The sentiment on the market deteriorates in the afternoon. Demand for the dollar increases as the aversion to risk grows. The pressure on the zloty rises - the EUR/PLN pair is the highest level since May, exceeding 4.50.
Not much appetite for risk on Monday
The sale-off of risky asset classes increased on Monday afternoon in line with the greater activity of the US investors. One hour after the start of the session on the New York Stock Exchange, the main US indexes lost about 3%, while their European counterparts even lost over 4%. The German index of the largest companies (DAX) lost over 4.5%, the most since March 27th.
The strong increase in risk aversion also strengthened demand for the dollar. Initially, the gains of the US currency were quite limited, but they speeded up in the afternoon. The main currency pair, i.e. the euro/dollar, fell to about 1.1730, the lowest level in over a month.
The EUR/USD exchange rate around this level also meant a fall below the 50-day moving average (1.1764). The last time the euro/dollar rate was consistently below this level was in mid-May this year (strong appreciation of the euro and the dollar depreciation started in the last days of May).
Demand for the dollar may still increase
In September, we no longer observe an increase in supply pressure on the dollar. If this gradual appreciation of the US currency continues, a fall below 1.17 may open the way for a partial rebound from levels observed during the holiday season. When the sentiment on the market deteriorated strongly, the euro was weakening. The statements made today by the president of the ECB and the German finance minister about the EUR/USD exchange rate (a headline topic around the last ECB meeting) have supported the dollar to some extent.
Christine Lagarde said that the European Central Bank (ECB) takes all data into account, "including the exchange rate," while Olaf Scholz, Germany's Finance Minister said that the ECB was facing the strengthening of the euro. In isolation, these comments could have had a limited impact, but with the already strong dollar growth in the afternoon, they could only have deepened the decline of the EUR/USD.
Zloty depreciates in the afternoon
Deeper sale-off on the equity market and further appreciation of the dollar in the afternoon also increased the scale of the zloty's depreciation against the main currencies. The EUR/PLN exchange rate exceeded 4.50, increasing to the highest level since the end of May, while the USD/PLN exchange rate exceeded 3.83 in the afternoon (the highest level since the end of July). The Polish currency may also be in a slightly weaker condition by today's disappointment in the form of weak data on retail sales (first drop since April).
The future fate of the zloty in the second part of the day will depend on the actions of the dollar and the development of market sentiment. The depreciation on the equity market was quite strong, so it may be possible to reduce the scale of the decline on the markets in later hours, which may also reduce the supply pressure on the zloty if such a scenario is realized. The dollar, on the other hand, has gained a bit more arguments for appreciation, and each subsequent day may increase uncertainty among market participants (second wave of COVID-19 approaching, US elections). Maintaining increased demand pressure on the dollar may now also weaken the zloty basket, making it impossible to pare the losses in the short term.