Dollar will not help zloty (Afternoon analysis 20.02.2019)

Factors that usually supported the Polish currency have not helped it recently. The zloty's quotations in relation to the euro and the pound are approaching symbolic levels. "Minutes" from the last FOMC are in the limelight, but they may not be as dovish as the market would expect.

Dollar still weak

The market awaits for the most important event - today's publication of the record of talks from the last meeting of the Monetary Committee of the Federal Reserve (FOMC). The changes in the broader market were not significant today, but it can be seen that expectations are oriented towards a very mild message coming from the so-called minutes. The main market indexes in Europe and futures contracts in the USA continued to grow, reaching the highest levels in 3-4 months. In turn, the EUR/USD quotations remained above the 1.13 level, i.e. close to the upper limit of quotations since February 7th.

So far, representatives of the FOMC have expressed an opinion about the need to be patient and that there should be a pause in interest rate increases. As a result, the message is already calculated in the price, and if it turns out to be not mild enough, it may even ultimately slightly strengthen the dollar. The US central bank's monetary policy will depend on the incoming macrodata from the US market. There are fears that a stronger than expected economic slowdown in the eurozone, Brexit, threats to international trade and a slowdown in China may also have a negative impact on the US economy. However, if the economy turns out to be relatively resilient and inflation will not be slowing down, two interest rate increases may become a realistic scenario again, which would help the dollar to return to the upward trend.

The lack of dollar appreciation, falling yields of US Treasury bonds, good sentiment on the equity market and better macrodata from the Polish economy are still too little to improve the zloty's situation. The Polish currency clearly depreciated today, the EUR/PLN exchange rate approached the 4.35 and the GBP/PLN exchange rate moved towards 5.00. These are the levels at which the zloty may become attractive to investors, especially if tomorrow's data from Poland and the eurozone prove to be good. A further weakening of the dollar would also help to strengthen the zloty, but the chances of its significant depreciation are limited. The US economy and its assets, despite the uncertainty surrounding monetary policy, are still a safe haven for capital and if we do not observe much worse than expected GDP, inflation and labour market data, the US currency does not have much potential for value loss.

Tomorrow's preview

Between 9:15 a.m. and 10:00 a.m. the IHS Markit will publish preliminary data for February's PMI indexes of industrial and services sectors for France, Germany and the aggregate of the eurozone. Recent months have not been good in terms of activity, especially in the industrial sector, where declining production and expectations among Europe's largest economies have been observed. It is important whether this trend will also continue at the beginning of the year. These can be particularly important readings for the euro, which has appreciated against a weaker dollar in recent days. Worse than expected PMI index readings may quickly weaken the single currency.

Tomorrow, the Polish Central Statistical Office (GUS) will present data on retail sales in January in Poland. Data on both wages and industrial production for January turned out to be above market expectations, reducing fears of economic slowdown in Poland slightly. However, the zloty remains weak, due to the lack of prospects for interest rate increases. However, if sales data also exceed the market consensus (growth by 5.4% year-on-year in real terms) and PMI data from the eurozone do not disappoint, it may be a stimulus that will contribute to paring some of the losses incurred by the zloty in the last three weeks.