Exchange rates after another shock; the dollar saved (Daily analysis 7.02.2022)

Shock comes after another shock on the currency market. On Thursday, the European Central Bank unexpectedly changed its front and announced a quicker abandonment of the crisis policy. On Friday, the US labour market report turned the perception of the economy upside down, and the dollar was saved from further depreciation.

The EUR/USD: investors confounded yet again

Just before the US labour market report, the dollar was pushed into a corner. The EUR/USD began to approach the 1.15 level and the highs from the first part of January. Their breakthrough after a very dynamic increase last week (the dollar weakened by almost 2% in one week, erasing all the appreciation from the end of the previous month) would pave the way for further sell-offs of the US currency. Solid employment data allowed the dollar to retreat from the abyss, but the correction so far has been modest.

Investors must judge whether they are more impressed by the ECB's surprising turnaround or by the Federal Reserve's determination to begin normalizing policy any time soon. The inflation readings scheduled for February 10th will be an important test for the dollar. A lack of reaction to a further acceleration in price growth would be a bad sign for the dollar.

The dollar: labour market data come as a big surprise

After two months of weak employment growth, a surge in omicron variant infections was expected to plunge the US job market. Such a scenario was also predicted by the estimates of a private company ADP, which referred to a decline in the number of jobs in the private sector exceeding 300 thousand full-time jobs. The official data published on Friday not only proved this to be wrong but also indicated an upward spiral in wages and prices!

First, the number of non-farm jobs rose by 467,000 in January against a forecast of 125,000. Second, it turned out that a key area of the economy in the Fed's eyes was not at all in distress at the end of last year - data for the previous two months were revised upward by more than 700,000 combined. Third, payrolls were up 0.7% from December and 5.7% from last year. Companies are still having trouble finding workers, which, with inflation at 7%, is a precursor to a further escalation in wage expectations. Despite the (positive) increase in labour force participation, the number of vacancies is still at a record high, which suggests a continuation of the current trend and will determine the start of the interest rate hike cycle as early as March.

The Polish zloty: MPC policy speaks in favour of the EUR/PLN declines

In January, NBP President Adam Glapinski announced that interest rate increases would be more decisive than the financial markets had expected. This means that the cost of money will probably be raised to over 4% in the entire cycle. In other words: at this moment, we are at the halfway point of raising interest rates. The words of the head of the central bank should not be interpreted as an explicit announcement that a stronger adjustment than the recent 50 bp hike is a foregone conclusion. Still, the likelihood of a sharper move has certainly increased.

However, last week's statement may be more significant, as it may be interpreted as an invitation to strengthen the zloty, which may play an important role in bringing inflation under control. This is why we expect a change in the influence of the MPC meetings on the fate of the zloty: in 2021, the EUR/PLN was more likely to rise during the weeks of the MPC meetings now monetary authorities will probably want to support the currency with their communication. Either way, rate hikes will positively impact the zloty regardless of the immediate market reaction to the tone of the announcement and the words of the NBP President at the press conference (probably to be aired on Wednesday at 3 p.m.). We expect that the euro exchange rate will fall to 4.50 in this quarter, and in the following months, our currency will maintain its upward path. In addition, this will be the first meeting for two new MPC members: Ludwik Kotecki and Przemyslaw Litwiniuk. Later in the month, the terms of Eryk Lon, Grazyna Ancyparowicz, Lukasz Hardt and Kamil Zubelewicz will also expire.