Hard times for dollar (Daily analysis 12.10.2018)

The US currency is clearly experiencing a downturn. Lower core inflation readings and slightly better data from the eurozone are exerting pressure on the dollar. The zloty is appreciating. It cannot be ruled out that the zloty is supported by the possibility of raising the rating by S&P Global Ratings.

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.: CPI inflation from the USA (estimated at 0.2% m/m and 2.4% y/y; excluding fuels and food 0.2% m/m and 2.3% y/y).

Dollar problems

The dollar, which determines the sentiment of many currencies in the world, is clearly weaker than expected. First of all, the US currency did not strengthen despite a strong increase in risk aversion. The same was also the case with other currencies (franc, yen) that are considered as safe havens.

Yesterday we stressed that the lack of support for the dollar should be rather short-lived. A strong deterioration in moods should translate into a strong dollar and a return of capital to the yen or the franc. However, it is difficult to predict how long this disturbance will last. Moreover, data from the USA on inflation failed to meet expectations yesterday. This is particularly true for core inflation, which increased by only 0.1% on a monthly basis. For the next month, the prices of medicine are falling as well as car prices. In the case of new cars, it was a drop by 0.1% m/m, but in the case of second-hand vehicles by as much as 3% over one month, which means that the annual reading was reduced to minus 1.5%. Health services are also increasing more slowly than in the past (2.0% y/y; the half-year average of monthly readings is the lowest in at least 30 years). This is, of course, good for Americans, but it may cause negative pressure on inflation also in the following months and question the sense of interest rate increases in the second half of 2019.

The economic divergence and also the interest rates between the US and the eurozone may be slightly reduced by today's Eurostat data. Industrial production in the single currency area has clearly recovered from the weak results of recent months and increased by as much as 1% m/m. Annual reading for September still does not look impressive (0.9% y/y). However, it is much better than originally indicated - revised slightly upward today (to +0.3% y/y) - the August publication (minus 0.1% y/y).

The dollar may return to its upward trend. Currently, however, investors will be more cautious about buying the dollar due to its recent unusual behaviour and the visible weakness of core inflation. Also, the eurozone can be in a slightly better condition than expected from previously published data.

Zloty goes positive

The zloty was not vulnerable to the last sale on the share market. Now, as global sentiment improves and the pressure on the dollar persists, it is appreciating. In the early afternoon, the EUR/PLN pair even fell below the 4.30 boundary. However, it is possible that domestic events may also improve the zloty's condition.

Today, Fitch and S&P Global Ratings will decide on the Polish creditworthiness. In the case of the first agency, no surprise is to be expected, as the A-rating is likely to be maintained. Definitely more may happen in the context of the S&P decision. Yesterday, PAP published a series of new S&P forecasts, which may suggest a change in the agency's approach to Poland. Moreover, the increase would only be a return to the evaluation before mid-January 2016, when the majority of market participants were surprised by a sudden cut in Poland's creditworthiness. Raising the rating could prolong the good sentiment to the zloty and at the same time make it even more resistant to external factors.