Franc appreciates (Daily analysis 31.08.2018)

Argentina raises interest rates to 60%. There is persistent fear in some emerging countries' currencies, but the risk of "contagion" by stable countries remains rather limited all the time. The zloty is relatively stable in the morning. However, the franc's strengthening on the global market may cause concern. The Swiss currency is now valued at 3.80 PLN level.

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.

Argentina in limelight

It cannot be denied that yesterday evening it was dominated by events in Argentina. The need to raise interest rates from 15 percentage points to 60% was spectacular. And the weakening of the local currency has attracted no less attention. At one point, the peso lost 20%, only during yesterday's session. Although the peso's daily depreciation ended at around 12%, the weakening of the Argentinean currency has exceeded 50% since the beginning of the year, and the USD/ARS pair has increased from 18.6% to 38.5%.

Argentina's problems are not a matter of recent days or weeks. The Buenos Aires government's loss of liquidity and capital outflow, which led to panic on the peso and the sale of local bonds, continue to be the result of insufficient reforms following the disastrous policy of the Kirchner populist years. It is not possible to repair a country that is not very competitive, overregulated and underinvested, with runaway inflation for several quarters. In addition, the removal of privileges and fiscal consolidation are not progressing as fast as planned also in Mauricio Macri's cabinet. The fundamental question is whether the current problems in Argentina will spread across the entire region or harm the global economy.

To some extent, in the context of the region, this is already happening. Brazil, which itself has a number of problems (slow growth after the 2015-2016 crisis, very unstable political situation before the elections, lack of major reforms), is also having a negative impact on Latin America. The uncertainty on the South American continent is also causing disruption in more vulnerable emerging countries.

This affects countries with current account deficits. The lack of dollars or euros means that they are clearly depreciating on the South African rand or Indian rupee. As more external problems arise, the greater the concern that Turkey's internal situation will also deteriorate. The weakest links (countries), therefore, already feel a quasi-crisis situation.

Other countries which have balanced trade, relatively good public finances and strong institutions have so far remained stable (e.g. emerging economies in the European Union). There is also a slight negative impact in China, although this may change because the decision to announce new duties on Chinese goods imported by the US is approaching. President Donald Trump suggested this possibility in an interview with the Bloomberg agency. If half of China's imports into the United States were indeed subject to customs duties of 25%, then it could be estimated that there is a real customs war, which would not have a positive impact on either the Chinese currency or the currencies of other emerging countries (especially those that are currently under serious pressure). Therefore, the most important information will be the decision on customs duties, which will probably be taken by September 6th.

Zloty remains stable

The Polish currency stays relatively stable. The EUR/PLN rate is moving around the 4.30 mark, which is a good result in terms of external events. The zloty is primarily protected by a balanced current account and a relatively good positioning of the European Union in the global trade conflict. So far, the zloty has been slightly hampered by a relatively high structural deficit in public finances and the polish MPC's unwillingness to raise interest rates.

It is worth noting the events related to the franc. It is usually a good indicator of global fear or concerns about the eurozone's condition. On Tuesday, the EUR/CHF was quoted at around 1.1450, and now it is around 1.1280. The frank strengthened to the euro by around 1.5% and is approaching its strongest value in relation to the euro for more than a year. This may be one of the warnings that when global sentiment deteriorates significantly (e.g. stock market falls, customs war with China extended), the eurozone will also be under pressure (e.g. the issue of Italy's fiscal problems). It would be also a time when the condition of the zloty could be clearly deteriorated to all major currencies, especially to the franc or the dollar.