Dollar appreciates (Daily analysis 04.09.2018)

Tensions in emerging markets are increasing after South Africa entered the first recession since 2009. The dollar appreciates, also to the euro. The zloty remains relatively stable, but the USD/PLN pair starts testing 3.73 level. The euro is close to the 4.31 PLN boundary.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Weak data

The first hours of Tuesday's session are in a rather subdued mood. Both US futures for shares and indexes in Europe are dropping. Moreover, strong downward pressures on emerging market currencies persist. Many of them have lost several percent in relation to the dollar this year, and the depreciation of the Argentinian peso exceeds 50%.

Concerns about the currencies and economies of Latin American countries (Brazil, Argentina, Venezuela) have been escalated by South Africa today. South Africa's GDP shrunk by 0.7% in the Q2. (on an annualised basis), after a decrease by 2.6% in the previous year (revised from 2.2%). Therefore, South Africa officially entered a period of recession, although its GDP is still growing slightly in annual terms (0.4% in the Q2).

According to South Africa's statistical office (STAT SA), the agricultural sector had the biggest negative impact on GDP. Transport and foreign trade also contributed negatively. The manufacturing production also turned out weak and finished the last quarter with zero results.

In its comments on the STAT SA data, it was stated that the significant negative contribution from agriculture was the result of droughts in some regions of the country and heavy hail in others. This has caused serious damage to the crops. However, it should be remembered that the clear dependence of the economy on South Africa's agriculture and mining sector (the latter having a positive impact on GDP in the Q2) and the fatal condition of the labour market (a very low employment rate in relation to the population) is a result of the lack of structural reforms in recent years. Therefore, negative weather events are now dragging the whole economy down very clearly, and the country is becoming the first economy (except in extreme cases such as Venezuela) to enter the recession. Around midday, the South African rand lost 2.5% compared to yesterday's closure. As a result of the current decrease in ZAR, it is already losing 19% this year and is the fourth currency from the end after the Argentinian peso (52% loss), the Turkish lira (43% drop) and the Brazilian real (slightly more than 20% decrease).

Decreases in the EM currencies (today the Indian rupee has also recorded historical weakness records - USD/INR exceeded 71.5) are supported by the dollar. This is evident not only in relation to the emerging countries' currencies but also in the EUR/USD pair. It reaches 1,1550, although there is a lack of new information from both the eurozone and the US (there was a holiday on Monday across the pond).

In the context of the next few days, it is still worth waiting for reports on trade. Today, Bloomberg wrote that President Donald Trump can announce tariffs on China's annual imports worth 200 billion USD on Thursday. If this is the case, then it seems that not only will emerging economies be under pressure, but it could also generate declines on the US markets. The most vulnerable currencies in emerging countries could then deepen their drops and the dollar could increase its growth rates.

Limited zloty depreciation

The Polish currency loses about 0.4% against the franc and the euro, while the dollar is clearly more expensive (by 1%) and tests 3.73 PLN level. The US currency still has a lot to reach the new annual highs to the zloty (about 0.10 PLN), but given the events abroad and the risks associated with a serious expansion of the trade conflict between the US and China, it is not excluded that these levels may be reached relatively quickly.

In the context of events in Poland, tomorrow's meeting of the Council may be quite interesting. The way in which the Council will approach the upcoming economic downturn and, at the same time, probably a slight acceleration of inflationary processes, will be quite revealing. If its position remains neutral with the prospect of an upward movement of its rate hikes in 2019/2020, then the zloty should not depreciate (core scenario). However, if the upcoming slowdown was to put pressure on the members of the Monetary Policy Council to reduce interest rates as the first step, then the Polish currency could be strongly influenced by sellers.