End of the year not good for dollar (Afternoon analysis 28.12.2018)

The dollar depreciates as the equity market increases. Inflation in Germany is lower than expected, but this is a result of energy and food prices. Positive sentiment on the equity market and the weaker condition of the US currency do not help the zloty, which depreciated in the afternoon.

Yen and franc appreciate

Over the last few days, the specific behaviour of the dollar has been observed with strong movements on the equity market. The US currency was increasing as the equity market grew and lost in the opposite situation. Today, there was a slight disruption of the latter dependence. A fall in the dollar accompanied the increases in the Asian and European equity markets. The main European indexes gained about 2%, so the appreciation of the franc and the yen, currencies perceived as "safe havens", which most often gain when the risk aversion increases and, e.g. stock prices fall, was also quite unusual.

However, the rapid changes in the sentiment on the equity market that we are observing are difficult to explain. Yesterday the main indexes in the USA ended the session with increases even though they lost 3 per cent during the day. In the previous days, the volatility was also very high. Although the movements in shares still translate into the foreign exchange market only to a limited extent, the pace of these changes indicates that the observed increases or decreases may turn up and down in a very short period of time. This creates uncertainty in the market. Especially since we have the end of the year and limited trade at the beginning of next week (another fear of sharp falls), as well as more political than economic factors that influence quotations.

This is mainly about the dissatisfaction of the US President with the Federal Reserve's rise in interest rates and the potential meeting with its chairman, Jerome Powell. Donald Trump also disagrees with the US budget, which does not take into account the expenditure on the construction of the wall with Mexico. While these issues "hang in the air", it is hard to achieve stabilisation on the market, although, in theory, both issues should not have such a big impact (the Federal Reserve is independent, and the budget issue, although slightly detrimental to GDP - will be solved).

Today at 2:00 p.m. Destatis published preliminary data on consumer inflation (CPI) in Germany. The data from the individual federal states, which had previously been received, strongly suggested that we should not expect a high reading. Eventually, the CPI was 1.7% year-on-year in December, 0.2 percentage points below expectations. However, if we look at the components, this decrease is a result of low year-on-year price increases in food (1%) and energy (4.8%). Core inflation is likely to remain stable, which should not be damaging to the euro. On the other hand, low energy costs (linked with strong price drops in the commodity market) may be a positive factor in production costs, with a positive impact on GDP.

Weaker zloty

The aforementioned global appreciation of the Swiss currency also caused a significant increase in the CHF/PLN exchange rate. The relation between the franc and the zloty increased to 3.84 today - the highest level since September 10th this year. Although the changes in relation to other main currencies were not significant, today they enabled the EUR/PLN exchange rate to rise to approx. 4.3070, which is the upper quotation limit of the last 5 weeks. The weaker condition of the zloty could be seen against the regional partner - the Hungarian forint. Today, the PLN/HUF exchange rate fell below 74.6, to its lowest level in 5 weeks. The zloty also lost to the pound or even to the weaker dollar (at 3:00 p.m.).

What is interesting, the combination of strong growth in the equity market with a weaker dollar was most often a positive signal for the zloty. However, the increase in uncertainty at the end of the year and the appreciating franc and yen slightly disrupt such scenario. The situation of the last two may change even further in the second part of the day when the US investors will be more active. If demand pressures on the Japanese and Swiss currencies decrease slightly and the US dollar remains weak while strong equity market growth is maintained, the zloty's condition may improve.

Next week's preview

Beginning of the next week seems to be relatively calm on the currency market, due to limited trading on some of the main markets on the 31st and 1st of January. On the other hand, the end of the week may be very important. On Thursday, ISM will publish December's level of PMI of the industrial sector in the USA. Friday will be even more important in terms of macroeconomic publications. Preliminary data on consumer inflation in December in Poland and also in the eurozone will be published. The data published so far suggests that for the eurozone it will be lower than current expectations, although the core reading will be important in this case.

On Friday afternoon, the US Department of Labor will publish a report on the US labour market. The most important information will be the change in the number of payrolls in the non-farm sector and how the average hourly wage has increased. Investors will pay particular attention to the latter factor, as it has a more significant impact on inflation. The dollar has been weakened recently, and solid data (employment growth of about 180-200 thousand people, wages by 3.0% year-on-year or more) from the labour market report may turn out to be the stimulus that will put the dollar back on the appreciation path.