower, which noticeably reduces their attractiveness, eg. during the next auction. It also causes a decrease in expectations of market interest rates.

In addition, the US stock market declined yesterday. Before the bond auction, debt market instruments had been not responding to the indices value lowering, but later this could have been a reason to buy treasury bonds on the secondary market and thus, further reduce of expectations regarding future interest rates.

Finally, it is also worth paying attention to another issue. Today’s "The Wall Street Journal" reminded statistics which are showing that two weeks ago hedging funds on the financial futures market had the highest (72 billion USD) net position (assuming a further decline in yields) since 2008. Last week it decreased to 66.7 billion, but this may also be a risk that the exposure may be further reduced, especially if the market moves in the opposite direction.

To sum up, the successful auction on the US debt market, combined with a weak session on the New York Stock Exchange led to a decline in government bond yields and a reduction in expectations regarding future growth in interest rates by the Fed. It was a fairly strong, fundamental signal to weaken the US currency. It is also possible that the softer dollar will remain in the next few days. On January, however, when plans for a more expansionary fiscal policy will begin to crystallise, a positive signal for the USD may be expected.

The zloty is weak regardless of the scenario

Observing the zloty’s behaviour over recent days, it may be assumed that there is practically no positive global scenario for the domestic currency. When the US debt yields and indexes increase, the dollar denominated assets seem to be more attractive and a flow of a capital from some emerging markets (unfavourable for PLN) occurs.

On the other hand, during the stock market or bond yields decline in the USA, the dollar heads down. However, a flow of capital to currencies, which are considered safe havens, occurs. In practice, these currencies finance carry trade strategy (the yen or the euro) while the zloty is not included in this group. As a result, none of the current scenarios seem to be favourable for the zloty. Probably only a relatively good sentiment on the stock markets, assisted by a softer-than-expected monetary policy (especially in the USA) would be able to significantly strengthen the PLN. For now, however, there are limited chances for such a development, which means that the zloty may continue to remain weak.