Dollar goes up slightly (Daily analysis 10.08.2020)

Monday began with further information confirming the increased geopolitical tension. On Friday, the US imposed sanctions on 11 Chinese officials in connection with the situation in Hong Kong, including the head of the Hong Kong administration, Carrie Lam. It did not take long for China to respond.

Punch after punch

During a briefing in Beijing, a spokesperson for the Chinese foreign ministry, quoted by Bloomberg, said that "in response to the U.S.'s wrong behaviors, China has decided to impose sanctions on those individuals who behaved badly on Hong Kong-related issues". Also on 11 officials from the United States.

The dollar rebounded already on Friday and today was the second day of its strengthening, following a wave of reports from the geopolitical front. The main currency pair, i.e. the EUR/USD, fell slightly below 1,1750 around midday. This is the lowest rate since last Tuesday, but still closer to the two-year rate highs (about 1.19) than the levels we observed at the beginning of July (about 1.11-1.13) or in May (about 1.07-1.10).

There are many reasons behind the dollar's depreciation in recent weeks, such as the falling real interest rate on the US debt and the worse effects of coping with the pandemic relative to, for example, Europe. However, further deterioration of relations between the powers is a factor which may strengthen the dollar.

Currently, one cannot yet speak of the return of a stronger dollar, or the entry into the path towards it. Increased demand for the dollar has not yet returned, and macroeconomic data support its current weakness in the context of the previous weeks. The sentix investor confidence index published today indicated a stronger-than-expected improvement for the eurozone in August, from -18.2 to -13.4 points.

This is the highest level since February. The imbalance between investors' expectations of the eurozone and the US continues, in favour of the common currency area (19.3 pts. vs 13.5 pts.), reflecting what we see in the euro/dollar quotations, but also in the generally weaker demand for the US currency.

The zloty remains among the strongest EM

As long as we do not see the dollar taking a growing path, current market conditions allow the zloty to maintain its good condition. During the "summer break" period, i.e. from 1 July, the zloty is in the top three of the strongest-growing currencies of emerging countries, alongside the Czech koruna and the Hungarian forint.

All three gained more than 6% against the dollar and about 1.6-2.2% against the strong euro. The calendar of macroeconomic events for the rest of the day does not include any significant macro publications or events. Therefore we can expect the zloty to stabilise around current levels, i.e. EUR/PLN about 4.40, USD/PLN about 3.74.