Hard negotiations on Brexit (Daily analysis 21.11.2018)

The European Commission may reject the Italian budget and subject the country to an excessive deficit procedure. Brexit remains a burden to the pound. The zloty is paring more than half of the recently incurred losses, and for the euro costs about 4.30 PLN again.

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

• 2:30 p.m.: Orders for durable goods excluding means of transport (estimates: 0.4% m/m).

Stronger dollar but its situation in unclear

Yesterday there were strong declines recorded in the US markets. There was also a significant reduction in the price of crude oil, of which the US type of WTI fell to its lowest level in more than a year. So why did the dollar appreciate?

First of all, in the last few days, the possibility of the early end of the Fed's cycle of increases reduced yields on government bonds and damaged the dollar. This time, however, it was different. Despite the fall in shares, yields did not depreciate. It may be that the debt market has already taken into account the recent comments of FOMC representatives to such an extent that the lower than expected inflation (drop in oil, worsening economic situation) was not able to push the yields lower, and as a result lower expectations regarding interest rates. On the other hand, worse sentiment in the USA has also translated into weak sentiment abroad, which usually supports the dollar, if this does not result in a less hawkish monetary policy in the United States.

Apart from the US events, it is also worth mentioning Italy. The morning reports about Matteo Salvini, Deputy Prime Minister and leader of the League, agreeing to changes in Italy's budget have not been confirmed. The European Commission declared that Italy is breaking its promise of debt reduction and is exposed to serious risks of non-compliance with EU rules (Stability and Growth Pact). So far, these reports have not triggered any negative reactions to Italy's Treasury bonds maturing in 10-years, which are in the range of 3.50-3.60%.

Brexit is also a European problem (for the pound bigger than the euro). Today, it is likely that Prime Minister Theresa May will meet with the head of the European Commission to discuss possible changes to the Brexit plan and at least partly respond to the expectations of the Eurosceptic members. It seems that this plan may not succeed. The EU will not be willing to make any changes before the special summit on Sunday, which was supposed to confirm the negotiated conditions by the EU.

Prime Minister May will also face difficult negotiations in the UK. The Northern Ireland Conservative Coalition (DUP) in the House of Commons has begun to vote on some issues against the government and Prime Minister May. Bloomberg reported that yesterday some budget amendments were voted through by the opposition (labourists, liberal Democrats, Scottish National Party) with the support of the DUP. On the other hand, labourists are beginning to see the possibility of another referendum on the Brexit, as the polls are starting to lean to the side of those who want to stay in the EU.

With the risk of the British Parliament rejecting the Brexit plan being extremely high (vote in the second half of December), the risk of chaos in the UK (new government, new elections, disordered Brexit, coming to power of the labourists) should continue to be a burden on the pound in relation to the most of the currencies.

Over a half of losses was pared

The Polish currency has pared a significant part of the losses incurred due to concerns about the institutional stability of the country. As a result, the EUR/PLN exchange rate returned to around 4.30 PLN. The zloty may also be positively affected by new OECD forecasts, which assume that the Polish economy will grow by 5.2% this year and by 4.0% next year. It seems that these estimates are too optimistic, but even if they do not fulfil, they may still show a relatively better condition of Poland compared to other countries, at least in the perspective of the next few quarters.

Given all these factors, the baseline scenario remains that the EUR/PLN remains close to 4.30 level. Problems related to Brexit or Italy have a negative impact on the zloty, but they will first start put pressure on the pound or the euro, and only then the zloty or other currencies of our region. The next few hours will probably be neutral for the Polish currency.