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Economic conditions do not support zloty (Afternoon analysis 05.09.2018)

5 Sept 2018 16:09|Bartosz Grejner

The zloty started to be affected by the continuing depreciation of emerging countries' currencies. The pound appreciates after reports of a possible agreement between Germany and the United Kingdom.

There will be no "hard" Brexit?

Today's session was basically an extension of the weak sentiment prevailing on previous days. Emerging country currencies (EM) were also under clear pressure. The dollar was slightly weaker, although it maintained most of the profits generated in the last week. The EUR/USD quotations rose slightly above 1.16 after 3:00 p.m.

The issue of additional tariffs, which the US may introduce in stages for imports from China worth 200 billion USD, is the road to a potential escalation of the customs war with China. It may globally limit the pace of economic growth. In such a scenario, the winners are most likely the US economy, which will lose the least, and the dollar, due to the outflow of capital from EM currencies.

In the afternoon there were also media reports from Bloomberg news agency that the German and UK governments agreed on a less detailed plan for future relations with the European Union after Brexit. It should ease the process of reaching an agreement on the UK leaving the EU. The lower probability of a "hard" Brexit (without agreement) has clearly strengthened the pound.

The pound's quotations against the dollar (GBP/USD) increased from 1.28 to nearly 1.30. The zloty depreciated - the pound's price per unit climbed even above 4.82 PLN. The deterioration of the Polish currency has been observed since the beginning of the day. The EUR/PLN exchange rate exceeded 4.33 today, reaching the highest level since mid-August.

Currently, the zloty is not supported by external conditions and the probability of its appreciation seems to be limited. The growing imbalance between economic growth in the US and the eurozone and the ongoing monetary tightening in the US make the dollar stronger in the coming months. This is also a negative signal for the zloty, which is usually under pressure when the dollar appreciates.

Today's press conference of the Monetary Policy Council (MPC) will also be important for the zloty. So far, the Council has maintained a very mild approach to monetary policy. It seems that this approach may be limited by the worsening of the situation of some emerging countries and a significant depreciation of their currencies, as well as problems of peripheral countries within the eurozone itself (Italy, Greece). A much more dovish attitude of the Monetary Policy Council to monetary policy may, in turn, accelerate the zloty's downward trend.

Tomorrow's preview

At 8:00 a.m., the Federal Statistical Office (Destatis) will publish July's data on orders in the German industry, which may give indications of the future production level in the sector. A previous publication pointed to a 4% monthly decline, which was the biggest decline in nearly 1.5 years. The market consensus this time indicates an increase by 1.6% month-on-month. Another weak reading could slightly increase the pressure on the euro and the share market, which are in a weak condition anyway, worsening the general sentiment on the market.

At 2:30 p.m., ADP will present August's report on employment changes in the non-farm sector in the USA. Market expectations suggest an increase in the number of payrolls by 188k. This data may be a good guide (although the correlation is not always ideal) before Friday's job report, which will include a similar figure. However, if the reading is in the range of about 150-250,000, its impact on the dollar's quotations will be rather limited.

At the same time, the US Department of Labour will publish weekly data on initial jobless claims. The median of market expectations indicates a minimal increase to 214k (by 1,000). However, this is still nearly 49-year-old lows from mid-July. A reading around or below the consensus would support the dollar, although its impact will be rather limited.

At 4:00 p.m. another set of US data will be published - orders in the industrial sector (consensus: -0.6% month-to-month) and the ISM service sector index (consensus 56.8 points). Taking into account the amount of data from across the ocean, the final impact on the dollar is not clear. Recent macroeconomic publications support the argument of the dynamic development of the US economy, therefore the chance of much worse than expected data and weakening of the dollar is limited.

5 Sept 2018 16:09|Bartosz Grejner

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.

See also:

5 Sept 2018 12:36

Eurozone failed expectations (Daily analysis 05.09.2018)

4 Sept 2018 15:36

Negative sentiment (Afternoon analysis 04.08.2018)

4 Sept 2018 12:59

Dollar appreciates (Daily analysis 04.09.2018)

3 Sept 2018 15:49

Brexit and macro data as burden to pound (Afternoon analysis 03.09.2018)

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