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Dollar keeps its increases (Daily analysis 6.02.2019)

6 Feb 2019 13:04|Marcin Lipka

The US currency was supported by a relatively good industrial ISM index and no negative impact of President Donald Trump's speech. On the other hand, similarly weak data was received from Germany - this time orders in industry failed to meet the expectations. The zloty depreciates slightly, and the MPC statement should be neutral for the zloty.

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

  • 4:00 p.m.: Publication of the MPC statement and the press conference.

Dollar is stronger but the changes are limited

Reports from the USA supported the dollar. The dollar strengthened after the publication of January's ISM readings from outside industry. The index dropped slightly compared to the December reading and market estimates, but the 56.7 level looks extremely good when compared to developed and emerging countries.

The increases achieved in the afternoon (about 0.2% in the dollar index) were maintained until Donald Trump's state. The President's speech itself was not particularly rich in economic elements. There were references to rapid economic growth, a good situation on the labour market or issues related to China (sympathy for President Xi and trade), but these elements were not much surprising. As a result, the dollar maintained the increases, but there was no further appreciation.

However, the outlook for the dollar remains neutral or even negative. The US currency appreciation has not been supported by increases in Treasury bond yields in recent hours, suggesting that investors do not expect interest rate increases in the coming quarters. Without a return to speculation on interest rate increases, it is difficult to expect a strong upward trend on the dollar.

The dollar, on the other hand, can take advantage of the weakness of other currency areas. This is what happened this morning. The EUR/USD pair fell due to another set of very weak readings from the German economy. Orders in German industry fell by as much as 7% year-on-year, which was the second worst reading in the last decade.

The Bundesbank's data on orders for December shows a drop in foreign orders (by as much as 9.6% year-on-year). In the case of capital goods (investment goods), the demand from outside Germany dropped by 11.1% year-on-year. This is bad news for the German economy, which is dependent on the external situation. But also the prospects for global economic activity, which may invest much less than previously expected.

As a result, the eurozone starts to win the race for the weakest link. This is where we have the structural problems of France and Italy, as well as the cyclical slowdown in Germany. This may prevent the ECB from tightening its monetary policy this year. Therefore, even the weakened by Fed dollar gains from the continued weakness of the eurozone.

Zloty still stable

The Polish currency weakened slightly during the last hours. This applies especially to its relations with the dollar, where the USD/PLN pair increased by about 0.5% during the last day, reaching the 3.77 PLN limit. However, this is a consequence of global events and not the result of a weak zloty in the region.

After 4:00 p.m., a press conference will begin after January's MPC meeting. The Council can easily announce the success of monetary policy-making in the last quarters. It has resisted market pressure to raise interest rates, and at the same time, it has become extremely optimistic about the prospects for the domestic economy (which, by the way, have been realised). Now the MPC, with this surplus of successes, will probably suggest much less inflationary pressure in the coming months than in the NBP's November projection. This is a justified position due to the decreasing pressure on producers' prices (worse economic situation abroad) and, of course, the government's blocking of increases in energy prices. All in all, the MPC will maintain its position on the unchanged interest rates in 2019 and will probably use the arguments in favour of this strategy, speaking out in the context of subsequent years. However, the market has been aware of these processes for a long time, so the impact on the zloty should be practically insignificant.

6 Feb 2019 13:04|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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