Fragile situation (Daily analysis 11.06.2018)

Geopolitical issues interact with economic reports. Sentiment remains positive, but optimism is probably vulnerable to the global situation. The zloty appreciates slightly against the euro and is much stronger to the forint.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Optimism that is easy to break

In the first hours of European trading, investors were positive towards risk appetite. The EUR/USD pair rose well above the 1.1820 rate, adjusting part of the appreciation in the morning. Where does this optimism come from or is it likely to continue?

The euro was supported by an extensive interview with the Italian Minister of Finance by Corriere della Sera, quoted by the foreign media. It addresses most of the concerns about Italy's economy. Giovanni Tria said that there is no discussion of leaving the eurozone. Also, there are no plans to introduce a parallel currency.

"The Financial Times" also stressed that Tria mentioned a pension system that was to be amended, without necessarily withdrawing the entire 2011 reform (increase in the retirement age). Tria also wants to reduce public debt, regardless of Brussels' pressure. The market has responded positively to these reports. The yields of the Treasury bonds maturing in 10-years fell by about 20 basis points and dropped below the 3.00% limit in the morning. However, optimism should be cautious about Italy. "Financial Times" points out that the entire political cabinet of the Ministry of Finance has not yet been set up. Furthermore, the new coalition will have to address the promised changes (retirement age, guaranteed income, tax cuts) and do something about it in spite of the reassuring statements made by Trio. This, in turn, may worsen sentiment again.

Simplifying the matter, however, it can be said that the meeting in Singapore between the leaders of the USA and North Korea (positive for the markets) acts as a counterbalance to the results of the G7 summit, where there were more serious disputes, particularly between Canada and the USA (the Canadian dollar suffered the most on this situation). However, it is difficult to establish how exactly President Trump's meeting with the other leaders went, and it seems that it was not as negative as with the Canadian Prime Minister.

In general, the market appeared to react calmly to all these developments (Italy, G7, Korea). It should be stressed, that this moderate optimism is fragile and may be quickly disturbed by reports concerning Italy (the leaders of the Movement or the League will distance themselves from the friendly comments made by Trio) or meetings in Singapore, which, given decades of lack of formal contact between the USA and North Korea, may end in nothing.

In the context of risk appetite, monetary policy developments will also be important. After last week's increases in the euro linked to the ECB's prospects for exit from QE, the euro has limited space for further upward movement, as this information is already in prices. However, there is a growing risk that the ECB will not be strong enough and that the market will be disappointed with a less concrete statement (there will be a discussion about the end of the QE, but no decision will be taken). In turn, in the context of the Fed, it is possible that FOMC will suggest a more hawkish monetary tightening path (a total of 4 rises this year and 3 next year). This is not a price factor, but it would probably help the dollar and cause EUR/USD to fall. Therefore, we have very important days ahead of us, which should be positive for the dollar rather than for the euro, given the current situation.

Stronger zloty

Today, the zloty is relatively strong, especially compared to the forint. The PLN/HUF pair rose above the 75 % limit (an increase by 0.7 %) and is the highest since March and close to historical records. The forint clearly feels the prospect of a less favourable monetary condition in the eurozone and the risk of a more cautious message from the ECB. Rates in Hungary are 0.9% and the deposit base remains negative at -0.15% and is not expected to increase at next week's central bank meeting.

The zloty also gains slightly to the euro, although Fitch (according to our estimates) left the rating and its outlook unchanged. However, as in the case of the global market, the optimism on the zloty is still fragile and the domestic currency may quickly return to decline, especially if it turns out that the Fed is hawkish and the ECB does not decide to exit the QE due to too low inflationary pressure and worse macroeconomic forecasts.