Further sentiment deterioration (Daily analysis 28.02.2020)

The flow of capital towards bonds weakens the dollar. The globally stronger euro helps the EUR/PLN to reach nearly 4.34. The Swiss franc becomes more and more expensive as fears of the coronavirus increase: the CHF/PLN pair reaches over 4.08.

Enormous movements on the bond market

Friday was marked by negative sentiment on the financial market. The main market indexes were losing over 5% in the morning, while yesterday, their US counterparts were losing over 4%. If this trend continues until the end of the day, this may be the worst week on the equity markets since the financial crisis of 2008.

Deterioration of market sentiment, which results in a deep sale on the equity market strengthens the strong flow of capital to Treasury bonds, especially of the US government. As a result, the profitability of the two-year debt fell below 1% today for the first time since 2016. Although the profitability of "ten-year-olds" still remains above 1%, their decrease from 1.30% yesterday to 1.16 today in the morning indicates that they too may soon cross this boundary. The cost of 2- and 10-year debt in the US below 1% may further increase fears of recession and consequently worsen sentiment.

The sharp fall in the profitability of US debt is exerting significant pressure on the dollar, which helps the euro. The gap between the profitability of the US debt and Germany is narrowing. This morning it reached about 1.756%, the lowest spread since September 2016. As a result, the euro is strengthening against the main currencies. The EUR/USD quotations increased to about 1.1053, reaching a high since February 4. A moment in the afternoon, the exchange rate of the main currency pair returned to around 1.10, but fluctuations may increase again in the following hours when US investors start to be more active.

The euro is becoming more and more expensive

Today, the globally stronger euro brought the EUR/PLN exchange rate up to nearly 4.34, the highest level since October 3. The zloty is currently under supply pressure, as are other emerging currencies, but this may not be the end of the Polish currency's weakening.

The situation with the coronavirus will not improve quickly, and it may get worse, and this may, in turn, deepen the zloty's depreciation. The franc also appreciates quickly in relation to the zloty. Today, the CHF/PLN quotations reached about 4.0844, which is the upper quotation limit from the first days of February 2017. In turn, the exchange rate of about 4.25 is the upper limit observed since the decision of the Swiss central bank (SNB) to release the franc's peg to the euro. If the situation with the virus worsens in Europe, the CHF/PLN exchange rate may move towards this level.